DRILLING OUTLOOK
Oil and gas projects draw
renewed interest from investors
amid energy supply shortfall
Companies that can diversify, embrace
transparency in sustainability and continue
focus on capital discipline likely to be favored
BY STEPHEN WHITFIELD, ASSOCIATE EDITOR
Geopolitical events of the past year, and
the resulting supply shortfall that has
gripped much of the Western world, have
placed energy security back in the fore-
front for a number of countries. The inves-
tor community has taken notice. While
the “energy transition” continues – with
governments around the world imple-
menting policies that aim to replace fossil
fuels with renewable energy – the process
remains gradual.

The supply shortfall, on the other hand,
is an immediate concern that could have
long-term global impact. Investors have
come to realize what operators and drill-
ers have known all along: Oil and gas will
continue to play a major role in the global
energy mix for years to come.

“We are not at a point where renewables
can completely fuel the needs of the world.

It’s a long way to go,” said Seenu Akunuri,
Energy, Utilities and Resources Deals
Leader at PricewaterhouseCoopers (PwC).

“Even though certain investors might say
they’re not going to focus on fossil fuels
and will focus on renewables going for-
ward, at the end of the day, when you look
at global energy needs, for the next 10,
20, 30 years, worldwide consumption for
hydrocarbons is going to continue.”
Still, the next few decades bring with
them a ton of uncertainty. Just how big of
a role will oil and gas play in the energy
mix? What will companies need to do to
draw interest from an investment com-
munity that, despite its recognition of the
importance of oil and gas, is still under
public pressure to move away from sup-
porting the industry? For this story, DC
spoke with analysts to gauge what the
transition to net-zero could mean in the
coming years.

Embracing sustainability
Pat Jelinek, Americas Oil and Gas
Leader, US West Energy and Resources
Market Segment Leader at Ernst & Young
(EY), noted that the exact role of oil and
gas in a low-carbon economy is uncertain.

EY outlined four scenarios covering the
range of possible scenarios for the energy
transition, from a very gradual move away
from hydrocarbons to the rapid adoption
of renewables:
■ Meet Me in Paris: Alternative energy
quickly becomes cheap enough to displace
existing energy infrastructure. In this sce-
nario, peak oil has already happened in
2022, and demand will fall steadily after
that. However, EY says this scenario is
unlikely, as demand is still expected to
increase next year. In fact, the US Energy
Information Administration is forecast-
ing global consumption of petroleum and
liquid fuels to increase by 2 million bbl/
day in 2023.

■ Slow Peak: Peak oil does not happen
until 2047, thanks to developing coun-
tries’ demand for petrochemicals, energy-
intense industrial usage and aviation.

■ Critical Gas: Oil demand peaks and trails
off in 2037 as consumers migrate to elec-
tric vehicles. Capital moves toward gas-
focused upstream and LNG assets.

■ The Long Goodbye: Oil demand peaks
in 2040 and continues at the same level
through 2050, as oil consumption from
existing vehicles, consumer inertia and
continued growth in aviation and petro-
chemicals keep demand stable.

While these scenarios describe very
different outcomes, they do share a few
trends. For example, natural gas, in com-
bination with renewables, will help drive
decarbonization. This will create a signifi-
cant upside for gas as a power-generation
fuel, although projections for natural gas
demand vary wildly. In the “Meet Me in
Paris” scenario, gas demand grows by 42
billion cu ft/day between 2022 and 2050,
a rate of 0.3% per year, compared with
growth rates of 285 billion cu ft/day in
“Long Goodbye” and 613 billion cu ft/day in
“Critical Gas.”
It’s important to note that investors
should see positive returns on their oil and
gas projects regardless of the energy tran-
sition scenario, Mr Jelinek said. This is
In each of Ernst & Young’s four energy transition scenarios, the global energy market will see peak oil demand sometime in
the next 25 years, although the estimated time frame ranges from 2022 all the way out to 2047. The scenarios also illustrate
significantly different demand for natural gas as a power-generation fuel, with up to 613 billion cu ft/day of growth between
2022 and 2050 under the “Critical Gas” scenario and only 42 billion cu ft/day of growth under “Meet Me in Paris.” EY has said
the “Meet Me in Paris” scenario is unlikely, however, with oil and gas demand both expected to increase next year.

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DRILLING OUTLOOK
Top: Year-on-year natural gas demand
growth is forecast to drop off in each of
EY’s energy transition scenarios, al-
though actual demand declines under
only one of those scenarios (“Meet Me
in Paris”) . Bottom: Regardless of the en-
ergy transition scenario, EY expects oil
and gas assets in every region around
the world to generate positive returns
for investors through 2050. Upstream
reserves and liquefaction are the asset
categories expected to generate higher
returns on average – EY noted OPEC
and Latin American upstream reserves
as particular segments of interest.

because, even after peak oil, there will still
be demand for oil and gas. The challenge
is that the returns will not always be stable
and predictable, and the pressure on gov-
ernments around the world to reduce fossil
fuel usage introduces geopolitical risk.

There are some actions that the industry
can take to help investors overcome their
hesitation. One is a continued focus on
capital discipline and on returning cash
to shareholders instead of chasing growth.

This has already been ongoing since the
2020 downturn, and, if continued, could
help to reassure investors.

Additionally, increasing transparency
around emissions data and sustainabil-
ity efforts can be advantageous. In a 2022
study, EY reported that 82% of oil and gas
companies published a sustainability or
ESG report aligned to the GRI, SASB or
TCFD frameworks in 2021, compared with
just 76% in 2020.

This increase in sustainability report-
ing has made investors “more educated
and comfortable” about the oil and gas
industry’s pledges toward the low-carbon
future, Mr Jelinek said, because they can
see the progress being made . However, he
noted that companies will need to improve
the quality of their sustainability reports in
order to maximize their value. In particu-
lar, EY noted in its report that only 26% of
oil and gas companies include third-party
assurance on ESG metrics in their sustain-
ability reports.

There’s also still a lack of reporting on
Scope 3 emissions. EY pointed out that oil
and gas companies primarily report on
direct emissions from company-owned
and controlled resources (Scope 1) and
indirect emissions from the generation of
purchased energy from a utility provider
(Scope 2). Only 33% of companies in the
EY survey reported Scope 3 emissions, the
indirect emissions that occur in the value
chain of the reporting company, including
both upstream and downstream.

This can be problematic because Scope
3 emission sources typically represent the
majority of a company’s GHG emissions,
but they are also the most difficult to mea-
sure and report because they cover sources
that are not directly under a company’s
control. “Scope 1 and Scope 2 emissions are
manageable,” Mr Jelinek said.

“Now, the lift is enormous when you
think about some of the complexity and
the breadth of the operations needed to
reduce those emissions, as well as the
age of some of the assets that exist in
the industry. But accurately reporting on
Scope 3 emissions is getting into areas
that can be outside of the control of the
operators, or even the investors. You’re get-
ting into areas where there aren’t technical
reporting standards.”
As the energy transition further pro-
gresses, sustainability reporting will likely
become a must-have, rather than a nice-
to-have, in order for the industry to secure
funding for new projects. In March 2022, the
US Securities and Exchange Commission
proposed rule changes that would require
companies to include climate-related dis-
closures in their registration statements.

Under the new rules, which could go into
effect for FY 2023, companies would be
required to disclose information about :
■ Its governance of climate-related risks
and relevant risk management processes;
■ How climate-related risks have had or
are likely to have a material impact on
their business in the short-term and long-
term future;
■ How climate-related risks have affected
or are likely to affect the company’s strat-
egy, business model and outlook; and
■ The impact of climate-related events
(severe weather events and other natural
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