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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