The oil and gas industry is shifting towards a new investment cycle that prioritizes decarbonization and sustainability alongside financial performance.

Emission-reduction targets are now a critical part of project development and decision-making processes.

Oil and gas companies must navigate uncertainty while delivering on their commitments to decarbonization, resilience, and diversification.

The upstream oil and gas sector stands on the cusp of entering a new investment cycle — one that Rystad Energy has dubbed the ‘deliver in uncertainty’ cycle — where there is set to be an increased focus among players to deliver on sustainability targets while remaining financially robust.

The previous cycle, which started amid the Covid-19 pandemic in 2020 and is now ending, threw energy markets into turmoil. However, it accelerated the pace of energy transition as oil and gas companies were forced to re-invent themselves, figuring out their value proposition amid an increasing push from investors and governments to do more to lower emissions.

With Russia’s invasion of Ukraine in February 2022, high energy prices, OPEC+ production cuts and a realization that transition may take longer, the pendulum swung towards resilient supply, with the stock prices of major oil players rising, market capitalization surging, and companies paying dividends and undertaking share buybacks like never before.

Oil price cycles typically affect investment levels and force some exploration and production (E&P) players to adopt new strategies and reset priorities to remain competitive and investable in a new market reality. The market is nearing the end of the current investment cycle where, to protect their balance sheets and stabilize returns, E&P players have revised and reshaped their portfolios, prioritizing decarbonization and portfolio resilience. As a result, a wide range of new key-performance indicators and targets were adopted as part of the decision-making process. Emission-reduction targets, emission intensity and carbon prices are no longer a novelty in decision-making and portfolio valuation; they are essential parts of a company’s strategy.

Digitalization has been under the spotlight of the industry and companies for several years, but eventually it became a part of ‘business as usual’. Now, digital initiatives are an essential component of project development as they are beneficial in terms of optimizing cost and time. Decarbonization can be considered in the same way: steadily, it is becoming a part of business strategy, and abatement plans must be included in each project development as, even if a company has an objective of increasing supply, its emission-reduction targets make it accountable for keeping emissions under control.

Decarbonization as a new digitalization strategy is now an essential part of business, with companies, the financial sector and governments sharing accountability for reducing emissions to meet global emissions targets.

For the upcoming ‘deliver in uncertainty’ investment cycle, oil and gas companies must deliver on commitments, targets and goals acquired in the previous cycle associated with decarbonization, resilience and diversification while performing their fiduciary responsibilities. Even under the most conservative energy transition scenario, where hydrocarbon demand aligns with a 2.2 degrees Celsius temperature increase – referring to average global temperature rises above pre-industrial levels – upstream investments are expected to plateau at around $620 billion per year.

By Olga Savenkova,  Rystad Energy / Dec 06, 2024.