A recent McKinsey Quarterly article by Scott Nyquist and Jurriaan Ruys identified both challenges and opportunities for the oil and gas industry stemming from looming climate change regulations. While many know of the downside risks to the oil and gas industry stemming from pending climate change regulations, I would like to highlight some of the revenue opportunities that Nyquist and Ruys point out in their article. These include greenhouse gas trading, energy efficiency consulting, biofuels and other renewable fuels and carbon capture and sequestration.
Oil and gas companies are directly responsible for only 6% of CO2 emissions (approximately 2.9 billion tons of CO2 equal vent split equally between upstream and downstream operations), the end uses of oil and gas hydrocarbons account for almost half of global CO2 emissions. Emissions from the industry are projected to grow by a third, primarily through more energy intensive upstream production methods as we move toward more unconventional sources – think tar sands and heavy crude production, even after a significant reduction of gas flaring (mainly in Africa). Downstream emissions will likely stay constant, but there may be a major shift in the country originating the emissions. Pending climate change legislation in the US (Waxman-Markey and Kerry-Boxer bills) will make it difficult if not impossible to refine crude domestically as refineries will not only be responsible for the emissions in their operations but also for the combustion of the fuel they sell. America may move from a country reliant on foreign imports of crude to a country reliant on imports of refined products which may pose an even more ominous national security issue.
First, many oil and gas companies have trading capabilities that can be expanded to greenhouse gas markets. Profits can be made in the CO2 markets as companies that have both CO2 emissions and abatement credits, the combination of these can provide arbitrage opportunities for the firms. Due to their direct involvement in the industry, companies will be able to develop proprietary views on the CO2 market and potentially profit from price movements.
By being leaders in the realm of energy, oil and gas firms can identify and implement energy efficient programs through a consulting arm. This knowledge can be sold to industrial firms everywhere to generate revenue for the firms and cost savings for clients.
Related to biofuels and other alternative transportation fuels, oil and gas companies have well developed marketing groups and retail operations that can provide electricity, hydrogen or CNG to customers. Many firms have even begun looking at adding biofuel production to their portfolio of assets. This provides a first mover advantage vs. new entrants that will need to develop an extensive infrastructure.
One of the biggest opportunities will be to develop and provide carbon capture technology and storage capacity to utilities and other industrial concerns. This technology will most likely have to be developed in order to meet regulatory requirements for refineries and upstream production with high CO2 emissions. Oil and gas companies have experience injecting CO2 and other compounds in reservoirs undergoing enhanced oil recovery, in addition to access to and knowledge of depleted fields that could be potential storage sites.
As Nyquist and Ruys state, “Top performers in this sector will be the ones that stay ahead of these changes by mitigating the downside risks through internal abatement efforts and by taking advantage of value creation opportunities that this rapidly changing business environment presents”. Investors would be well served to seek out those companies that are already looking ahead to leverage their existing strengths, assets and knowledge to win in this evolved market.