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Chinese employees work on a floating solar power plant in Huainan, a former coal-mining region, in China's eastern Anhui province on Dec. 11, 2017. Chinese President Xi Jinping vowed in September, 2020, to go carbon neutral by 2060.-/AFP/Getty Images

Graeme Edge is a Calgary based entrepreneur, co-founder of the Energy Disruptors: UNITE event series and CEO of ScaleBlaze, a specialist energy transition and clean energy executive search firm

Governments globally are lining up to set ambitious climate targets for the mid-part of this century. Significant recent “net zero” CO2 announcements from China, Japan and South Korea are countering much of the climate narrative coming out of the United States. And we can expect that to change in the new year when president-elect Joe Biden, who has pledged to reverse Donald Trump’s regressive policies on climate change, takes office.

What we are seeing play out is a geopolitical dogfight for 21st-century energy supremacy between traditional petrostates and China, which looks to become the world’s dominant electrostate. China is uniquely positioned with a huge domestic market, manufacturing expertise, rising R&D capability and globally recognized brands. (Look no further than Huawei and Xiaomi.) It is aiming to dominate the hardware, software and data businesses for future renewable energy, transportation and industrial electrification. The emergence of new sharing business models led by Didi Chuxing, a ride-hailing company, is further accelerating these trends.

Many commentators, energy analysts and leaders at incumbent oil and gas companies are either failing to see the tectonic shifts happening, or they see the trends but don’t know how to respond. Often the counterargument to this increasingly electric energy future is increased global economic activity, further industrialization in Asia and rising consumer demand for things such as plastics will make all energy boats rise, oil and gas included. This is a risky strategy. A better solution is for exploration and production (E&P) companies to first look inward, not outward, before they miss the opportunity to work a changing landscape to their advantage.

Most E&P companies have been so busy surviving that they haven’t looked up long enough to see the wood for the trees. The “wait for prices to recover” strategy of the past five years has not paid off and is unlikely to do so. Capital for publicly traded oil and gas companies is getting more expensive. Stakeholders are increasingly pressuring university endowment funds and other sources of investment to divest from hydrocarbons. Institutional investors such as BlackRock are signalling that major improvements are needed from the oil and gas industry on environmental, social and governance issues and emissions reductions.

Many large E&P companies have responded with vague “net zero” announcements that contain little detail on how to achieve this. Public perception is increasingly skeptical, and actions must replace words. Reliable ESG data are sorely lacking and it’s not clear how future CO2 improvements will be recorded, verified or audited. A global price on carbon is long overdue to level the energy playing field and mitigate CO2 leakage from the West to the developing world.

With a new generation of internet and social-media savvy young people increasingly voicing their frustration, the climate-change narrative has morphed into the climate-crisis dialogue. Against this backdrop, voices promoting a divestment from fossil fuel are only increasing in volume, potentially causing a vicious spiral in capital costs in years to come for both public and private oil and gas companies. The unintended consequence of all this could be to push future hydrocarbon investments and greater supply from the West into the hands of national oil companies in parts of the world that have little to no environmental legislation, monitoring or enforcement, ultimately increasing global CO2 emissions.

In many ways, hubris exists on both sides of the climate and energy debate. Staunch oil and gas proponents view climate-change advocates as naive, arguing new renewable energy technologies are fraught with high costs, technical problems and a lack of energy density. And indeed, many hardcore transition proponents – some calling for the total eradication of hydrocarbons – are poorly versed in the economic and geopolitical realities of the global energy supply chain: Much of it will be impossible to decarbonize without significant technological, economic and regulatory breakthroughs. The transition will take decades, play out at various paces across different regions and be fraught with complexity.

What should E&P companies do about all of this? To begin, they must go beyond their peer group for examples of leading-edge thinking, ambition and execution. Boards and executive teams are split into three groups: the traditional “do what you know best” camp; leaders sitting on the energy transition fence; and increasingly loud voices calling for decisive action around business transformation. The latter group is still outnumbered. In many ways, leaders are afraid to step out from the herd mentality that has been prevalent for too long in the industry.

With the majority of oil and gas boards heavily weighted with industry veterans, diversity of opinion is sorely lacking. Existing boards are in desperate need of overhaul – as are the traditional executive search firms that serve them and continue to hire in their own image. Younger, more diverse board members are sorely lacking. Creativity, customer-centric design, digital technology transformation, electrification market knowledge and strategic pivot expertise are essential for future success.

Boards are understandably nervous about the viability of diversifying into new low carbon energy investments. There seems to be little crossover between running an oil and gas company and trying to build a renewable energy business. How do they compete with incumbent utilities and entrepreneur-led entrants that are more knowledgeable about global power markets and emerging trends – including virtual power plants, distributed energy resources and digital grid innovations – and have deeper consumer-facing business expertise?

Oil and gas companies are looking at the emergence of the hydrogen economy as a possible saving grace that would enable them to play to their fuel-based engineering strengths and competency in developing complex processing and distribution infrastructure. Another area of considerable opportunity is scalable technology-based solutions in carbon capture, utilization and storage, and potentially selling this expertise to other industrial polluters and competitors.

There are no clear answers on how best to respond to the current crisis facing the industry, but the first step should be the rejuvenation of oil and gas company boards and leadership teams. A bolder, more diverse and inclusive future vision for the industry would not go amiss either.

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