European Majors Leading But Investor Pressure Evolving Fast, Turning to Mid-caps, Juniors 

In a new report, Sustainable Fitch reveals that oil and gas companies are struggling to come up with credible transition plans, and that while European majors are leading the transition, investor pressure is evolving fast and turning to mid-caps and juniors. 

The use of the sector’s fossil fuel products is one of the biggest global sources of GHG emissions and it is one of the most emissions-intensive industries. Demand destruction and pressure to decarbonize due to the global transition to a low-carbon worl d present significant and unique risks for the oil and gas industry.

Most Companies Not Yet Addressing Possible Demand Destruction

With 90% of the world’s GDP and 85% of the world’s population covered under some sort of national net zero policy or target, we expect a profound impact on demand for oil and gas products in the long term. However, oil and gas companies still generate the vast majority of revenues from producing and selling fossil fuels and investment in upstream production and exploration remain significantly larger than capex in low-carbon business models.

New Business Models Emerging Only Slowly

European majors and some mid-caps and juniors are increasing investments in renewable energy and other alternative fuels while US majors are focusing on blue hydrogen and carbon capture solutions (CCS) as possible new revenue streams. In the short term, no oil and gas company has developed a business strategy that would offer a clear and robust path to shift away from fossil fuel production.

Shift from Oil to Gas Brings Long-Term Uncertainty

Both majors and smaller companies have started to significantly shift from oil to gas production. Gas has long been seen as a ‘bridge fuel’ and many in the industry consider it a viable, long-term option as a lower-carbon energy source to shift from coal electricity generation to gas before making the shift to renewables. The coal-to-gas shift is one of the main reasons why the US has achieved considerable emissions reductions in recent decades. Especially in emerging markets this has been a key reason for continued investment in gas exploration, and gas demand forecasts continue to project increasing demand for gas in the coming decades, especially in Asia.