Commentary: Oil and gas is not the sunset industry you think it is
Even as climate change intensifies the call for decarbonisation, the oil and gas sector will play a pivotal role in Singapore, say EY consultants.
SINGAPORE: The oil and gas sector is widely seen as a sunset industry.
Write-downs of around US$145 billion (S$193.7 billion) in asset values globally over the first three quarters in 2020 have added to that perspective.
Singapore, while not a domestic oil producer, has high stakes in this sector. The country is a global oil trading hub and a major global refining and petrochemicals center, accounting for 1.5 million barrels a day or 1.5 per cent of the global refining volume, and 25 million tonnes per annum or 1.2 per cent of the global petrochemicals capacity.
It also thrives on a large shipping industry and is one of the main shipping bunkering stations in the world, given its strategic location.
But that may change as the world transitions away from fossil fuels. There is little disagreement that burning them contributes to climate change and other adverse environmental effects.
READ: Commentary: Singapore's oil and gas sector should embrace transition to a green future with confidence
The pandemic and other world events in 2020 have brought climate change and sustainability to the fore for businesses, governments and communities.
The oil and gas industry is similarly stepping up its response to climate change. For instance, The Oil and Gas Climate Initiative, led by a consortium of global industry players, has set aside US$1 billion to catalyse the shift to a low-carbon ecosystem.
Institutional investors are scrutinising companies’ actions and resilience towards climate change. Public policies will increasingly be oriented toward reducing greenhouse gas emissions and fossil fuels’ share in the energy mix.
In an ideal world, we would flip a switch and the energy ecosystem would be transformed. Electric vehicles would instantly replace those powered by internal combustion engines. Electricity would be generated by solar panels and windmills.
However, the reality is it takes time for consumer adoption, technology, regulations and infrastructure to come together. Oil and gas players must tackle the clean energy transition head-on and confront the “sunset” outlook for the sector.
OIL COMPANIES HAVE HUGE ROLE IN CLEAN ENERGY TRANSITION
While exploration and production may arguably be considered as “sunsetting” segments, major oil companies can face this clean energy transition with confidence.
Major oil companies are moving forward with large-scale complex projects with the most innovative technologies. They possess operational experience in the most challenging environments and have the ability to attract capital.
The energy transition is well underway as oil and gas companies decarbonise and invest in new technologies.
Major European oil companies such as BP, Shell and Eni have already announced plans to invest in the energy transition in one way or another; in renewables, carbon capture, utilisation and storage, hydrogen and buying green electricity.
Most oil majors are investing in solar energy, a key source of future energy for Asia-Pacific. Examples include BP’s investment in the Lightsource Joint Venture; Eni’s recent commissioning of a 31MW solar power plant in Italy and similar projects in Australia, Tunisia, Pakistan and Kazakhstan.
Shell also has five solar projects and plans to build a 120MW solar plant in Australia, which will help reduce its carbon emissions by 300,000 tonnes per year.
Offshore wind too is particularly attractive for oil and gas companies as there are significant cost synergies with offshore oil and gas platforms. China and Europe are leading regions for offshore wind developments.
While the energy mix is shifting towards more renewables, given the lack of stable renewable energy and accelerated energy demand in the region, the use of gas will likely remain important in providing energy to Asia as the region works toward reducing carbon emissions.
The International Energy Agency forecasts that approximately 35 per cent of the world’s electricity generation will still be coal-based in 2024. This represents an immediate fuel switch opportunity to leverage natural gas, a relatively cleaner fuel that emits about half the volume of greenhouse gas when combusted to generate electricity compared to thermal coal.
Singapore can capitalise on its existing strengths to become a future hub for natural gas trading and redistribution. In September 2020, there were over 50 companies with a liquefied natural gas (LNG) trading or business development presence in Singapore, up from over 45 in 2018.
With Asia’s appetite for LNG expected to grow, players in the ecosystem will be looking to invest and establish new LNG trading desks to feed this demand. As Asia’s oil trading hub, Singapore already has the necessary trading ecosystem and infrastructure in place, which will be attractive for companies looking to expand into LNG trading.
Additionally, Singapore is continuing to develop the use of LNG as a marine fuel and is introducing a second LNG terminal. The country’s annual LNG bunkering capacity is expected to hit 1 million tonnes by the end of this year, as the maritime community seeks low or zero carbon fuels to meet International Maritime Organisation’s (IMO) aim to halve the sector’s greenhouse gas emissions by 2050 from 2008 levels.
NEW CAPABILITIES NEEDED IN CLEAN ENERGY SECTOR
As oil and gas companies move towards low-carbon technologies, the sector will need new capabilities. This means opportunities for tech-savvy professionals to join the sector, and for incumbents in the industry to be reskilled and upskilled.
Yet, such retraining can be a challenge. According to an EY global report Oil and Gas Digital Transformation and the Workforce Survey 2020, workforce composition and training are widely acknowledged as barriers to technology adoption.
The skillsets needed to onboard and extract value from technologies such as data analytics, data science, design thinking and artificial intelligence far outpace the current level of maturity across the industry.
With Singapore’s advanced education system and workforce transformation strategies, there is an opportunity for the country to build a pool of skilled talent and plug the skill gaps to anchor its appeal as an oil and gas hub – or perhaps even contribute as an exporter of such talents and capabilities.
Programmes, such as the Industry 4.0 Human Capital Initiative helmed by the Singapore Business Federation, are already in place to help companies, including those in the oil and gas sector, to be equipped with people management and job redesign skills.
Out of the 46 companies that participated in the programme that ran between March and September 2020, the oil and gas sector was heavily represented.
Further, the Government’s position on advancing sustainable development offers the certainty oil and gas players need to move forward with the energy transition.
The announcement of the Singapore Green Plan this year establishes targets and focus areas. With policies such as the Carbon Pricing Act, which indirectly incentivise players to adopt low-carbon technologies and solutions, the country’s intent to build a greener and energy-efficient future is clear.
The future of oil and gas is complex. It would be premature to predict the demise of the oil and gas sector – at least not yet.
Rather, the sector needs a transformation, more urgently than before. For Singapore, whether this presents an opportunity or challenge will depend on how well it enables and integrates the sector’s evolution into its overall sustainable development plan.
What will it take for Big Oil to transition into a low-carbon world? Find out on The Climate Conversations.
Sanjeev Gupta is EY Asia-Pacific Oil and Gas Leader and EY Asean Energy Market Segment Leader, and Praveen Tekchandani is Director, Climate Change and Sustainability Services at Ernst & Young LLP. The views in this article are those of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.