Vulnerability Index Reveals Scale of Challenge

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This past year of Covid-19 disruption has focused greater attention on issues of vulnerability, not least for an oil industry facing the double challenge of a pandemic and an energy transition that's gaining real momentum. Corporate vulnerability to the energy transition depends on both the durability of the current business, and how strategy is adjusting to ensure longer-term viability. Various approaches are being tried with companies looking to both boost the resilience of existing business models and to transform by implementing more radical changes, according to Energy Intelligence's pioneering Vulnerability Index. "With pressures continuing to rise, developing a fuller strategy is critical,” says Alex Martinos, co-author of the report. It is then crucial to implement the strategy and deliver, he adds. The latest annual update of the Vulnerability Index highlights how engagement with the energy transition is spreading across the industry (NE May21'20). The greatest improvement in scores is not among the European majors -- who have already taken action -- but among mid- and low-tier companies taking some initial, albeit important, steps. Such actions indicate that transition- and climate-related demands from investors and wider stakeholders are rising across peer groups -- a “megatrend” that’s expected to continue (related). Intended to assess which companies are best placed to survive the energy transition and which are most exposed, the Vulnerability Index includes 26 oil and gas companies -- 11 national oil companies (NOCs), six leading independents, four regional integrated companies, and all five supermajors. With each one facing pressures and challenges, the index also points to the different strategic priorities for peer groups and individual companies. European Majors Europe's majors continue to lead in advancing transformational strategies, but have their work cut out to prove the viability of the emerging business models, the ranking suggests. The group has set increasingly bold net-zero emissions targets, with nearly all except Austria's OMV including some form of Scope 3 end-use ambitions in their goals. Many also entered 2020 with well-advanced transition strategies, especially relative to other peer groups, deepening their plans and focusing more on execution. They are expected to continue rapidly advancing their transition strategies and mitigating their vulnerability. BP, which enacted the most dramatic strategic pivot of the entire industry, lags other supermajors in diversification and its European peers in low-carbon investments, a gap it needs to close quickly. European firms account for the lion’s share of the industry’s low-carbon investments too, focusing not just on renewable power, but also on technologies like carbon capture and storage (CCS), hydrogen and biofuels. But some face near-term tradeoffs between shoring up their finances and developing new business models. And, longer term, they still need to demonstrate the viability of their transformation models -- a particular uncertainty for financially vulnerable firms like BP, the report says. National Oil Companies NOCs have a different approach, reflecting the pressures they face as the custodians of national resources. The top NOCs lead on portfolio resilience, with Qatar Petroleum, Saudi Aramco and Petronas ranked first, third and fourth in this category. Financial resilience also helps set these NOCs apart, but there's no guarantee they will maintain this advantage amid recent price volatility and growing state revenue needs. While some NOCs are starting to expand their transition responses, inaction remains the top risk. Moves to diversify toward durable oil and gas segments are nascent and lack an underlying transition strategy. Such NOCs also need to clarify and link emissions goals to adaptation strategies and implementation -- while protecting their financial resilience. Many are well placed to invest more in low-carbon technologies like renewable power, CCS and hydrogen but have made limited moves, so far (NE Apr.1'21). US Majors US majors rank closer to NOCs than to their European peers, given their more modest energy transition strategies. But along with global independents they are moving to articulate clearer transition strategies, focusing, much like NOCs, on adaptation. Several, including Chevron and Exxon, have updated their emissions targets with a focus on cutting Scope 1-2 direct and indirect emissions from their operations over a five-year period. Occidental Petroleum is a rare exception, adopting a strategy built around carbon capture and the only one in this group with net-zero targets that include Scope 3. Energy Intelligence expects US firms to face continued pressures to set out more compelling strategies -- possibly also starting to address emissions from product use. They will further need to continue efforts to show clearer, more concrete transition strategies, as pressures from investors, government and society rise. As well as pathways to further reduce operational emissions, radical moves to improve portfolio carbon performance are needed. More investment in newer low-carbon areas looks possible, with interest spreading from CCS to hydrogen (NE Apr.8'21). Ronan Kavanagh, London

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