The oil and gas industry can affordably invest $838 billion over the next 10 years to optimize the hydrocarbon business and/or open up new growth avenues in the energy transition, Deloitte said in a report released May 17.

It’s a formidable sum, but Deloitte noted that oil and gas companies invested almost $285 billion in hydrocarbons in 2020 alone, while clean energy investments totaled just $60 billion from 2015 to 2020. The huge investment is a manageable way to explore options and navigate the gap between today’s hydrocarbon reliance and the potential “green economy” of the future.

Even accelerated energy transition scenarios—including those from BP Plc, Rystad Energy and Shell—project oil demand at 87 million barrels per day (MMbbl/d) by 2030, the study said, which creates an investment, portfolio and strategic conundrum for oil and gas companies. The debate is whether to stay and capture the remaining value in hydrocarbons or explore the broader energy landscape, which leans toward electricity.

“Traditional upstream companies could choose to remain oil and gas specialists and be the leanest E&Ps, operating with a pervasive focus on cost and performance,” the study said. Those companies may not be suited for the utility-type margins and fragmented competition of the green energy domain. Others will be drawn to the opportunity to develop new capabilities and move away from the commodity mindset.

Five Debunked Myths

Despite the dramatic changes engulfing the industry, Deloitte pointed to lessons learned from the past. A statistical and financial analysis of 286 listed global oil and gas companies from 2010 to 2020 debunked five myths about portfolio building.

Agility and flexibility always deliver gains. The study found that only 16% of companies that made frequent changes ranked in the top quartile.

These attributes can have tremendous impact if done correctly, Deloitte said, but overdone or executed indiscriminately can destroy the value and trust of stakeholders. One integrated company, given as an example, constantly changed its strategy, shifting from oil to gas and back, shale to conventionals and back, and failing to generate lasting value.

Bigger and integrated is better. The study found that over 70% of large and integrated companies had subpar performance.

These attributes make sense when used to access markets and create supply chain efficiencies. However, Deloitte said it suspects that some strong balance sheets could be hiding inefficiencies.

Oil has lost its luster. The study found that two-thirds of oil-heavy portfolios delivered above-average performance, despite the disruption and price pressures of the past decade.

“In fact, a few oil companies have delivered average returns on capital of over 20% over the last five years, high than many companies un nonservice industries including utilities and capital goods,” Deloitte said.

Every “green” shift is profitable and scalable. The study found that only 9% of portfolios that became greener made it into the top quartile.

“While costs have fallen considerably, the relative economics of green energy businesses are yet to deliver consistent results,” the study said. That said, oil and gas companies have seen benefits in cases in which they have made investments in renewables or clean technology that are complimentary to their core businesses.

Shale’s pain makes all other portfolio options an obvious choice. The study found that 18% to 45% of non-shale portfolios delivered below-average performance.

Decisions, Decisions

Natural gas, the world-beater of the early 2000s, is now fighting for market share with renewables. Hydrogen might be a good choice for a company to park investment dollars but which one? Blue or green?

“This unpredictability in the clean energy space resembles the dynamism typically seen in the technology industry,” Deloitte said.

Renewable power, primarily wind and solar, has attracted the most attention because of increasing economies of scale, competitive supply chains and technological improvements, the study said.

“However,” the authors wrote,” a higher share of renewables might not directly translate into profitable growth due to fragmented and fierce competition in this space, which may not excite large O&G companies aiming to build a differentiated portfolio.”

Green hydrogen appears to be on the upswing, with costs expected to drop by about 64% by 2040, aided by strong regulation and cost efficiencies. The regulatory environment also seems to be favoring biofuels and other renewable fuels.

Climate targets and investment incentives seem to be benefiting carbon capture, utilization and storage. Investments in those projects doubled to $27 billion since 2010, the study said, citing the U.S. Energy Information Administration.

Organizations looking to invest in the green space would probably benefit by spreading their risk and choosing a combination of clean energy capabilities, Deloitte said, adding that integrated oil and gas companies are strongly placed to maximize value combined projects involving renewables, mobility and storage, and green hydrogen.

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