Why Investing in Clean and Efficient Energy Production is a Boon for Oil and Gas

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Oil and gas companies had a remarkable year in 2022. Record profits and technological innovations empowered decision makers to expand domestic energy production, slash debts and return cash to investors through stock buybacks and variable dividends.

Typically, companies in this position arrive at a crossroads: they can either prioritize shareholder expectations for quarterly growth or shore up the long-term sustainability of their operations. But the results of Lathrop GPM’s third annual “Oil & Gas Market Update” suggest that oil and gas executives are choosing to walk and chew gum at the same time.

Several factors are driving the shift to this dual-pronged business strategy. Rising inflation and geopolitical turmoil have demonstrated the importance of diversified and domestic business investments to safeguard the industry’s future. U.S. energy demand is increasing, as are calls for a broader shift to alternative energy sources.

These developments have forced oil and gas executives to thread the needle between long-term and short-term goals. And for the most part, they’ve landed on a common set of solutions: 47% of energy and utilities executives have reported a commitment to a CO₂ emissions reduction or net-zero emissions goal, and our survey respondents named energy efficiency improvements as their leading focus for diversified investments.

Why does that path appeal to oil and gas executives, and what are the new opportunities the clean energy transition offers?

Emissions reduction a win-win

Shareholder pressures continue to mount as ESG-focused investing becomes more commonplace. In fact, more than $30 trillion is projected to pour into ESG-focused investments by 2030, and large institutions have begun to include more specific expectations for companies claiming to meet ESG criteria. To court these environmentally conscious investors, oil and gas companies recognize the need to develop a long-term carbon reduction plan and provide ESG disclosures in the interim.

But the move to reduce emissions isn’t just about placating investors. ESG factors appear to have a consistently positive impact on companies’ financial performance. Sustainability initiatives also appear to drive better results, in part because of improved risk management and increased innovation. Not to mention an early move to carbon reduction could stave off pressure from regulators as they race to standardize and formalize ESG reporting in the U.S.

It tracks then, that nearly three-fourths of industry leaders in our survey said that ESG policies were in development or already in place at their companies, with industry standards and regulations their primary motivations for adoption. Further, more than seven in 10 oil and gas decision makers saw opportunity in the growing focus on renewables and environmental initiatives.

As these trends ramp up, oil and gas companies should consider taking a page from companies such as Marathon Oil Corp., which ties greenhouse-gas (GHG) reduction targets to yearly cash bonuses for employees, or VAALCO Energy, which links executive compensation to ESG factors such as carbon footprint-reduction targets and improved reporting of air, water and waste metrics. Doing so could set them on a path toward stronger investments, limited disruption from regulators and even profitability over the coming decade.

Sustainability leads to efficiency

At least two-thirds of oil and gas executives surveyed said they would focus on new technologies heading into 2023—and among those projects, carbon capture and methane emission reduction dominated companies’ large-scale investments. This sprint toward innovation wasn’t just spurred by public outcry or investor relations. The industry’s advances could make energy production more efficient, driving down costs and opening up new sources of revenue.

Carbon capture in particular is an attractive prospect for industry heads because it doesn’t require a full-scale pivot to renewables. And with the passage of President Biden’s sweeping climate package last September, billions of dollars have been earmarked to support new carbon capture technology.

Not ones to leave money on the table, industry leaders launched a diverse array of carbon capture projects. Exxon Mobil Corp., CF Industries and EnLink Midstream recently joined forces to capture 2 million metric tons of CO₂ annually—slated to get off the ground in 2025. Occidental Petroleum Corp. plans to finance a project to capture CO₂ from the Permian Basin and store it underground, using it to increase pressure in the oil field and unearth—you guessed it—more petroleum. Although not necessarily a long-term solution to climate change, carbon capture projects such as Occidental’s have the potential to lower oil recovery costs, drive drilling efficiencies and reduce GHG emissions.

Oil and gas companies have also trained their sights on recapturing methane, a GHG that scientists believe could one day be used in manufacturing organic chemicals and fuel. Leading industry players are now deploying sensors to detect methane leaks from aircraft or satellites. Preventing such leaks will not only help them meet emissions targets but could prove lucrative in the long run. In fact, companies who haven’t devoted R&D efforts to this burgeoning technology risk falling behind the curve—the scientific community’s recent efforts to craft a scalable process for converting methane into methanol, for example, have shown great promise.

Another notable finding from our survey: industry leaders believe digitization can also streamline energy production and day-to-day operations. The integration of technologies such as cloud computing and predictive drilling analytics is helping industry players increase productivity. Using intelligent automation—a tantalizing proposition in today’s tight industry labor market—companies can monitor workloads and boost server utilization to optimize their investments while reducing their environmental footprint.

Recent breakthroughs in AI, like ChatGPT, suggest the full automation of drilling processes may be within grasp before the end of the decade. To reap these production efficiencies, oil and gas companies will have to sincerely consider transforming into digital-first organizations.

2023 off to a strong start

Coming off an impressive year, oil and gas businesses may feel tempted to rest on their laurels. But today’s volatile political and economic climate could easily catch up to them. Industry leaders should continue leveraging this high cash flow, low-debt environment to introduce larger, diversified investments in clean and efficient energy production. Many industry players have taken their first steps toward a sustainable, carbon-neutral future. But 2023 is already well underway, and industry executives need to keep moving to ensure they don’t get left behind.

Patrick McRorie leads the energy team of law firm Lathrop GPM and is partner-in-charge of the Denver office.