High prices must fuel the IOCs' transition: WoodMac
Oil and gas companies (IOCs) must use the current cash flow windfall opportunity to speed up decarbonisation of their businesses, global natural resources consultancy Wood Mackenzie said in a report released August 19.
WoodMac tracks 45 international oil companies (IOCs) and estimates they will generate a $1 trillion cash windfall above planning and base cash flows if Brent crude remains in a $50-$70/barrel range for the rest of this decade.
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The longer IOCs cling to their current – and for now highly successful model – the worse the hit will be when it eventually comes, the report says. It urges their greater engagement with goverment and society as a whole.
Stakeholders are demanding greater accountability for carbon emissions along the value chain. Net zero Scope 1 and 2 emissions by 2050 are now the industry standard. But the move to limit Scope 3 emissions – those that come from the consumption of the products – will carry significant implications for corporate strategies and capital allocation, it said.
“It is incredibly rare for an industry to get a decades-long notice that its business is under threat. Not only does the oil and gas industry have the luxury of clear warning, it has significant cash flow coming its way from higher prices," it said. “The sector has the chance to ‘do it all’ – return cash to shareholders, fortify balance sheets and accelerate corporate transformation."
It said that having a clear financial framework for their energy transition would give companies credibility. "It should cover capital allocation between dividends, financing and investment in the legacy oil and gas businesses and low-carbon businesses.” In particular it said that the relative quantities of cash allocated to legacy and new energy, whether technology or projects, should be materially weighted towards the latter over time.
Wood Mackenzie estimates that the majors will allocate a sixth of their 2021 investment budget to renewables ($15bn), split evenly between mergers and acquisitions and organic capital expenditure. This is "clearly too little to move the needle – and other IOCs are barely scratching the surface on decarbonisation spending.” it said.
Even if they gave away 30% of operating cash flow in dividends that would still allow budgets to expand by a third relative to current planning. If two thirds went on low-carbon spending and a third on oil and gas, IOCs could have $660bn of decarbonisation investment firepower this decade.... A committed and collaborative response, in contrast, could transform IOCs into a credible part of the solution.”