Complying with ESG standards and philosophy is extremely important to the survivability of O&G companies, an analyst says 

by NUR HANANI AZMAN / pic by AFP

ENVIRONMENTAL, social and corporate governance (ESG), and technology are overarching factors that require oil and gas (O&G) companies to make the transition from being pure fossil fuel players to energy solution companies. 

IDEAS senior fellow and Asia School of Business assistant professor of business and society Dr Renato Lima de Oliveira said new technologies, such as electric vehicles, are starting to seriously impact oil in its core market, which is as fuel for transportation. 

“As investors pump money into ESG funds, it is becoming more expensive to fund projects that do not meet ESG criteria, such as building new coal power plants. 

“With a declining market in a few years and raising financing costs, core O&G players will face increasing challenges. So, complying with ESG standards and philosophy is extremely important to the survivability of O&G companies today,” he told The Malaysian Reserve (TMR). 

De Oliveira added that energy transition will have an impact on different actors and governments differently, generating winners and losers. 

Energy-rich countries that rely on fiscal revenues from sales of O&G could lose from the transition as there will be less dividends from national oil companies (NOCs) to be received and royalties to be collected. 

“Investors of companies who are not seriously building new capabilities in renewables risk seeing their assets sharply losing value. The energy transition will not come overnight, it is a long process, so there is time to adjust. “It won’t take anyone by surprise. The important thing is to build contingency plans and invest in new capabilities,” he added. 

There is No Single Path Towards Net Zero

The biggest O&G companies understand that the energy consumption pattern is slowly but surely changing, and they want to have a portfolio that is resilient to that. 

Initiatives are focused on reducing current emissions by shifting fuels to low-carbon alternatives and deploying more efficient processes, and capturing and storing emissions from the hard to abate sectors such as steel, cement and chemicals. 

“The key is to come up with lower-cost technologies to align what is technically feasible with what is economically doable. 

“This requires a combination of technological advances and policy incentives such as carbon taxes,” de Oliveira said. 

The ESG agenda is a global one and Malaysia is deeply connected into the global value chain. 

“There are multinationals with a presence in Malaysia that are pushing for it and local suppliers who export from Malaysia and need to comply with ESG standards. 

“A key challenge is to have more bottom-up pressure from social and environmental activism in Malaysia and ensure transparency and accountability of decisions that go against this agenda, such as large-scale conversion of reserve forest to other economic activities,” he reckoned. 

Call For Concrete Policies 

Fitch Solutions Senior O&G analyst Peter Lee said the upstream outlook for Malaysia is mixed with the general view for crude oil production levels to continue to decline over the coming years, as natural declines set in, and investments move towards cleaner fuels. 

The outlook for natural gas is more positive, he added, with a fair majority of planned and proposed upstream projects in Malaysia are more heavily geared towards gas, while mature offshore, deep-water areas offer output growth potential, including in the form of under-developed higher carbon dioxide (CO2) gas reserves. 

“The sector continues to be reliant on the activities of Petroliam Nasional Bhd (Petronas). The state-owned entity has signalled the intent to reduce annual capital expenditure spend over the coming years, although it has pledged to maintain spending in domestic upstream activities for the time being,” Lee noted. 

He added that the thawing of relations with the Sarawak government in this regard, is a plus for the NOC, as it frees up Petronas to leverage on the abundant remaining gas opportunities in the state,” he told TMR. 

Higher development costs remain the main issues for foreign firms as projects move out to costlier, more difficult to access areas, and would require sustained high levels of global oil prices to justify the investments required. 

ESG considerations are also becoming important factors in dictating a NOC’s ability to forge ties with foreign firms, which are facing more explicit shareholder pressure to abide by ESG values. 

In this respect, Lee said Petronas’ early commitment to net-zero target by 2050 and increased efforts to reduce scope 1 and scope 2 emissions from its assets, amid growing interest in new energy businesses, stand to serve it well in the years to come. 

“In terms of how feasible the net-zero 2050 target, given how early in the process we still are, is difficult to tell. 

“Though in contrast to its ambition to achieve carbon neutrality in the next several decades, concrete policies in regards to how this goal will be achieved are still not set — both at the national and corporate levels — indicating clear room for improvement,” he added. 

ESG To Actas A Tool to Achieve Sustainability 

Amarjit Kaur, a director and consultant at SHEMSI Sdn Bhd, an environmental and sustain AFP bility consultancy, said O&G companies can expect increased pressure from stakeholders to be more accountable and start taking more urgent action, guided by science. 

She said this could be setting science-based targets, focusing more effort on effective CO2 mitigation, be it through adapting new carbon capture and storage technologies, implementation and use of renewable energies, and by revising or transforming current business models. 

Being under the spotlight as one of the main contributors of climate change, the O&G sector is greatly expected by its stakeholders, including the public and investors, to accelerate implementation of ESG strategies and effectively communicate their performance, she said. 

“Failing to do so will affect the company’s reputation, operations and its overall social license to operate. The Royal Dutch Shell Group, for example, was recently embroiled in climate change litigation and was ordered by Dutch judges to cut its emissions by at least 45% at the end of 2030, relative to 2019 levels,” she told TMR. 

Amarjit said regulators will most likely place greater emphasis on carbon disclosures and adoption of science-based targets, and perhaps even making it mandatory through frameworks such as the Task Force on Climate-Related Financial Disclosures. 

“We could perhaps also expect phasing out of certain industries that are major CO2 emitters, or those that heavily rely on fossil fuels. This includes for example prohibition on exploration of new O&G fields. 

“Shareholders/investors will most likely place more confidence in companies that reflect ESG risks and opportunities in their strategy and demonstrate implementation of their action plans,” she added. 

Stakeholders will also expect more reliable and comprehensive ESG related disclosures from companies including information on their strategy and updates on their progress and performance. 

“As climate change accelerates, we can expect stakeholders in general to be more scrutinising of the energy sector’s actions,” she reckoned.