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Energy Transition: Optimizing Existing E&P Value and Clean Energy Potential

Paul Allan, Richard Brogan

Abstract: Reduction of CO2 emissions has become a key component of many E&P company strategies, reflecting the accelerating demands of interest groups, activist investors, and country specific legislation for specific targets and measures of carbon footprint reduction. Underlying this requirement for change are the existing investments and cash flows resulting from the core ‘conventional’ business opportunities, that while potentially carbon heavy generate the cashflows needed to sustain and grow the business. Our work with several major energy firms has shown that assumptions and decisions impacting the pace of needed change need to be carefully tested, as many of the optimal decisions are counter intuitive. An example at a large integrated company was the insight that expansion of its shale resource investments accelerated the transition to a lower carbon footprint, given the cashflow generation and potential to advance low carbon alternatives in parallel. A portfolio model has been developed that replicates many of the options a company might assess in developing a strategy for carbon reduction and energy transition. This includes estimations of carbon generation from existing businesses as well as carbon reducing strategies ranging from carbon capture to new clean energy sources such as wind, solar, or hydrogen. A case study is used to represent the existing performance delivery and expectations for a large, integrated oil firm as it ‘transitions’ into a cleaner, low-carbon company. This modelling provides a window into the complexity of timing trade-offs, criticality in specific early investments, and drivers to the decisions surrounding a transitional business. The impacts of stasis, premature ‘forced’ transition, and errors in new clean energy ‘bets’ are assessed and tested, providing insights into risk mitigation strategies and alternatives. The case study clarifies the complexity in trade-offs within what appears to be a ‘simple’ energy transition strategy. This highlights the value and insights resulting from quantitative modelling of these decision structures. This paper provides examples of current methods of quantifying and assessing carbon reducing strategies. As the actual costs of generation depends on political considerations and societal demands, a wide range of typical company assumptions is outlined. In assessing alternative sources, the paper outlines the related ‘costs’ in the most touted clean-energy alternatives, both in the costs of implementation as well as the possible costs or charges resulting from future carbon generation. While most integrated energy companies have considered carbon reduction within their strategic plans for many years now, the investments in carbon reduction are for the most part negligible in comparison to conventional investments. International attention to carbon reduction and changes in societal expectations are putting additional pressures on companies to adapt more rapidly. However, transition introduces additional uncertainty, as seen by the possibility of a reduction in the credit ratings of some companies. Planning and understanding the proposed path is key to success.
Keywords: artificial intelligence / renewable energy / wind energy / sustainability / investment / transition / climate change / social responsibility / portfolio / selection

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