IOCs lead the push towards net zero

Only a handful of state-owned oil and gas companies around the world are taking serious steps to move beyond hydrocarbons, with even fewer truly looking to decarbonise, as most have various degrees of ambition to move away from fossil fuels compared with IOCs like Shell, BP and Total.

Listed oil and natural gas majors have faced growing criticism as the world adapts to a new energy landscape that is focused on energy security and adjusting to high fuel costs. At the same time their larger state-owned peers – the likes of Saudi Aramco, Rosneft and Petrobras – have attracted comparatively little public anger.

It is a mixed bag when it comes to NOCs and the energy transition, according to an analysis of company reports and announcements from 22 of the world’s largest NOCs. Southeast Asian NOCs – such as Malaysia’s Petronas and Thailand’s PTT – are clear frontrunners as they have taken serious steps to diversify that include establishing clean energy subsidiaries and implementing a wide swath of decarbonisation measures.

The Middle Eastern NOCs are following a two-pronged strategy. Abundant low-cost reserves are enabling an expansion of their hydrocarbon businesses but these companies are also among the most ambitious for renewable energy and hydrogen. China’s companies are caught in the middle as all three have decarbonisation targets and are making progress to reach them – yet relative to their size, their actions are modest at best.

Latin America is characterised by diversity. Mexico’s Pemex, Venezuela’s PDVSA and Ecuador’s Petroecuador show no interest in anything non-hydrocarbon. Brazil’s Petrobras is taking some steps to adapt but remains firmly fixed on fossil fuels. Colombia’s Ecopetrol and Argentina’s YPF have tangible plans to expand beyond oil and natural gas.

Russia’s five main state energy companies are laser-focused on hydrocarbons. There are no indications that any of Rosneft, Gazprom, Lukoil, Tatneft and Surgutneftegaz seek to make any inroads into low-carbon sectors. Russia's invasion of Ukraine and the subsequent isolation of its oil companies from the global financial system further disincentivizes the companies to decarbonise.

Setting up goals

Three tiers emerge when comparing the decarbonisation targets of NOCs. The Southeast Asian and Middle Eastern companies – excluding Kuwait Petroleum Corp (KPC) and Algeria’s Sonatrach – are the most ambitious as they have both near-and long-term emission reduction targets, and also the most extensive renewable energy, hydrogen and capital expenditure targets.

Petronas, PTT and Pertamina from Southeast Asia, and Aramco, Abu Dhabi National Oil Company (ADNOC) and QatarEnergy in the Middle East have each set aggressive near-term Scope 1 and Scope 2 greenhouse gas emission targets to be achieved before 2035. The three Southeast Asian NOCs and Saudi Aramco have gone a step further by announcing aggressive long-term Scope 1 and Scope 2 targets to be fulfilled after 2035.

All six companies from the two regions also have ambitious renewable power capacity targets, while Aramco, ADNOC and QatarEnergy are looking to stake an early lead in the nascent hydrogen sector with aggressive goals for producing low-carbon hydrogen.

NOCs in the rest of the world have shown considerably less motivation when it comes to their decarbonisation targets. China’s NOCs land in the middle – China National Petroleum Corp (CNPC), CNOOC and Sinopec variously have targets for renewable energy, hydrogen, and capex commitments for the energy transition, but these are less ambitious than their peers in Southeast Asia and the Middle East. Their Scope 1 and Scope 2 pledges are also less inspiring.

State energy giants in Latin American and Russia rank at the bottom of the decarbonisation targets hierarchy. Colombia’s Ecopetrol and YPF from Argentina stand out as having considerable ambitions for their size, but there is almost a total absence of targets among their peers like Pemex, PDVSA and Petroecuador. For Russia, while Gazprom, Rosneft, Lukoil, Tatneft have aggressive near-term Scope 1 and Scope 2 emissions targets, each company has stayed silent on plans for renewable power, capex for funding the transition, and hydrogen output.

Progress on decarbonization strategies

Middle Eastern and Southeast Asian companies are leading the pack for active decarbonisation measures – mainly renewables, hydrogen, and carbon capture and storage (CCS) – but the rest of the pack is lagging.

A handful of companies make up the bulk of the 130 GW of renewable energy targets by 2035 announced to date by NOCs. ADNOC is the clear trailblazer among the 22 NOCs with a goal of deploying 50 GW by 2030. ADNOC likely aims to achieve this via Emirati renewable energy company Masdar, in which it acquired a 24% stake in Masdar’s renewables business in 2021.

Masdar holds a portfolio of roughly 23 GW of installed renewables capacity, which would imply ADNOC has about 5.5 GW through its stake, and has another 1.4 GW of projects in Azerbaijan and Tanzania in the pipeline.

 Similarly, Petronas’ goal is set by its wholly-owned subsidiary Gentari that was set up last year rather than by the Indonesian state giant itself, with the unit targeting up to 40 GW by the end of this decade. Aramco and Thailand’s PTT also prioritise the renewable energy sector. PTT owns a power generation subsidiary called Global Power Synergy Public Company, which handily positions the Thai conglomerate to ramp up its renewable energy capacity.

Petrobras has the largest project in the pipeline with its 4 GW Aracatu wind farm offshore Rio de Janeiro to be developed with Equinor, although the project remains in the planning stage.

The Middle Eastern producers are particularly well-equipped to scale up their renewable energy capacity. Their low-cost and abundant hydrocarbon production is leading to growing revenues in high oil price environments, while requiring fewer dollars-per-barrel of reinvestment than their peers. Meanwhile, their levelized-costs-of-electricity are among the lowest in the world. It is likely that ADNOC, Aramco and QatarEnergy will all expedite their renewable energy deployment over the years to come.

 Southeast Asian producers have strong incentives to branch away from their core business. Hydrocarbon revenues make up a relatively smaller share of their portfolio, and for Pertamina and particularly PT reserves are running low.

Ecopetrol is in a similar position, with president Gustavo Petro, elected last year, planning to “end Colombia’s reliance on fossil fuels” with oil and natural gas reserves sufficient for fewer than 10 years of production. The company also acquired a 51% stake in Colombia’s electricity transmission company Interconexion Electrica, suggesting that it seeks to make more inroads into the power sector.

Low-carbon hydrogen initiatives are sparser. Only six companies – Sinopec, Aramco, Petronas, QatarEnergy, ADNOC and Ecopetrol – have announced output targets, which amount to a combined 8.5mn metric tons/yr of production. This is the equivalent to around 28bn m³ of natural gas, or just over one-tenth of the 270bn m³ of natural gas that the six NOCs aimed to produce annually by 2030.

The Middle East leads the group when it comes to hydrogen, mainly in the form of blue hydrogen produced by natural gas and CCS. Aramco has targeted 2mn mt/yr of blue hydrogen by 2035 but a shortfall in natural gas might thwart its aspirations as the company prioritises the use of natural gas to abate oil in the power sector.

Aramco is looking to expand its natural gas production by 60bn m³/yr by 2030, but only has the 20bn m³ Jafurah field and the 11bn-m³ Hawiyah natural gas plant in the pipeline. This would be enough to offset about half of the 900,000 barrels per day used for the kingdom’s power generation, leaving little to no natural gas for blue hydrogen. ADNOC might face a similar shortfall, while Petronas and QatarEnergy are better equipped to provide needed natural gas.

A flurry of EU diplomacy emerged in the Middle East last year as the European mainland sought to rapidly minimise its dependency on Russian energy imports. Hydrogen will form a key component of this strategy, in line with the EU’s target to import 10mn mt/yr of low-carbon hydrogen by 2030. While Europe prefers green hydrogen, it seems possible that the Middle East will opt to ramp up its natural gas-based blue hydrogen exports to Europe.

In Latin America, Ecopetrol, Petronas and YPF will likely step up their hydrogen ambitions. Ecopetrol and Petronas have already taken first steps, having a well-elaborated stance on hydrogen and multiple partnerships. Ecopetrol also stands to benefit from the administration of Gustavo Petro, who was elected as Colombia’s president last summer and heavily favours a move away from fossil fuels. And while YPF lacks any concrete projects or targets to date, Argentina and YPF have established the H2ar Consortium that seeks to foster cooperation between different parts of the hydrogen value chain.

The NOCs account for about 30% of globally installed CCS capacity, at 14.6mn mt/yr. Petrobras accounts for 8.7mn mt/yr as it has the world’s largest CCS capacity after ExxonMobil. But only five out of the 22 NOCs have CCS projects in the pipeline – three of which come from the Middle East – that amount to 20.7mn mt/yr. Adding up all existing and planned projects, their capture volume amounts to 35.4mn mt/yr – equivalent to nearly two-thirds of the 55mn mt/yr that Petrobras emitted as Scope 1 and 2 emissions in 2020.

 This is marginal compared with the 265mn mt/yr of CCS capacity that the International Energy Agency (IEA) says could be in place by 2030. But the relatively small figure is mainly because the bulk of new CCS projects under the IEA’s total are deployed in fossil fuel-fired power generation, in which the NOCs have little to no stake. With blue hydrogen ambitions looming large among the Arab Gulf countries, an uptick in their CCS ambitions seems likely.

 At the same time, the biggest upcoming CCS users – namely Petrobras, Aramco and QatarEnergy – reinject or plan to reinject most of their captured CO2 into oilfields for enhanced oil recovery. This raises doubts over what extent CCS can be considered part of their energy transition strategy. Rather, in tandem with a shift toward natural gas and downstream, CCS may enable NOCs to centre their energy transition narrative around their core business.

Commitments to transition spending

All of China’s and Southeast Asian NOCs as well as Petrobras have earmarked capex for decarbonisation activities in the years to come, but the amounts remain modest at best. For China, CNPC, Sinopec and CNOOC have consistently lifted capex over 2016-2021, with CNOOC planning to continue the upward trend this year. But investments in low-carbon energy remained below 0.5% of total capex for Sinopec and CNPC, while CNOOC’s reached 1.6% as of 2021.

 CNPC aims to spend around $1.5bn/yr on decarbonisation activities including natural gas, which would be a sixfold increase from 2021 spending. And at its annual strategic review in January, CNOOC reiterated a goal of allocating as much as 10% of its capex to renewables – primarily offshore wind – by 2025.

 Pertamina, PTT and Petronas have all announced capex plans for at least up to 2024 that include details on how much they intend to spend on low-carbon activities. To date this stands at $825mn/yr and $1.18bn/yr for Petronas and PTT respectively up to 2026, and $1.66bn/yr for Pertamina until 2024.

Pertamina however has a broad definition for what counts as a low-carbon business, including the likes of natural gas-fired power generation and coal gasification. With half of the Indonesian NOC’s planned power generation capacity set to come from natural gas, much of its low-carbon capex will likely still be allocated to fossil fuels. 

The high capex in the upstream segments for both Chinese and Southeast Asian NOCs will likely need to be sustained. Both regions are set to experience oil demand growth of about 1.5mn barrels/day by 2030, while natural gas demand will grow even more rapidly. The rising demand will come amid dwindling domestic reserves, which will force the companies to extract increasingly costly reserves.

In comparison Russia’s biggest energy players are not prioritising decarbonisation in their capex budgets. On average it made up less than 0.5% of their annual capex during 2015-2021. With the exception of Lukoil, almost all of those expenditures went to emissions reduction measures within their existing hydrocarbon business, notably flaring reduction. This is in line with the almost complete absence of targets or projects in the realm of renewables, hydrogen or other new energy segments.

There are no indications that Rosneft, Gazprom and their peers will change this strategy in the years ahead, as all publicly available plans hint of a continued hydrocarbon focus. The companies’ isolation from most of the global financial system following Russia’s invasion of Ukraine one year ago has further disincentivized ventures into low-carbon energy.

Latin America stands out in that every NOC in the region is allocating significant capex for their upstream business. The downstream sector by comparison usually receives around 10% of total capex, compared with 20-30% for China, Southeast Asia and Russia. The smaller share reflects the marginal role that the refining and chemical sector play in Latin America’s energy transition narratives.

 Only Petrobras has specifically earmarked a budget – $2.8bn out of $68bn – for decarbonisation efforts in its Strategic Plan for 2022-26. The reelection of Luiz Inácio Lula da Silva as Brazil’s president in October 2022 will likely herald the emergence of “Big Petrobras” – entailing greater capex for both its hydrocarbon and new energy segments.

 Colombia’s Ecopetrol spent an average of $860mn/yr on environmental issues during 2010-2020, though none of this was aimed at decarbonisation. The company has earmarked $140mn/yr for producing low-carbon hydrogen until 2040. Given the election of Gustavo Petro – who has high decarbonisation ambitions – as Colombia’s president in summer 2022, along with the company's depleting oil reserves and the high oil price environment, it is likely that Ecopetrol will accelerate its transition going forward.

 No public data is available for Middle Eastern NOCs except for Aramco, although each company has made announcements about its upcoming investment plans – most recently in 2021 and before the onset of the high oil price environment following the Russian invasion of Ukraine.

Aramco’s net income for the first three quarters of 2022 jumped by 68% from a year earlier. Assuming this increase is replicated by regional peers, the Middle East’s NOCs have significantly more financial means at their disposal than anticipated in their most recently announced capex plans – enabling the likes of Aramco, ADNOC and QatarEnergy to use those abundant revenues for both hydrocarbon and new energy businesses.