Ways to Play | Energy Transition Opportunities for Operators

Understand how upstream oil and gas business models best fit with emerging energy transition opportunities and gain context on the best avenues for energy transition participation for an upstream oil and gas operator. 

Research written by:  

Carson Kearl, Associate, 403.213.3814 

Morgan Kwan, P.Eng, Director, 403.535.4909 

Ian Niebor, P.Eng., CFA, Manager Director, 403.294.6494 

This eBook is based off the report published by the Enverus Energy Transition Research team, Ways to Play | Energy Transition Opportunities for Upstream Participants, published on Sept. 6, 2023. Enverus Intelligence Research clients can view the full report  here

Enverus Intelligence Research, Inc., a subsidiary of Enverus, provides the Enverus Intelligence® | Research (EIR) products.  See additional disclosures.

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Summary

  • A deliberate energy transition strategy is imperative. Upstream operators are increasingly exploring the transition, but many remain hesitant to deploy capital. Any decision, including inaction, must be well informed and deliberate in response to growing stakeholder demands.  
  • An operator’s energy transition strategy is strongly shaped by the context of its current business, the capabilities of its assets and workforce and, most importantly, its conviction in the necessity to participate in the first place. 
  • Participation in the energy transition extends beyond social license and is ultimately driven by financial returns. The transition offers both financial challenges, like rising compliance costs, and opportunities, including incentives and new business ventures, making it more than just a social responsibility. 
  • Opportunities are multifaceted and interconnected across multiple energy sectors, such as hydrogen’s vast value chain. Partnerships or acquisitions are essential as no single operator can navigate all these areas in-house, as successfully demonstrated by many upstream operators.
  • Risks in the energy transition are dynamic. Operators face evolving policies and stakeholder inquiries coupled with the threat of retrospective judgment. The fluidity of the transition underscores the need for proactive risk management. 

Overview: A Framework To Develop an Energy Transition Strategy

The energy transition is happening. While it may be viewed as a major headwind by some traditional upstream oil and gas operators, Enverus Intelligence Research (EIR) sees opportunity in the numerous business models that are emerging around transition technologies and the policies implemented to support them.

With the flurry of buzzwords and headline technologies, it is easy to be overwhelmed with what exactly the energy transition entails and how much effort, if any, should be invested toward it. EIR’s holistic approach to analyzing the energy transition space helps facilitate developing a strategy that goes beyond targeting net-zero emissions, to create a strategy that is accretive to your business.

The rise of investor preference toward operators who are participating in the transition presents a unique set of opportunities to diversify revenue streams and gain favor in the public eye. This guide is a framework for operators to create a strategy that suits a scale and scope unique to them.

3 Cs to Build Your Energy Transition Strategy

  • Context: This is important because of the impact it can have on project feasibility and returns. Context refers to a company’s existing access to infrastructure, production of a necessary resource and other geographical and regional characteristics. Without an aligned context between the existing business and a transition technology, accretive success will be hard to follow.
  • Capabilities: Given the assumed contextual adjacency with an energy transition technology, the current capabilities of your existing organization are the next important factor. Adjacent expertise can include geological and technical capabilities in reservoir analysis and drilling, which translates well to direct lithium extraction (DLE) and geothermal technologies. Scalability is important in any venture – does your infrastructure and skill set enable a competitive advantage?
  • Conviction: The level of conviction your organization is ready to pour into the energy transition will ultimately determine your success in strategy. As with any corporate strategy, success requires commitment throughout the whole organization. Waffling in and out of projects not only deters investors but deteriorates value.

Absolute conviction in the energy transition in general must be a baseline but ultimately EIR categorizes conviction in the energy transition into three buckets:

  1. Aware
  2. Adaptive
  3. Adoptive

All these considerations combined help determine which energy transition technologies make sense for an effective strategy. While most upstream operators are increasingly exploring the transition, many remain hesitant to deploy capital. Any decision, including inaction, must be well informed and deliberate in response to growing stakeholder demands. Participation in the energy transition extends beyond social license and is ultimately driven by financial returns. The transition offers both financial challenges, like rising compliance costs, and opportunities, including incentives and new business ventures, making it more than just a social responsibility.

Alignment of Energy Transition Technology to the Current Upstream Business Model

While the term energy transition is a broad, sweeping term thrown about to capture any movement away from hydrocarbons, the Energy Transition Research (ETR) team focuses on the technologies that are attracting capital flows and investor interest, and are set to make a meaningful impact on the primary energy mix. To simplify the array of technologies, we organize them into either technologies that impact the hydrocarbon molecule or are part of the electrification movement.

For each technology we specify how closely it fits within an operator’s current business (Figure 3). Fully adjacent technologies bolster revenue from existing sources or leverage credit schemes like those contained in the U.S. Inflation Reduction Act (IRA). Partially adjacent technologies create a new revenue stream founded on existing infrastructure and skill sets such as producing a new product or CCUS. Given the application of some technologies, we recognize that they are non-adjacent to existing hydrocarbon business models. Non-adjacent technologies are mostly power-focused and either involve generation projects or mass consumption of electricity to produce a resource.

Energy Transition Technologies

ETR evaluates many of the technologies that are part of the energy transition, focusing on those that attract the most investor interest and capital flow. Below are details on the various technologies and how an upstream operator can incorporate them in their transition strategy. 

 

NOTE: In the text below, upstream in the context of the oil and gas industry refers to exploration and production activities.  

Renewable Natural Gas

RNG, also known as biomethane or upgraded biogas, is derived from organic materials such as agricultural residues, wastewater sludge, municipal solid waste or livestock manure. RNG can serve as a direct substitute for conventional natural gas because it’s chemically similar, being primarily methane. 

RNG presents a promising opportunity for upstream operators to leverage their core competencies in infrastructure development, project management and operations within the context of a sustainable, low-carbon energy solution. 

How RNG Works

Biogas production

Organic waste is decomposed anaerobically (in the absence of oxygen) in digesters or landfills to produce biogas.

Upgrading

The biogas, a mixture of methane, carbon dioxide and impurities, is processed to remove contaminants and CO2 to create high-quality RNG.

Integration

Once cleaned and upgraded, RNG can be injected into existing natural gas infrastructure or utilized for various applications, from electricity generation to transportation fuel.

How Upstream Operators Can Participate
  1. Source identification: Given upstream operators’ expertise in geospatial analysis and resource evaluation, they can identify and assess potential sources of organic waste suitable for RNG production.
  2. Infrastructure development: Experience in constructing and managing complex facilities can be applied to develop biogas capture systems, upgrading facilities and interconnection infrastructure to integrate RNG into existing natural gas pipelines. 
  3. Supply chain integration: Upstream operators can facilitate the transportation and distribution of RNG using existing natural gas infrastructure, given the similarities between RNG and conventional natural gas. 
  4. Project financing and management: Operators can leverage their project management and financing expertise to develop or invest in RNG projects, overseeing them from inception to operation.
  5. Joint ventures and partnerships: Collaborating with municipalities, agriculture sectors or RNG technology providers can expedite project development and capitalize on synergies. 
  6. Regulatory and policy engagement: Engage with policymakers and regulatory bodies to foster favorable conditions for RNG development, secure necessary permits and benefit from potential incentives or credits. 
  7. Research and development: Partner with research institutions and tech firms to enhance RNG production techniques, improve yields and develop technologies that maximize RNG’s benefits. 
  8. Carbon offsets and credits: As RNG helps in reducing greenhouse gas (GHG) emissions (especially when capturing methane that would have otherwise been released into the atmosphere), upstream operators can benefit from carbon credits or offsets, enhancing their environmental footprint and potentially generating additional revenue. 
  9. Diversification strategy: RNG offers a sustainable pathway for upstream companies looking to transition into greener energy sectors. Incorporating RNG into their portfolio diversifies their energy mix and mitigates risks associated with a decreasing demand for fossil fuels. 
  10. Stakeholder engagement: Upstream companies can engage with local communities, showcasing RNG projects as sustainable solutions that address waste management issues, reduce GHG emissions and create local jobs. 
Carbon Markets

Carbon markets, also known as cap-and-trade systems or emissions trading systems, are market-based approaches used to control GHG emissions by providing economic incentives for businesses to reduce their carbon footprint. 

Participation in carbon markets provides an economic incentive for upstream operators to innovate and reduce their emissions, potentially turning a regulatory challenge into a business opportunity. 

Overview of Carbon Markets

Cap

Governments or regulatory bodies set a maximum limit or cap on the total amount of GHGs that can be emitted by certain sectors of the economy. This cap is usually reduced over time, aiming to decrease overall emissions.

Allocation

Once the cap is set, emission allowances (often equivalent to one ton of carbon dioxide) are either given away to emitters or auctioned off.

Trading

Companies that emit less than their allocated amount can sell or trade their extra allowances on the carbon market. Conversely, companies that exceed their limits can buy additional allowances from those with excess.

Banking and borrowing

In some systems, companies can bank unused allowances for future use or borrow against future reductions.

Offsets

In addition to trading allowances, some systems allow for carbon offset credits. These are credits earned from projects that reduce, avoid or sequester emissions outside of capped sectors, like afforestation or renewable energy projects.

How Upstream Operators Can Participate
  1. Compliance: If they fall under a regulated sector, upstream operators will need to comply with the emissions cap. This means measuring, reporting and verifying their emissions and ensuring they have enough allowances to cover those emissions. 
  2. Efficiency improvements: Upstream operators can invest in technology and practices that reduce their emissions, such as improving equipment efficiency, reducing methane leakage or implementing CCS. Reduced emissions might mean that they end up with surplus allowances that can be sold on the carbon market.
  3. Carbon offsets: Upstream operators can invest in or develop projects that reduce or capture GHG emissions, earning carbon offset credits. Examples include reforestation projects, methane capture from waste piles or investing in renewable energy projects. 
  4.  Trading and banking: By actively participating in the carbon market, upstream operators can buy allowances when they’re cheaper and bank them for future use or sell surplus allowances if they have reduced their emissions beyond their allocation.
  5. Engagement and advocacy: Upstream operators can engage with policymakers and regulators to shape the design and operation of carbon markets, ensuring that the rules are clear, fair and effective. 
Carbon Capture Utilization and Storage (CCUS)

A set of technologies and processes that CO2 emissions at their source, then either utilize them in various applications or store them underground to prevent them from entering the atmosphere. CCUS plays a vital role inaddressing climate change, especially in sectors where decarbonization is challenging. 

Overview of CCUS

Capture

This is the process of capturing CO2 emissions directly from industrial processes or directly from the atmosphere. Various technologies can be used, including post-combustion capture, pre-combustion capture, oxyfuel combustion and direct air capture.

Utilization

Captured CO2 can be used in various applications. Examples include: 

  • Enhanced oil recovery, where CO2 is injected into oil reservoirs to increase extraction rates 
  • Producing chemicals, plastics or fuels 
  • Carbonate mineralization for building materials 

Storage

If not utilized, the captured CO2 can be transported and stored underground in geological formations, such as depleted oil and gas reservoirs or deep saline aquifers.

How Upstream Operators Can Participate
  1. Enhanced oil recovery: Many upstream operators are already familiar with CO2-EOR, where CO2 is injected into oil reservoirs to improve oil recovery. The CO2 can be sourced from industrial emissions or natural sources. 
  2. Storage: Upstream operators have expertise in subsurface geology, making them well-suited to identify and develop suitable storage sites for CO2. Depleted oil and gas fields can be repurposed for CO2 storage. 
  3.  Infrastructure development: Upstream companies can repurpose existing infrastructure (like pipelines) or develop new ones to transport CO2 from capture sites to storage or utilization locations. 
  4.  Direct air capture: Some upstream operators might invest in or partner with companies that specialize in direct air capture, given the potential scale of this technology and its relevance to the energy industry. 
  5. Innovation and R&D: Upstream companies can invest in research and development to improve CCUS technologies, reduce costs and expand the range of viable applications. 
  6. Partnerships: Forming partnerships or joint ventures with other industries or sectors (e.g., power generation, cement or steel production) can enable large-scale CCUS projects that benefit multiple stakeholders. By participating in CCUS, upstream operators can reduce their carbon footprint, develop new revenue streams and position themselves as part of the solution to global climate challenges. 
Direct Lithium Extraction (DLE)

DLE is a term used to describe a range of technologies designed to extract lithium directly from brine sources more rapidly and efficiently than traditional evaporation pond methods. 

How Upstream Operators Can Participate

Given that upstream typically refers to the exploration and production phase in the oil and gas industry, the term can be analogously applied to lithium exploration and brine production. 

  1. Brine resources: Upstream operators with rights to brine resources (like those often found in oil and gas operations) can explore the lithium content in these brines. Some oil and gas reservoirs coexist with lithium-rich brines. 
  2. Technological investments: Invest in or partner with companies developing DLE technologies. Given their expertise in extraction technologies, upstream operators might be in a position to advance and optimize DLE methods.
  3. Infrastructure: Utilize existing infrastructure for exploration, drilling and production to extract lithium-rich brines.
  4. R&D collaboration: Collaborate with research institutions or technology firms to develop and refine DLE processes tailored to the specific composition of the brines they have access to.
  5. Joint ventures and partnerships: Form alliances or joint ventures with established lithium producers or technology providers to leverage synergies and share risks.
  6. Regulatory and policy engagement: Navigate the regulatory landscape for lithium extraction and production, ensuring compliance and advocating for supportive policies.
  7. Diversification: As the energy transition progresses, diversifying into minerals crucial for renewable energy and electric vehicles, like lithium, can be a strategic move for upstream operators. 
Blue Hydrogen

Blue hydrogen refers to hydrogen produced from natural gas through a process called steam methane reforming, where the carbon dioxide (CO2) byproduct is captured and stored using CCS technology. This process reduces the carbon emissions typically associated with traditional hydrogen production methods, making the hydrogen “blue.” 

How Blue Hydrogen Production Works:

Steam methane reforming

Natural gas (primarily methane, CH4) is reacted with steam to produce hydrogen and CO2. The primary reaction is: CH4+ H2O = CO + 3H2.

Carbon capture and storage

The CO2 produced from steam methane reforming is captured and then transported and stored underground in geological formations to prevent its release into the atmosphere.

How Upstream Operators Can Participate
  1. Feedstock supply: Upstream operators, being major producers of natural gas, can provide the primary feedstock (methane) required for blue hydrogen production. 
  2. Integration with SMR facilities: Upstream companies can invest in or partner with existing SMR facilities or build new ones adjacent to natural gas production sites to optimize logistics and costs. 
  3. Carbon capture infrastructure: Upstream operators have expertise in subsurface geology and reservoir management. They can utilize this expertise to develop and manage underground storage sites for CO2. Depleted oil and gas fields can be repurposed for CO2 storage. 
  4. Transport infrastructure: Utilize existing gas transportation infrastructure or develop new ones to transport hydrogen to market centers or export terminals. 
  5. Technology investments and R&D: Collaborate with research institutions or tech firms to advance SMR and CCS technologies to improve efficiency, reduce costs and enhance the carbon capture rate. 
  6. Joint ventures and partnerships: Form alliances with industrial hydrogen consumers or hydrogen technology providers. Collaborative projects can pool resources and expertise as well as share risks. 
  7. Regulatory and policy engagement: Engage with policymakers to advocate for supportive regulations, incentives or policies that promote the development and scaling of blue hydrogen technologies. 
  8. Diversification strategy: As the energy transition progresses, diversifying into clean energy carriers like hydrogen can be a strategic move for upstream operators. Blue hydrogen can serve as a bridge toward a more sustainable energy future while leveraging existing natural gas infrastructure and expertise. 
Green Hydrogen

Green hydrogen is produced using renewable energy sources, primarily through the electrolysis of water. Electrolysis splits water (H2O) into hydrogen (H2) and oxygen (O2) using electricity. When the electricity used for this process comes from renewable sources such as wind, solar or hydro, the resulting hydrogen is termed “green” since the production process is carbon-free. 

How Green Hydrogen Production Work

Electrolysis

Water is passed through electrolyzer that applies an electric current to split water molecules into hydrogen and oxygen.

Renewable energy integration

For hydrogen to be considered green, the electricity used in electrolysis should come from renewable sources. This ensures that the entire hydrogen production process is carbon neutral.

How Upstream Operators Can Participate
  1. Renewable energy development: Upstream operators can invest in or develop renewable energy projects (like wind or solar farms) that directly supply electricity to hydrogen production facilities. 
  2.  Electrolyzer investment: Invest in, partner with or develop electrolysis facilities to produce hydrogen. Given the growing market for green hydrogen, there is potential for significant returns on investment. 
  3. Storage and transport: Utilize expertise in gas storage and transportation to develop infrastructure for hydrogen. While hydrogen infrastructure has its unique challenges, upstream operators have experience with handling gases that can be applied to hydrogen. 
  4. Research and development: Collaborate with research institutions, tech firms and other stakeholders to advance electrolysis technology, improve efficiency and reduce costs. 
  5. Joint ventures and partnerships: Engage in alliances or joint ventures with companies specializing in green hydrogen production or technology providers to leverage synergies and pool resources. 
  6. Regulatory and policy engagement: Engage with policymakers to advocate for supportive regulations, incentives or policies that promote the development and scaling of green hydrogen technologies. 
  7. Market development: Upstream operators can work with potential large-scale consumers of green hydrogen, such as transportation sectors (e.g., bus fleets, shipping), industrial users or power generation companies, to develop and expand the market. 
  8. Diversification strategy: As the global energy landscape shifts toward cleaner alternatives, diversifying into green hydrogen offers upstream operators a chance to be part of a sustainable energy future and tap into a growing market.
Advanced Nuclear Reactors

Advanced reactors, often referred to as small modular reactors (SMRs), present a compact alternative to traditional nuclear reactors. Their design allows for off-site manufacturing and subsequent on-site assembly, minimizing on-location construction. Their reduced reactor core size, combined with cutting-edge design elements, offers heightened containment capabilities and an elevated safety profile. 

How Advanced Nuclear Reactors Work

Modularity

SMRs are designed to be modular, meaning they can be manufactured in a factory and transported to their intended location. This approach aims to reduce construction times and costs.

Scalability

Their modularity also means multiple advanced reactors can be deployed together to achieve the desired capacity, offering flexibility and scalability in power generation.

Safety features

Advanced reactors often incorporate passive safety features that rely on natural forces like gravity and natural circulation, reducing the need for external power or active cooling systems.

How Upstream Operators Can Participate
  1.  Energy supply: Upstream operators, particularly those in integrated energy companies, can invest in or partner with advanced reactors developers to provide a diversified energy mix, complementing their traditional hydrocarbon-based portfolios. 
  2. Site development: Upstream operators often have experience with remote or challenging environments, and advanced reactors are touted as solutions for providing power in such areas. Operators can leverage their experience to develop suitable sites for SMR deployment. 
  3. Infrastructure and logistics: The transport and installation of SMRs may benefit from the logistical expertise of upstream operators, especially for remote areas or offshore platforms. 
  4. Financing and investment: Upstream companies, with their capital resources, can invest in the development, manufacturing and deployment of advanced reactors, either through direct investment, joint ventures or partnerships. 
  5. Research and development: Collaborate with institutions or tech firms to improve advanced reactors technologies, safety protocols and integration with other energy systems. 
  6.  Decommissioning expertise: Upstream operators have experience in decommissioning large infrastructure projects (like offshore platforms). This expertise can be applied to the decommissioning phase of SMRs. 
  7. Regulatory and policy engagement: Given the complexities around nuclear energy, upstream operators can engage with policymakers to navigate and shape the regulatory landscape, ensuring compliance and fostering a favorable environment for nuclear energy development. 
  8. Public relations and stakeholder engagement: The nuclear industry, often faces public skepticism. Upstream companies, with their experience in public relations and stakeholder engagement, can play a role in educating the public, addressing concerns and building trust. 
  9. Diversification strategy: As the global energy transition progresses, diversifying into zero-emission power sources like advanced reactors can be a strategic move for upstream operators. It positions them as contributors to the climate solution while potentially tapping into new revenue streams. 
Geothermal

Geothermal energy harnesses the Earth’s natural heat stored beneath the surface, utilizing it for electricity generation or direct heating. This renewable energy source is consistent as it does not rely on intermittent factors like sun or wind. 

How Geothermal Energy Works

Heat extraction

Geothermal systems extract heat from the Earth through deep wells that tap into hot water and steam reservoirs.

Electricity generation

In geothermal power plants, the heat from the Earth’s core is used to heat water or another working fluid to produce steam. This steam drives a turbine connected to a generator, producing electricity.

Direct use applications

Geothermal heat can also be used directly for heating buildings, growing plants in greenhouses, drying crops, heating water at fish farms and several industrial processes such as pasteurizing milk. 

How Upstream Operators Can Participate
  1. Exploration and drilling: Upstream operators have significant expertise in subsurface exploration and drilling techniques, which are essential for identifying and accessing geothermal resources. This expertise can be directly applied to geothermal well drilling. 
  1. Reservoir management: Understanding and managing underground reservoir dynamics is crucial in both oil and gas and geothermal operations. The expertise in reservoir management from the oil and gas sector can be transitioned to geothermal reservoirs.
  2. Infrastructure development: Operators can utilize their experience in infrastructure development, such as power plants, pipelines and other necessary structures for geothermal projects.
  3. Financing and investment: Upstream companies can invest in geothermal projects or partner with existing geothermal developers, leveraging their capital and project management capabilities.
  4. Research and development: Collaborate with research institutions or tech firms to advance geothermal technologies and improve efficiency, thereby reducing costs.
  5. Regulatory and policy engagement: Upstream operators are accustomed to navigating complex regulatory environments. They can engage with policymakers to foster a supportive regulatory landscape for geothermal development.
  6. Environmental and safety protocols: Apply environmental and safety protocols from the upstream sector to geothermal operations, ensuring sustainable and safe practices.
  7. Public relations and stakeholder engagement: Use their experience in stakeholder engagement to address any concerns, build trust and foster positive relationships with communities where geothermal projects are developed.
  8. Diversification strategy: As part of a broader energy transition strategy, upstream operators can diversify into geothermal energy, positioning themselves as contributors to renewable energy solutions and hedging against potential declines in traditional hydrocarbon markets.
Renewable Generation

Renewable energy generation, specifically solar and wind, has witnessed rapid growth due to increasing demand for sustainable energy, technological advancements and decreasing costs. While solar captures energy from the sun through photovoltaic cells or concentrating solar power systems, wind energy taps into the kinetic energy from wind to turn turbines and generate electricity. 

How Renewable Energy Works

Solar energy

  • Photovoltaic (PV) systems: These convert sunlight directly into electricity using semiconductor materials.
  • Concentrating solar power: This method uses mirrors or lenses to concentrate sunlight onto a small area to produce heat, which then drives a generator to produce electricity.

Wind energy

Wind turbines transform the kinetic energy from the wind into mechanical energy. This mechanical energy is then converted into electrical energy through a generator.

How Upstream Operators Can Participate
  1. Land and site development: Upstream operators often have access to vast tracts of land or offshore sites. These could be repurposed or utilized for solar farms or wind installations, especially in areas with high solar irradiance or consistent wind patterns.
  2. Infrastructure development: Experience in infrastructure deployment can be transferred to the development of renewable generation facilities, including substations, transmission lines and other auxiliary structures. 
  1. Project financing and management: Upstream operators can use their financial resources and project management expertise to invest in, develop or manage large-scale solar and wind projects.
  2. Supply chain management: Upstream companies have robust supply chain management systems that can be adapted for the procurement, transportation and assembly of renewable infrastructure, like solar panels or wind turbines.
  3. Integration with existing operations: Renewable generation can be integrated into existing operations to power facilities, reduce carbon footprints or even as part of enhanced oil recovery operations using renewable energy.
  4. Research and development: Collaborate with technology providers, institutions or startups to advance renewable technologies, improve efficiencies or innovate on energy storage solutions.
  5. Regulatory and policy engagement: Engage with policymakers and regulatory bodies to ensure a favorable environment for renewable energy development and to secure necessary permits and approvals.
  6. Joint ventures and partnerships: Partner with established renewable energy developers to leverage their technical expertise and market insights.
  7. Diversification strategy: Incorporating renewable energy into their portfolio helps upstream operators diversify their energy mix, mitigate risks associated with fossil fuel price volatility and position themselves in a rapidly evolving global energy market.
  8. Environmental and sustainability initiatives: Adopting renewable generation can significantly enhance an operator’s environmental, social and governance profile, appealing to investors increasingly focused on sustainability.

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