Change in the White House has brought swift transformation to US environmental policies, especially those affecting the oil and gas sector. We don’t believe the beginning of the end is here for the oil and gas industry, but the energy sector faces substantial change—and companies need to adapt over time.

Climate Is Changing the Energy Sector

The Paris Agreement, which limits emissions to keep global temperatures within 2°C of preindustrial levels, has caused companies globally to focus on their environmental impact. Energy firms are no exception. Many management teams have been investing, planning and articulating steps they’re taking to ensure they will comply.

The European integrated exploration and production (E&P) companies are leading the charge in their commitment to emissions reduction and diversification into renewable energy. They’re able to lead not only because Europe is, on the whole, further ahead in planning and preparing for climate change, but also because they have the funding.

Oil and gas producers faced a challenging 2020 market environment. The pandemic crippled demand just as competition between Saudi Arabia and Russia created a temporary supply glut, cratering oil prices. This reinforced the conservative capital investment of E&P companies and slowed business for oil-service companies.

We are not convinced that oil demand will recover to pre-COVID levels, but the near-term outlook for oil prices is constructive, particularly if supply comes back more slowly than demand. Even though we expect capital expenditure to shift toward renewables as companies reduce carbon exposure in their portfolios, fossil fuels will still play a material role in the energy mix for decades to come.