The alternative would be to continue producing while sequestering CO2.
But with carbon capture and storage (CCS) technology in its infancy – and the lack of a global carbon price – there are few incentives for making such a commitment.
Regardless of whether firms commit to becoming net zero, all oil and gas companies will need to make changes as demand for hydrocarbons falls.
Challenges
Disciplined capital expenditure will be key, as companies will need to ensure that new investments are consistent with the marginal cost of supply for limiting warming to well below 2°C.
As demand falls, so will this marginal price. For some firms, the transition challenges will be too great, and they will instead need to focus on low-cost production, reducing their level of production, returning cash to investors and eventually winding down all operations.
As the transition gathers pace and demand for hydrocarbons declines overtime, it is essential for credit investors to select issuers that are well positioned to alter their long-term strategic thinking.
Oil and gas companies with high-quality assets that can break even at low prices are attractive.
As greater scale allows companies to further reduce costs, companies in attractive basins are likely to benefit from increased consolidation.
In addition, strong balance sheets and sufficient liquidity should help firms navigate the associated decline in prices and potential uptick in commodity-price volatility going forward.
Despite the challenges, we believe there are companies that are well-positioned to tackle the transition to a low-carbon economy in the years ahead.
Audra Delport is deputy head of credit research at the international business of Federated Hermes
