To keep global warming to below 1.5 degrees C this century, the global energy system needs to be transformed from being largely based on fossil fuels to being largely based on renewable energy. This global energy transition shifts the production and consumption away from non-renewable fossil fuels towards the use of low carbon and renewable energy solutions. 

The International Renewable Energy Agency (IRENA) in its Global Renewables Outlook: Energy Transformation 2050 sets out an ambitious outlook to cut 70% of the world’s energy-related carbon dioxide (CO2) emissions by 2050. Over 90% of this reduction would be achieved through renewables and energy efficiency measures.  IRENA estimates that around 260GW of renewable energy capacity was added globally in 2020, beating previous record by almost 50%.

In the context of this fast-progressing energy transition, Oil and gas companies are faced with the existential challenge of how to diversify away from their current reliance on fossil fuels without losing the value and cash generating potential of their current business.  The expected decrease in demand for fossil fuels and concerns over damage from climate change is creating business risks for oil and gas companies and could result in a significant number of stranded assets and loss of value. In the long run, this could also lead to the transformation for some of the major oil and gas companies into completely new businesses.

Diversification, in the context of the global energy transition, is to broaden the core business of oil and gas companies into new low-carbon energy products and markets.  At present,

there are limited low-carbon diversification options available to invest in, and the options are in industries that are themselves nascent or require a huge amount of R&D investment to improve profitability.  Each option comes with some opportunities and some downside risks.  The challenge is to select the optimal option, given firm-level capabilities, economic, social, and political conditions, to effectively diversify away from a fast- disappearing value source, whilst managing the risks and opportunities.