This underpins the need to transition from fossil-based fuel to no or low-emission energy sources, the key pillar of the energy transition. We see a unique role of oil and gas (O&G) companies amid this push, including those of international oil companies (IOCs) and national oil companies (NOCs).

IOCs and NOCs can redefine their long-term value strategy for existing fossil-fuel (hydrocarbon) portfolios or expand into non-hydrocarbon portfolios depending on unique geographic opportunities. There are two main moves that IOCs and NOCs can make to respond to energy transition: Reduce one’s own emissions through decarbonization and more efficient operations and act where energy transitions create new, positive opportunities for oil and gas companies, such as investing in renewables,

Energy transition will likely impact O&G companies' hydrocarbon portfolio, especially on high-carbon fuel. From the global level, O&G companies face a risk of either underinvesting to supply future hydrocarbon demand or overinvesting, which results in stranded assets. On a localized level, O&G companies face differentiated exposure to localized energy transitions depending on the country's situation. For example, stress-testing indicates that forecast gas price is expected to fluctuate post-2022, due to the recent Ukraine-Russia war and supply constraints.

Given the broad uncertainty of both the speed and scope of future energy transitions, O&G companies can diversify into non-hydrocarbon: Power value chain (e.g. renewables, gas power plant), new fuels (e.g. biofuels), Carbon Capture and Storage (CCUS) and circular economy (e.g. waste-to-energy).

However, venturing into a non-hydrocarbon business requires new and different capabilities than typical companies do. Moreover, even with the right capabilities, O&G may encounter challenges in the near-term based on the materiality and scale of returns. As a result, O&G companies are suggested to identify opportunities based on geographical options and the company's capabilities.

For example, Shell and British Petroleum invested in biofuels as they view business synergies with refining and retailing activities. On the other hand, Equinor discovered good opportunities for O&G players in offshore wind as they can leverage their technical know-how about oil offshore-platforms development.

Shifting direction to non-hydrocarbon business is not always easy for NOC; the challenges in meeting national energy demand while keeping security, affordability and accessibility could hinder the transition, as the case may be with state oil-and-gas company Pertamina.  

As one of the biggest state-owned companies Pertamina holds the key to providing cleaner energy to society. Six refinery units and 67 upstream blocks in operation place Pertamina as a national-energy backbone. However, this role could come as a challenge for this giant company to accelerate the transition to non-hydrocarbon business, taking into account several factors.

First, national target for energy supply. The target to increase crude-oil production to meet 1 million barrels per day (bpd) by 2030 puts Pertamina's upstream business in a position to seek new oil and gas discoveries via organic or inorganic growth. Reevaluation and prioritization of hydrocarbon upstream portfolio could be exercised to provide a lower carbon intensity of crude-oil production.

Another key lever is to integrate upstream operation with CCUS. The world leader in oil production, Saudi Aramco, has operated CCUS since 2015 at the Hawiyah gas-production facility to capture 800,000 tons of CO₂ for enhanced oil recovery.

Second, affordability vs. profitability. Economic feasibility of renewable fuels (i.e. hydrogenated vegetable oil, bioethanol, bio jet) is still higher compared to heavily-subsidized hydrocarbon fuels. With the COVID-19 impact on society, an increase in energy prices may delay economic recovery. Fiscal and non-fiscal incentives could provide a boost to launch green products while encouraging the market to grow and meet the economies of scale.

Third, the risk of stranded assets. Business diversification to non-hydrocarbon puts Pertamina's upstream to downstream operations domestically and abroad at risk of not meeting its economic return and being underutilized. The company's strategy to re-focus the assets will be critical for its business sustainability.

Fourth, agility and capabilities for new business. Being an arm of the government certainly provides a more significant hurdle to venture into new business. Business decisions and risks sometimes are not in favor of the bureaucratic process needed. The agility to enter new markets is critical to being a key player in the low-carbon business, especially with the expected growing demand for commodities like biofuels and hydrogen.

Pertamina can play a role in the transition by expanding into non-hydrocarbon fuel and adopting decarbonization technologies to achieve net-zero emission in the long-term while increasing gas production and utilization to ensure short-term energy security.

In the long term, with the potential in Indonesia, Pertamina can lead the transition by adopting some key decarbonization technologies that are already within its expertise:

First, geothermal: Expand an existing business as a foundation, to offset renewable power's intermittency.

Second, solar photovoltaic: Start with captive power for own-use operation.

Third, bioenergy: Waste biomass to energy and process vegetable oil to renewable fuels in the refineries.

Fourth, electric vehicle ecosystem: Repurpose traditional fuel stations for charging and swapping stations.

Fifth, CCUS: Sub-surface capabilities for carbon-emissions reduction in upstream and refinery operation.

In the short to medium term, Pertamina needs to focus its sights on balancing the energy supply from renewables and fossil fuels to avoid the risk of an energy crisis. Alternative lower-carbon energy to fill in the gap is natural gas as alternative to coal.

The government has targeted increasing gas production from 5.3 billion cubic feet per day (bcfd) in 202 to 12 bcfd by 2030 for domestic utilization to meet the demand from the industrial sectors. A more aggressive upstream exploration is expected to meet the target, with a significant amount of capital investment directed toward upstream.

Short-term hydrocarbon business is seen as a source of capital to invest in long-term low-carbon technologies.

Chairing the Business 20 Energy, Sustainability and Energy Task Force, Pertamina could take this opportunity to lead the business community to realign their medium to long-term vision with the global policy pathways.

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Aufar Satria is a consultant at the Boston Consulting Group and Merdiani Aghnia Mokobombang is an analyst at state-owned oil and gas company Pertamina. Both are core team members of Business 20 Energy, Climate and Sustainability Task Force.