Energy Transition Opportunities
Reducing Carbon Intensity with
an Energy Security Focus
Energy Transition Opportunities
Reducing Carbon Intensity with
an Energy Security Focus
The reelection of U.S. President Donald Trump, combined with the Republicans assuming control of both the House and the Senate, will likely lead to a shift in energy transition policy that could have far-reaching impacts. Trump has been outspoken about his intention to reverse many of the Biden era clean energy legislative actions, and he is likely to evaluate repealing many of the previous administration’s actions on climate change. The extent of that repeal still remains unknown.
A key target will be the IRA, which Republicans will target for repeal or revision through the budget reconciliation process, an arcane Senate process that allows for passage of privileged resolution by simple majority (and the same process by which the Democratic-controlled Congress enacted the IRA).
The IRA expanded and extended federal tax credits for the deployment of clean energy technologies and manufacturing, creating or enhancing credits available for energy storage, carbon capture, hydrogen, clean fuels and the manufacturing of qualifying solar, wind and battery components as well as the production of critical minerals. It also established a right to transfer or sell tax credits for cash and otherwise made the tax credit market more accessible. We anticipate Congress will act on the IRA tax credits in the first 100 days of the new session and the Trump administration will likely revise Treasury guidance for certain credits left in place.
On the regulatory front, we anticipate a repeal of the Environmental Protection Agency’s power plant rule, new source performance standards for oil & gas, and emissions standards for greenhouse gas and criteria pollutants from mobile sources, which will lessen the regulatory oversight of these sectors. Open questions remain as to what would be proposed in their place.
Energy security, which has been a driver of energy policy since the outbreak of war, will continue to displace anti-oil & gas sentiments, continuing to restore investor confidence in the energy industry.
There continues to be a mismatch in narratives at the global versus regional levels, with fossil fuels expected to account for 40-60% of total energy demand in 20501 despite sizeable constituencies like the United Kingdom (U.K.) and European Union (EU) planning to be free of the direct use of fossil fuels for transportation and power generation entirely by that date.
In the U.K., the new Labour government announced it will not grant new oil & gas licenses for drilling in the North Sea, with taxes on oil & gas companies also increasing as it prioritizes doubling onshore wind, tripling solar power and quadrupling offshore wind by 2030. It also has a clear policy agenda to advance and foster investments in carbon capture and storage, hydrogen, marine energy and long-term energy storage.
Right now, we continue to see high demand for oil & gas globally as governments balance the need to reduce emissions with the requirement to “keep the lights on” and keep commodity prices at a reasonable level. French oil & gas giant TotalEnergies has predicted that global oil demand will peak just after 2030 and only then begin to taper down toward 2050 targets.
The reelection of U.S. President Donald Trump, combined with the Republicans assuming control of both the House and the Senate, will likely lead to a shift in energy transition policy that could have far-reaching impacts. Trump has been outspoken about his intention to reverse many of the Biden era clean energy legislative actions, and he is likely to evaluate repealing many of the previous administration’s actions on climate change. The extent of that repeal still remains unknown.
A key target will be the IRA, which Republicans will target for repeal or revision through the budget reconciliation process, an arcane Senate process that allows for passage of privileged resolution by simple majority (and the same process by which the Democratic-controlled Congress enacted the IRA).
The IRA expanded and extended federal tax credits for the deployment of clean energy technologies and manufacturing, creating or enhancing credits available for energy storage, carbon capture, hydrogen, clean fuels and the manufacturing of qualifying solar, wind and battery components as well as the production of critical minerals. It also established a right to transfer or sell tax credits for cash and otherwise made the tax credit market more accessible. We anticipate Congress will act on the IRA tax credits in the first 100 days of the new session and the Trump administration will likely revise Treasury guidance for certain credits left in place.
On the regulatory front, we anticipate a repeal of the Environmental Protection Agency’s power plant rule, new source performance standards for oil & gas, and emissions standards for greenhouse gas and criteria pollutants from mobile sources, which will lessen the regulatory oversight of these sectors. Open questions remain as to what would be proposed in their place.
Energy security, which has been a driver of energy policy since the outbreak of war, will continue to displace anti-oil & gas sentiments, continuing to restore investor confidence in the energy industry.
There continues to be a mismatch in narratives at the global versus regional levels, with fossil fuels expected to account for 40-60% of total energy demand in 20501 despite sizeable constituencies like the United Kingdom (U.K.) and European Union (EU) planning to be free of the direct use of fossil fuels for transportation and power generation entirely by that date.
In the U.K., the new Labour government announced it will not grant new oil & gas licenses for drilling in the North Sea, with taxes on oil & gas companies also increasing as it prioritizes doubling onshore wind, tripling solar power and quadrupling offshore wind by 2030. It also has a clear policy agenda to advance and foster investments in carbon capture and storage, hydrogen, marine energy and long-term energy storage.
Right now, we continue to see high demand for oil & gas globally as governments balance the need to reduce emissions with the requirement to “keep the lights on” and keep commodity prices at a reasonable level. French oil & gas giant TotalEnergies has predicted that global oil demand will peak just after 2030 and only then begin to taper down toward 2050 targets.
Decarbonization
Biofuels, Refining and Carbon Markets in Focus
A Change in Tone
In line with the rolling back of anti-oil & gas sentiment that we have seen from governments, there has been a shift in tone among oil & gas majors as they move to finesse their energy transition strategies. While many were redirecting investments into electricity and battery storage businesses, that has now in many cases reversed in favor of a focus on investments and advancements in areas adjacent to traditional energy business lines, such as the advancement of renewable fuels particularly for hard-to-abate sectors like shipping and aviation.
Reducing the Carbon Intensity of Refining
We see biofuels as an increasing area of emphasis among some of the larger traditional energy companies, along with a move towards lowering the carbon intensity of refining. The new EU Emissions Trading System will see refiners charged a levy for each ton of carbon emitted, and it therefore is becoming attractive to these companies to build hydrogen facilities to serve refineries either to support blending with natural gas or as an eventual replacement fuel, particularly given the economic value in receiving green hydrogen to avoid carbon taxes.
Decarbonization
Biofuels, Refining and Carbon Markets in Focus
A Change in Tone
In line with the rolling back of anti-oil & gas sentiment that we have seen from governments, there has been a shift in tone among oil & gas majors as they move to finesse their energy transition strategies. While many were redirecting investments into electricity and battery storage businesses, that has now in many cases reversed in favor of a focus on investments and advancements in areas adjacent to traditional energy business lines, such as the advancement of renewable fuels particularly for hard-to-abate sectors like shipping and aviation.
Reducing the Carbon Intensity of Refining
We see biofuels as an increasing area of emphasis among some of the larger traditional energy companies, along with a move towards lowering the carbon intensity of refining. The new EU Emissions Trading System will see refiners charged a levy for each ton of carbon emitted, and it therefore is becoming attractive to these companies to build hydrogen facilities to serve refineries either to support blending with natural gas or as an eventual replacement fuel, particularly given the economic value in receiving green hydrogen to avoid carbon taxes.
Carbon Tax Credits Gain Momentum
There are signs of the larger traditional energy companies evaluating voluntary carbon markets more than ever before, with companies snapping up clean-energy tax credits and seeking to take advantage of those initiatives as they work towards achieving their stated carbon goals.
Carbon Tax Credits Gain Momentum
There are signs of the larger traditional energy companies evaluating voluntary carbon markets more than ever before, with companies snapping up clean-energy tax credits and seeking to take advantage of those initiatives as they work towards achieving their stated carbon goals.
Investment in New Technologies
Mixed Outlook
Carbon Capture, Sequestration and Storage
Despite a great deal of interest and effort, few carbon capture projects have come to fruition in the U.S. It has proved challenging to get projects off the ground—with questions around who bears the risk of carbon dioxide leaks and associated liability for lost tax credits as well as uncertainty around economic subsidies given the shifting political landscape. In addition to several large infrastructure companies and private equity-backed carbon capture & storage (CCS) companies determined to stay the course, we have also seen a bright spot in certain oil & gas companies remaining dedicated to furthering CCS projects in an effort to satisfy their ESG goals. That being said, initial indications from the incoming administration and Congress are that CCS is an area with one of the highest levels of support to continue to receive benefits from the IRA.
Geological carbon sequestration is a key element of CCS projects and a swathe of recent legislation has sought to help it move forward safely. Additionally, failure to obtain necessary rights-of-way and lack of clear eminent domain authority in certain states have been challenging hurdles for several CCS projects. Geological carbon storage projects often hinge on questions of pore space ownership and at least seven U.S. states passed amendments in 2024 to address property rights questions. Four states—Illinois, Colorado, Pennsylvania and Alabama—all tied pore ownership to surface estate rights, with the amendments passed by Louisiana, Alaska, Alabama and Wyoming specifically aiming to promote unitization of pore space for carbon sequestration. Another issue that has proved central to the regulation of carbon sequestration is the survival period or shifting of liability for the sequestered substance, with states also passing laws to clarify how parties responsible for accidents will be held accountable. We anticipate that the next two years will bring clarity as to whether these moves helped to facilitate CCS investments.
Investment in New Technologies
Mixed Outlook
Carbon Capture, Sequestration and Storage
Despite a great deal of interest and effort, few carbon capture projects have come to fruition in the U.S. It has proved challenging to get projects off the ground—with questions around who bears the risk of carbon dioxide leaks and associated liability for lost tax credits as well as uncertainty around economic subsidies given the shifting political landscape. In addition to several large infrastructure companies and private equity-backed carbon capture & storage (CCS) companies determined to stay the course, we have also seen a bright spot in certain oil & gas companies remaining dedicated to furthering CCS projects in an effort to satisfy their ESG goals. That being said, initial indications from the incoming administration and Congress are that CCS is an area with one of the highest levels of support to continue to receive benefits from the IRA.
Geological carbon sequestration is a key element of CCS projects and a swathe of recent legislation has sought to help it move forward safely. Additionally, failure to obtain necessary rights-of-way and lack of clear eminent domain authority in certain states have been challenging hurdles for several CCS projects. Geological carbon storage projects often hinge on questions of pore space ownership and at least seven U.S. states passed amendments in 2024 to address property rights questions. Four states—Illinois, Colorado, Pennsylvania and Alabama—all tied pore ownership to surface estate rights, with the amendments passed by Louisiana, Alaska, Alabama and Wyoming specifically aiming to promote unitization of pore space for carbon sequestration. Another issue that has proved central to the regulation of carbon sequestration is the survival period or shifting of liability for the sequestered substance, with states also passing laws to clarify how parties responsible for accidents will be held accountable. We anticipate that the next two years will bring clarity as to whether these moves helped to facilitate CCS investments.
In 2024, the Louisiana legislature passed five CCS bills, creating a comprehensive legal framework for projects that included clarifying eminent domain authority for CO2 pipelines and establishing unitization procedures for CCS reservoirs. Illinois also passed the SAFE CCS Act in July 2024, which lays down a set of standard features essential for the regulation of CCS projects and established unitization procedures similar to those adopted in Louisiana.
Efforts and initiatives like this, should they be followed by others, should help to ease the uncertainty of CCS investments. It remains to be seen how regulators and legislators in key states like Texas will address these issues, although it appears likely that efforts in such states will mirror those of states like North Dakota and Louisiana. Nonetheless, gaps and gray areas in legal regimes will remain as constant factors in need of attention when advancing the growth of CCS.
Hydrogen
The U.S. Treasury was poised to finalize its long-awaited green hydrogen production tax credit guidance before the end of 2024, in an effort to solidify the incentives for green hydrogen production set out in the IRA. Those tax credits are now firmly in the spotlight for the new administration, which may yet look to modify some or all of the efficacy of the clean hydrogen tax credit.
How the change in administration and recent rulings will impact the hydrogen market in the U.S. remains to be seen as we move through 2025, but, given the natural overlap between hydrogen and the traditional energy industry, there is a lot of conversation around the case for green hydrogen and its derivatives. There is also significant policy support in the EU and Germany for clean hydrogen and green ammonia production and imports. Both the EU Carbon Border Adjustment Mechanism and the EU Emissions Trading System should unlock capital for development of projects. Additionally, there is a strong and growing demand for byproducts of hydrogen production (such as ammonia) from Asian markets.
Renewable Natural Gas
We have seen a flood of renewable natural gas projects getting off the ground in 2024, capturing biogas from sources such as food waste, landfill, farms and wastewater treatment plants for use in electricity generation, heat and transportation fuel.
These projects often qualify for meaningful tax incentives, with the focus here once again on the biogas investment tax credits set out in the IRA and how the new administration might manage those moving forward. The IRS also created a production tax credit that was expected to benefit renewable natural gas projects during 2025-2027 for which there has yet to be promulgated any rules, creating an opportunity for the new administration to leave its mark.
Sustainable Aviation Fuel & Renewable Diesel
Hard-to-abate sectors like shipping and aviation have become a focus for oil & gas companies pursuing energy diversification efforts and a number are building sustainable aviation fuel (SAF) capabilities. These facilities typically blend SAF with fossil fuels to reduce their overall carbon footprint and obtain compliance with one or more regulatory regimes while moving towards the decarbonization goals set by the aviation sector.
New regulations are appearing all the time to encourage the growth of SAF. The EU’s Refuel EU policy requires aviation fuel suppliers to ensure that all fuel made available to aircraft operators at EU airports contains a minimum share of SAF from 2025 and, from 2030, a minimum share of synthetic fuels. Those minimums will increase gradually until 2050. Elsewhere, Singapore is now requiring flights departing its airspace to be at least partially fueled by SAF starting in 2026.
Whether greenfield or refurbishment of existing facilities, building new SAF facilities requires capital and as a result, we are seeing a growing number of partnerships being entered into between producers, airlines, feedstock companies and refiners.
A theme that is growing in popularity is the conversion of refineries to produce SAF and other biofuel products. One case in point is the Neste joint venture with Marathon Petroleum for the production of renewable diesel via a conversion project at Marathon’s refinery in Martinez, California. In another, Phillips 66 announced last year that its San Francisco refinery has now fully transformed into one of the world’s largest renewable fuels facilities, processing only renewable feedstocks and producing 30,000 barrels per day of renewable diesel.
Hydrogen
The U.S. Treasury was poised to finalize its long-awaited green hydrogen production tax credit guidance before the end of 2024, in an effort to solidify the incentives for green hydrogen production set out in the IRA. Those tax credits are now firmly in the spotlight for the new administration, which may yet look to modify some or all of the efficacy of the clean hydrogen tax credit.
How the change in administration and recent rulings will impact the hydrogen market in the U.S. remains to be seen as we move through 2025, but, given the natural overlap between hydrogen and the traditional energy industry, there is a lot of conversation around the case for green hydrogen and its derivatives. There is also significant policy support in the EU and Germany for clean hydrogen and green ammonia production and imports. Both the EU Carbon Border Adjustment Mechanism and the EU Emissions Trading System should unlock capital for development of projects. Additionally, there is a strong and growing demand for byproducts of hydrogen production (such as ammonia) from Asian markets.
Renewable Natural Gas
We have seen a flood of renewable natural gas projects getting off the ground in 2024, capturing biogas from sources such as food waste, landfill, farms and wastewater treatment plants for use in electricity generation, heat and transportation fuel.
These projects often qualify for meaningful tax incentives, with the focus here once again on the biogas investment tax credits set out in the IRA and how the new administration might manage those moving forward. The IRS also created a production tax credit that was expected to benefit renewable natural gas projects during 2025-2027 for which there has yet to be promulgated any rules, creating an opportunity for the new administration to leave its mark.
Sustainable Aviation Fuel & Renewable Diesel
Hard-to-abate sectors like shipping and aviation have become a focus for oil & gas companies pursuing energy diversification efforts and a number are building sustainable aviation fuel (SAF) capabilities. These facilities typically blend SAF with fossil fuels to reduce their overall carbon footprint and obtain compliance with one or more regulatory regimes while moving towards the decarbonization goals set by the aviation sector.
New regulations are appearing all the time to encourage the growth of SAF. The EU’s Refuel EU policy requires aviation fuel suppliers to ensure that all fuel made available to aircraft operators at EU airports contains a minimum share of SAF from 2025 and, from 2030, a minimum share of synthetic fuels. Those minimums will increase gradually until 2050. Elsewhere, Singapore is now requiring flights departing its airspace to be at least partially fueled by SAF starting in 2026.
Whether greenfield or refurbishment of existing facilities, building new SAF facilities requires capital and as a result, we are seeing a growing number of partnerships being entered into between producers, airlines, feedstock companies and refiners.
A theme that is growing in popularity is the conversion of refineries to produce SAF and other biofuel products. One case in point is the Neste joint venture with Marathon Petroleum for the production of renewable diesel via a conversion project at Marathon’s refinery in Martinez, California. In another, Phillips 66 announced last year that its San Francisco refinery has now fully transformed into one of the world’s largest renewable fuels facilities, processing only renewable feedstocks and producing 30,000 barrels per day of renewable diesel.
Battery Value Chain
Critical minerals such as lithium, nickel and cobalt have a central role to play in energy transition given they sit at the heart of battery storage. We see oil majors in the Middle East and elsewhere now entering the race for critical minerals with a number of deals focused on either the acquisition of mineral rights or involvement in refinery projects. The IRA manufacturing tax credits include the production of many critical minerals in the U.S., which has driven significant interest and a number of publicly announced investments.
For example, in 2023, ExxonMobil purchased drilling rights in Arkansas in an area believed to be rich in lithium deposits. Lithium demand is expected to increase by almost 90% over the next two decades, according to the International Energy Agency.
Battery Value Chain
Critical minerals such as lithium, nickel and cobalt have a central role to play in energy transition given they sit at the heart of battery storage. We see oil majors in the Middle East and elsewhere now entering the race for critical minerals with a number of deals focused on either the acquisition of mineral rights or involvement in refinery projects. The IRA manufacturing tax credits include the production of many critical minerals in the U.S., which has driven significant interest and a number of publicly announced investments.
For example, in 2023, ExxonMobil purchased drilling rights in Arkansas in an area believed to be rich in lithium deposits. Lithium demand is expected to increase by almost 90% over the next two decades, according to the International Energy Agency.
Infrastructure
Repurposing Assets for Transition
Across the world, oil & gas companies continue to look for opportunities to adapt their infrastructure in order to more actively participate in energy transition, with the use of pipelines to transport hydrogen mixed with natural gas as a good example.
Europe Invests in Hydrogen Networks
In Europe, the Hydrogen and Decarbonized Gas Market Package was adopted by the EU in May 2024 and aims to shift the gas system to low-carbon and renewable gases with a framework for repurposing obsolete gas networks.
Germany, in particular, is investing a lot in repurposing existing gas infrastructure, with construction beginning on a core hydrogen pipeline network that will ultimately comprise 9,000 km of pipelines by 2032, 60% made up of repurposed gas pipelines. In the U.K., oil & gas wells coming to end of life are being repurposed for geothermal energy rather than being decommissioned.
Energy Transition Hubs Emerge
Supermajors are also developing energy transition technologies alongside their refining and petrochemical hubs using carbon capture and leveraging existing infrastructure. ExxonMobil’s project in Baytown, Texas will produce up to one billion cubic feet per day of low-carbon hydrogen at its existing refining and petrochemical facility, capturing over 98% of the associated CO2 emissions and storing those underground. By the time it is completed in 2028, the site aims to be the largest low-carbon hydrogen project in the world.
Elsewhere, Tallgrass is developing a first-of-its-kind hydrogen-to-power project in Wyoming, converting a retired coal-fired power plant to a clean hydrogen driven power generation facility.
Challenges for Midstream Players
While only the largest public midstream companies have balance sheets strong enough to pursue meaningful energy transition investments, those that do are looking for fee-based contracts and commonalities to their core business of pipelines and terminals.
Infrastructure
Repurposing Assets for Transition
Across the world, oil & gas companies continue to look for opportunities to adapt their infrastructure in order to more actively participate in energy transition, with the use of pipelines to transport hydrogen mixed with natural gas as a good example.
Europe Invests in Hydrogen Networks
In Europe, the Hydrogen and Decarbonized Gas Market Package was adopted by the EU in May 2024 and aims to shift the gas system to low-carbon and renewable gases with a framework for repurposing obsolete gas networks.
Germany, in particular, is investing a lot in repurposing existing gas infrastructure, with construction beginning on a core hydrogen pipeline network that will ultimately comprise 9,000 km of pipelines by 2032, 60% made up of repurposed gas pipelines. In the U.K., oil & gas wells coming to end of life are being repurposed for geothermal energy rather than being decommissioned.
Energy Transition Hubs Emerge
Supermajors are also developing energy transition technologies alongside their refining and petrochemical hubs using carbon capture and leveraging existing infrastructure. ExxonMobil’s project in Baytown, Texas will produce up to one billion cubic feet per day of low-carbon hydrogen at its existing refining and petrochemical facility, capturing over 98% of the associated CO2 emissions and storing those underground. By the time it is completed in 2028, the site aims to be the largest low-carbon hydrogen project in the world.
Elsewhere, Tallgrass is developing a first-of-its-kind hydrogen-to-power project in Wyoming, converting a retired coal-fired power plant to a clean hydrogen driven power generation facility.
Challenges for Midstream Players
While only the largest public midstream companies have balance sheets strong enough to pursue meaningful energy transition investments, those that do are looking for fee-based contracts and commonalities to their core business of pipelines and terminals.
Conclusion
Policy Shifts but Direction Remains Evident
Oil & gas companies continue to identify and capitalize on countless opportunities related to the deployment of new energy technologies to advance the energy transition, with their approaches broadly maturing and coalescing around maximizing synergies, leveraging available subsidies and responding to regulatory drivers. As we enter 2025 with a new administration in the White House and newly elected governments in place in other major states around the world, the fundamental dependence of many of these strategies on government support will be in sharp focus.
The last two years have seen the acknowledgement that oil & gas demand continues to grow globally as well as a greater recognition of the need to balance climate goals with the imperative need to maintain energy security. We continue to see a rise in shareholder activism across the board, while the risks of reputational damage associated with greenwashing are also increasing. There is little doubt, therefore, that regardless of the prevailing U.S. administration, oil & gas majors remain committed to evaluating decarbonization strategies and possible investments in clean energy technologies in the years ahead.
1 See Global Energy Perspective 2024, McKinsey & Company, September 2024.
2 See https://www.reuters.com/business/energy/global-oil-demand-track-peak-2035-totalenergies-says-2024-11-04/
3 See https://newrepublic.com/post/188307/trumps-climate-plans-disaster-even-exxon-worried
4 See https://www.chevron.com/newsroom/2024/q1/chevron-ceo-on-energy-in-coming-years
5 See https://www.msn.com/en-us/money/markets/repurposing-oil-and-gas-infrastructure-a-geothermal-revolution-in-the-north-sea/ar-AA1rQdt9#
Conclusion
Policy Shifts but Direction Remains Evident
Oil & gas companies continue to identify and capitalize on countless opportunities related to the deployment of new energy technologies to advance the energy transition, with their approaches broadly maturing and coalescing around maximizing synergies, leveraging available subsidies and responding to regulatory drivers. As we enter 2025 with a new administration in the White House and newly elected governments in place in other major states around the world, the fundamental dependence of many of these strategies on government support will be in sharp focus.
The last two years have seen the acknowledgement that oil & gas demand continues to grow globally as well as a greater recognition of the need to balance climate goals with the imperative need to maintain energy security. We continue to see a rise in shareholder activism across the board, while the risks of reputational damage associated with greenwashing are also increasing. There is little doubt, therefore, that regardless of the prevailing U.S. administration, oil & gas majors remain committed to evaluating decarbonization strategies and possible investments in clean energy technologies in the years ahead.
1 See Global Energy Perspective 2024, McKinsey & Company, September 2024.
2 See https://www.reuters.com/business/energy/global-oil-demand-track-peak-2035-totalenergies-says-2024-11-04/
3 See https://newrepublic.com/post/188307/trumps-climate-plans-disaster-even-exxon-worried
4 See https://www.chevron.com/newsroom/2024/q1/chevron-ceo-on-energy-in-coming-years
5 See https://www.msn.com/en-us/money/markets/repurposing-oil-and-gas-infrastructure-a-geothermal-revolution-in-the-north-sea/ar-AA1rQdt9#
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