Lead or Follow: Updating the case for oil and gas in the energy transition

Sep 3

Hamish Wilson, CEO of BluEnergy writes…

In 2019 I argued the oil industry should lead the energy transition, on the grounds of social licence and commercial opportunity. Seven years on, the industry has largely retreated, investors have shown themselves indifferent to net-zero positioning, and McKinsey's 2024 case for the industry's role stops well short of the accountability for emissions the majors themselves once claimed. This paper sets out what changed, and argues for a narrower, more testable thesis: oil companies have no general mandate or durable shareholder incentive to lead the energy transition. But they do have a comparative advantage in parts of the CO₂ transport and storage system. But the lead in this sector has to come from the emitters; the potential carbon tax burden falls on them. The emitters will choose the lowest cost route to avoiding that tax. The oil industry is in a position to enable emitter decarbonisation by taking early project develop risk in transport and storage. Regulation is likely to drive that investment, by demanding ‘compliance’.

1. Revisiting the 2019 Thesis

The role of the North Sea, and the UK government's decisions on fields such as Rosebank and Jackdaw, has once again put the oil industry's place in the energy transition under scrutiny. I first addressed this question in 2019, in a piece under this same title. My argument then rested on two pillars: that leading the transition was necessary to maintain the industry's social licence to operate, and that the transition itself represented a significant commercial opportunity.

BP appeared to agree. In 2020 it pivoted explicitly around the energy transition. The collapse in oil demand during the pandemic reinforced a genuine sense across the industry that change was structural rather than cyclical — adapt or die. I believed it too: enough to help found BluEnergy, to advise oil companies on how to capture the commercial opportunity the transition represented.

How things have changed.

2. What Actually Happened

Most major oil companies have since rolled back their transition commitments. BP has reframed itself around oil and gas production. Shell and Equinor have cut transition investment. TotalEnergies and Eni, along with a handful of smaller operators, are the clearest exceptions, continuing to back both renewables and carbon capture and storage. This retreat has been driven substantially by investors — both retail and institutional — unwilling to sacrifice returns in the name of net zero.

The direction of travel on accountability for emissions tells the same story. The 2020 commitments from BP, Shell, TotalEnergies and Eni explicitly addressed Scope 3 emissions — the emissions from consuming the hydrocarbons the industry sells, not merely producing them — implicitly accepting some responsibility for them. Both BP and Shell have since rolled that back, Shell despite a legal challenge. Interesting to note that both TotalEnergies and Eni have held their positions.

With the exception of the shareholder negative reaction to BP's 2020 pivot, share performance across the sector has tracked underlying business fundamentals, not net-zero positioning. That is the central, uncomfortable fact: my 2019 assumption that shareholders would push oil companies to lead has been refuted by events. Capital is amoral. It goes where the returns are.

This is not a second-hand observation. Over the past five years I have been directly involved in raising capital for CCS projects, with real success in the United States and considerably less elsewhere. Without exception, every investor conversation has been about financial returns. Climate obligation, moral or otherwise, has not featured in a single investment decision I have been part of.

That amoral capital logic did not emerge in a vacuum. The period since 2020 has delivered a succession of external shocks — the pandemic, the war in Ukraine and the energy and supply shock that followed, and now the war involving Iran — that together reinforced inflationary pressure and created a sustained cost-of-living challenge. Consumers are experiencing the physical effects of climate change more directly than ever, but they are simultaneously under real pressure on budgets, which inevitably reduces both their willingness and their ability to pay a premium for low carbon options.

At the same time, the drift toward de-globalisation and ‘country first’ politics has made the kind of coordinated, cross-border action the original climate consensus assumed progressively harder to achieve. Against that backdrop, it is unsurprising that shareholders did not sustain a valuation premium for transition strategies: there was genuine early market enthusiasm in 2020, but it never converted into the durable signal that would justify diverting large amounts of capital away from the core business. The macro environment since has made that signal harder, not easier, to generate.

3. Building on McKinsey: Necessary, Not Sufficient

McKinsey's 2024 paper, addressing the same question I asked in 2019, reaches a more conservative conclusion: hydrocarbons remain necessary for decades, so the industry's most defensible near-term role is reducing its own Scope 1 and 2 emissions, while its skills and balance sheet may support a broader role over time.

What McKinsey does not do is assign the industry any accountability for Scope 3 — the emissions that dwarf Scope 1 and 2, and the very category BP, Shell, TotalEnergies and Eni voluntarily claimed in 2020. That is not a neutral scoping choice. It quietly ratifies a retreat that had already happened, without explaining why the ambition narrowed or what should replace it.

Scope 1 and 2 reduction is, as McKinsey argues, largely a matter of execution, and I do not dispute that it is the obvious and irrefutable near-term task. But treating it as the ceiling — rather than the floor — is where this paper parts company with McKinsey. The harder and more consequential question is what the industry does to support the energy transition: its capital base, its project-delivery skill, and its ninety-year history of managing large, long-duration, capital-intensive risk.

4. A Sharper Framework: Electrons and Molecules

The industry's potential contribution splits into two broad categories with entirely different economics, and conflating them is where both the industry and its critics go wrong.

Electrons

Renewable electricity generation — wind, solar, batteries — is, regulatory interference aside, commercial on its own terms and does not need oil and gas involvement to scale. If anything, the evidence points the other way: entry by large oil companies, with their outsized balance sheets, has driven up bid prices in offshore wind auctions and distorted early-stage market development rather than accelerating it. It is unsurprising the majors have pulled back. Where oil companies have engaged more constructively, it has typically been through separately capitalised subsidiaries with their own P&L — TotalEnergies and Eni again being the clearest examples — kept structurally apart from the core business rather than bolted onto it. I don’t think oil companies bring anything extra to the sector that the existing industry eco system cannot provide.

Molecules

Carbon dioxide and by extension, hydrogen, is a different problem, and one the industry is genuinely built for. Managing subsurface risk, operating pipelines, and delivering large capital projects on long time horizons is precisely what oil and gas companies do. The case for the industry leading on CCS is not aspirational — it is close to a straightforward extension of the existing skill set. The difficulty is not capability. It is economics, and it is worth stating plainly:

– CCS is fundamentally a waste-disposal business.

– Captured CO₂ has no intrinsic value at the scale required; no use case yet absorbs emissions at that scale.

– CCS projects are large and capital-intensive, with commercial risk dominant and subsurface risk well understood and manageable.

– A CCS project is unlikely to deliver oil-and-gas-competitive returns while demanding oil-and-gas-scale capital exposure.

– Where CCS is commercial today on a stand-alone basis, it is generally because it rides on Enhanced Oil Recovery. Absent that, pure CCS only becomes viable once a durable carbon price exists (such as the 45Q regime in the US).

– Where a carbon price does exist, the value has to be split across emitter, pipeline owner and storage provider — and that split is determined by relative bargaining power, not by any inherent claim. An oil company's position in subsurface storage does not give it control of that value chain in order to demand higher returns.

Given these economics, the industry's reluctance to embrace CCS is rational rather than negligent..

5. Oil company Investment Decision Framework

So, how should oil companies look at CCS investments? Stripped of sentiment, the following is the operating reality driving all oil company investments — molecules-based or otherwise:

– Oil companies are capital-constrained and will fund the highest-return projects available to them.

– Investors assign no premium to net-zero positioning from an oil company; they expect the company to stick to what it is good at.

– Investment decisions are anchored to current and expected oil and gas prices, not climate scenarios.

– Investors are, in this context, amoral: climate obligation does not appear as a line item in the investment case.

– The industry is culturally and financially built for large, long-duration, high-risk, high-capital projects — and prices its capital accordingly.

– The risk, capital, revenue and return profile of wind, solar and battery projects bears little resemblance to a typical E&P project.

– Combining a high-risk, high-return business with a low-risk, low-return business inside one corporate structure sits awkwardly with almost any theory-of-the-firm logic.

Taken together, these are difficult to argue with — and they make it hard to see why any rational oil company board would choose to invest in the transition, particularly given that the great majority of credible forecasts still show hydrocarbons supplying a material share of global energy demand out to 2050 and beyond.

Therefore to allow oil company shareholders to support the Energy Transition requires a different commercial proposition. Oil companies are not going to invest on an altruistic basis. They require a long term commercial model to create the market conditions in which an investment in CCS can ‘stack up’ against alternatives.

6. Regulatory-Driven Change: Setting Obligations

Europe's Net Zero Industrial Act has the potential to radically change the CCS playing field. It places a legal obligation on 44 hydrocarbon producers to help deliver 50 million tonnes per annum of injection capacity by 2030, backed by financial penalties for non-compliance. This turns CCS from a discretionary activity into a compliance cost. This should, in principle, be the kind of binding demand signal that finally makes CCS investable at scale.

Yet for most obligated entities the reality on the ground is closer to the opposite. The NZIA is being challenged in the courts with many hoping that it will ‘go away’. For others, the NZIA is experienced as a distraction, outside core competence, competing for capital against the core business..

An alternative model, that has not reached the statue books, applies a similar thesis: the Carbon Takeback Obligation (CTBO), developed by Oxford researchers under Myles Allen and now under active consideration by the UK government. Rather than setting an aggregate injection-capacity target for the industry as a whole, a CTBO obliges each producer individually to store a rising percentage of the carbon it puts on the market — typically proposed to start around 5–10% and ramp toward 100% in line with net zero. How a company achieves compliance is flexible: a producer can build its own storage, buy verified storage from someone else, or exit the market.

The obligation is the regulator’s to set; how it is met is left to the market. This is, in effect, extends the producer responsibility applied to hydrocarbons — the same principle already used for packaging and electronics.

For both the NZIA and the nascent CTBO model, the oil companies' investment decision will be based on the penalties for non-compliance. Under the NZIA, Member States were legally required to establish these penalties by 30 June 2026. That deadline has now passed, but implementation is running behind schedule: a coalition of industry associations, infrastructure operators and civil society groups wrote to Member States in July 2026 urging them to publish and enforce penalty regimes without further delay, and by the time of writing jurisdictions have yet to do so. Until they act, the NZIA's enforcement framework — and the binding investment signal it is meant to create — remains only partly in force. For the CTBO model to work, a similarly credible and consistently enforced penalty regime would need to be put in place.

There is a complementary regulatory lever worth discussing alongside NZIA and CTBO, because it operates on the other side of the value chain. The EU’s Carbon Border Adjustment Mechanism (CBAM) does not target hydrocarbon producers directly; it targets emitters — steel, cement, aluminium, fertiliser and similar carbon-intensive importers — by pricing the embedded carbon in goods entering the EU market. That is a different signal to NZIA or a CTBO: rather than obliging the oil and gas industry to store carbon, it obliges downstream industrial emitters to account for it, and in doing so puts real competitive support behind low-carbon production for the first time. If the CBAM-style mechanisms spread, the pressure to decarbonise may increasingly come from the emitting industries themselves, rather than from oil and gas.

These regulator mechanisms reframe the industry’s role: not as a voluntary leader of the transition, and not even simply as a compliance-driven abater of its own emissions, but as an enabler — supplying the infrastructure, technical capability and balance sheet strength that emitters and regulators need to deliver. But it is activated only once regulation, whether an NZIA-type mandate, a CTBO, or the demand pull of a CBAM-driven market, makes doing so commercially necessary.

The US has taken a different approach to stimulate CCS. The 45Q regime pays the emitter if it removes CO2 in the form of a tax credit. In effect, the government pays a per CO2 dollar amount in cash to the emitter. The emitter, and the whole CCS value chain, has a defined bankable carbon price to work with. The power in the system is with the emitter and they choose the lowest cost capture technology and storage site. It is interesting to note in this market, with possible exceptions (e.g. Oxy, Exxon - through its purchase of Denbury), it is not the oil industry that has led, it is oil company expertise in smaller companies backed by private equity.

The 45Q model is unlikely to be directly transplantable to the international sphere, since it depends on a specific US tax-credit structure. But the underlying pattern is worth taking seriously: where a bankable carbon price exists, oil-company balance sheets were largely absent from the winners, and oil-company expertise repackaged into leaner, PE-backed independents captured the a large slice of the opportunity. Whether Europe's NZIA and any eventual CTBO produce a similarly disaggregated outcome, or instead reward a major-backed collaborative model, is an open question this paper returns to in its conclusion.

A Compliance and Obligations-Driven World

Given the clear oil industry investor signals directing capital away from climate change solutions, the regulator has to step in to force companies to engage in the CCS market. This intervention is necessary to drive the weight of capital needed to make a material difference. The intervention will come through either an NZIA construct or CTBO. Indeed, I would not be surprised to see that the permits to develop Rosebank and Jackdaw are linked to some form of carbon abatement obligation.

How should the industry respond? The industry does have genuine skills and capital that could and I believe should make a material contribution to climate change.

Most regulators around the North Sea have noted these skills and, driven in part by the drive to sustain an offshore industry, have encouraged oil companies to develop carbon dioxide storage solutions through repurposing existing infrastructure. This has the dual benefit of postponing decommissioning costs and maintaining a work force. The encouragement has come in the form of capital grants - ALL the current CCS projects in the North have reached FID have had capital grants. This ‘storage led’ approach consequently requires capital support back up the value chain to carbon capture and the development of the infrastructure needed to get volumes of CO2 to the coast and then offshore to injection sites.

The oil industry has naturally taken the lead in these projects. The emitters have been encouraged to support the projects through capital grants. But the nature of these projects, offshore, multi party, contractually complex, with no private capital at risk has made them expensive. These high costs of the offshore storage solutions has the potential to kill the nascent CCS market – which therefore has to change.

But, emitters are getting increasing exposure to carbon tax through the withdrawal of ETS credits, and the impact of CBAM. They are looking for the lowest cost route to avoid paying the ETS. The lowest cost route, absent government support, is not necessarily to store in the North Sea. The ‘locus of power’ in the future CCS system will shift to the emitter who will look to purchase lowest cost services, which may or may not come from an oil company. The CCS market may fragment as has happened in the US, with smaller PE backed companies competing directly with oil companies.

But we have to create the market. The idea behind the NZIA is that oil company capital, driven by compliance obligations, de-risks the storage market such that a private capital can follow. In this construct, the emitter will take the lead, with oil companies participating initially as enablers of storage capacity as driven by compliance. Ideally when the compliance lever is withdrawn, oil companies will participate along side all other players in an established market.

7. An Updated Position: Lead or Follow?

The honest answer, revised from 2019, is more nuanced.

The industry will not lead in the sense I originally meant — voluntarily, ahead of policy, funded from its own capital, in pursuit of social licence, and extending to the full Scope 3 footprint of its products. That thesis is refuted by seven years of evidence and should be retired. Nor is “follow” right, because the industry is not passively reacting to market signals — it is actively choosing which parts of the transition to engage with, on terms set by its own risk-and-return logic rather than by moral suasion.

Put differently, the more interesting question may no longer be whether the industry has failed to lead the transition. Its shareholders never placed durable value on it doing so: the early enthusiasm of 2020 did not convert into a valuation premium sufficient to justify diverting capital away from the core business. In the absence of an effective carbon price or a consumer signal that economically rewards low-carbon producers over high-carbon ones, there was no rational basis on which shareholders would have encouraged an oil company to accept lower returns voluntarily. If neither investors nor consumers supply that signal, it has to come from government.

The more useful question, then, is where leadership of the transition moves next — and increasingly the answer looks like the emitters themselves, prompted by mechanisms such as CBAM, with oil and gas repositioned as enablers rather than leaders.

In conclusion, the industry has no general mandate to lead the energy transition, and no shareholder base willing to fund one. But through a combination of compliance driven legal obligations and emitter led ETS/CBAM initiatives, oil companies will be forced to participate in the energy transition. They will invest in storage capacity up to achieving compliance and no more. However, through this mechanism, the capital released through oil company obligations will transform and potentially create the market for storage capacity.