ISG Provider Lens™ Oil and Gas Industry - Services and Solutions - Enterprise Asset Management - Europe 2024

European oil and gas industry is investing in upstream, AI and GenAI and beefing up OT cybersecurity

Declining demand

Oil and gas (O&G) demand in Europe is projected to decline significantly, with estimates showing a 25-50 percent reduction by 2030, compared with 2019 levels, and at least 80 percent by 2050. As this transition progresses, Europe’s oil and gas suppliers risk losing their key export market and revenue, with limited prospects for alternative buyers in the medium term. Without diversifying their economies, these countries may experience economic, social and political instability because of falling oil and gas revenue. The European Union (EU) and its member states must assist these countries in moving away from fossil fuels to avoid destabilizing the region, which could impact migration, trade and geopolitical stability.

Focusing upstream investment to meet energy security

Europe’s upstream oil and gas industry is at a pivotal moment, with offshore developments gaining attention amid energy security concerns and climate goals. The North Sea remains a focal point for exploration and production (E&P), with up to 10 projects expected to reach final investment decisions within two years. The offshore sector will be crucial to Europe’s energy independence and carbon neutrality drive. According to EICDataStream, more than 260 European upstream projects are being tracked, valued at over $132 billion and expected to start by 2030. The U.K. and Norway lead these efforts, contributing over 80 percent of the projects, with a combined CapEx of more than $109 billion. However, only 24 percent of these projects have entered the construction phase, leaving 76 percent still in the planning stages.

Norway plays a crucial role in Europe’s energy security, supplying 25 percent of its natural gas needs and offering a stable political environment. Significant developments like Yggdrasil, Valhall PWP and Utsira High clusters highlight its importance. Major companies such as Equinor, Aker BP and Vår Energi are committed to expanding production, while
Norway continues to explore both frontier and infrastructure-rich areas to maintain steady output.

On the other hand, the U.K.’s E&P sector faces challenges because of political and fiscal uncertainties. While the Energy Profits Levy has been extended to 2029, concerns over fiscal instability and looming tax proposals from the Labour Party are creating uncertainty for the sector, impacting investments and developments in the North Sea.

Changing CapEx scenario

Major European oil and gas companies have slightly adjusted their capital budgets in response to the energy crisis, redirecting some investments to oil and gas production. While they remain committed to their long-term netzero goals, they recognize the need to balance emission reductions with energy security in the short term. These modest increases in fossil fuel investment are not expected to impact their ongoing commitment to the energy transition. Governments have also taken notice of rising consumer hardship alongside oil company profits, prompting renewed support for windfall taxes. The U.K. has introduced a 25 percent levy on domestic oil and gas profits, and the European Union is recommending a 33 percent windfall tax on this year’s profit increases. In the U.S., windfall taxes have entered political discussions. As the industry recovers from a decade of poor economic returns, careful consideration is needed to ensure such taxes do not discourage further investment.

Europe leading global energy transition

Europe is leading the energy transition, with major oil and gas companies shifting focus from oil production to gas and investing heavily in lower-carbon activities. By 2025, six of Europe’s largest producers are projected to collectively
spend $27 billion annually on low-carbon initiatives, accounting for around 35 percent of their total CapEx. These European companies are committed to achieving net-zero emissions across scopes 1-3 by 2050, while their U.S.
counterparts prioritize reductions in scope 1 and 2 emissions intensity. This shift has driven an increase in energy transition mergers and acquisitions, fueled by strong financial positions and the need to accelerate decarbonization
efforts.

EU boosts CCUS initiatives

The European Union has allocated approximately $1.5 billion to carbon capture, utilization and storage (CCUS)  projects through its latest Innovation Fund, alongside over $500 million for CO2 transport and storage under the Connecting Europe Facility program. Significant funding has also been provided by the Netherlands ($7.3 billion) and Denmark ($1.2 billion), driving project developments like the Dutch Porthos project, which plans to inject 2.5 million metric tons of CO2 annually into offshore gas fields by 2027, and Italy’s Ravenna CCS hub, which will begin its first phase of injection in 2024. Final investment decisions (FIDs) have also been reached for five capture facilities,  including ammonia and hydrogen projects in the Netherlands and bioenergy with CCUS in Denmark. Meanwhile,
Germany has reentered the CCUS arena with a carbon management strategy to achieve carbon neutrality by 2045 and plans to amend legislation to regulate CCUS activities, including offshore CO2 storage.

Challenges and progress in developing a lowcarbon hydrogen economy in Europe

Developing a hydrogen economy is essential for achieving the 2050 net-zero target, but current EU policies are overly regulatory rather than market driven. In 2023, progress was made in establishing a regulatory framework for  lowcarbon hydrogen in the EU and the U.K., but gaps remain, particularly in the EU. The U.K. takes a more technology-neutral approach, while the EU focuses on renewable hydrogen. Despite ambitious targets, both regions fail to achieve significant market deployment. Key challenges include insufficient project commitments, slow policy implementation and a lack of demand from offtake agreements.

More government action and investment are needed to boost production, implement hydrogen quotas and support project development. Over the next year, progress may depend on the success of projects winning European  Hydrogen Bank auctions and the signing of firm offtake agreements.

European biofuel industry facing headwinds as major players scale back

Recent setbacks have plagued the European biofuel industry. Chevron’s decision to furlough workers at its biodiesel plant in Germany, following BP’s scaling back of expansion plans and Shell’s halted construction, signals a challenging outlook. Chevron’s temporary plant shutdown because of low biofuel prices is a concerning indicator of future viability.
These developments raise questions about the long-term sustainability and profitability of the European biofuel market.

AI and GenAI investments

Traditionally focused on engineering, the oil and gas industry is increasingly integrating AI and generative AI (GenAI) to optimize operations across its value chain. AI is being used for site exploration, subsurface imaging, reservoir modeling and predictive maintenance, enhancing operational efficiency in exploration, production, refining and supply
chain management. Major companies like BP, Shell and TotalEnergies are adopting AI tools to drive efficiency. BP is deploying Microsoft’s AI assistant, Copilot for Microsoft 365, to enhance productivity, while Shell collaborates with SparkCognition to accelerate subsurface exploration using GenAI. TotalEnergies also uses Copilot, focusing on  operational transformation and upskilling employees with AI-driven tools and training.

Cybersecurity as the backbone of critical infrastructure

Cybersecurity has become a major threat to the EU’s critical infrastructure sectors, particularly energy. The number of cyberattacks targeting energy has risen dramatically, with over 200 incidents reported in 2023 alone. The ENISA report found that many energy sector operators lack adequate cybersecurity measures, including security operations center monitoring of critical OT processes. To tackle the cybersecurity menace, the European Commission has welcomed the adoption of the Cyber Resilience Act, the world’s first legislation of its kind. This act introduces mandatory cybersecurity requirements for all hardware and software products sold in the EU. Manufacturers need to implement cybersecurity measures throughout the product lifecycle and provide timely security updates. The act aims to improve product security, empower consumers and combat cyberthreats.

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