The Oil and Gas Business during the Energy Transition
The government relations capabilities needed to win
There is plenty of evidence that the energy transition is accelerating. Shareholders and the judiciary forced International Oil Companies to lower emissions. We see them selling their dirtiest assets while investing in renewable technologies. Investors have been piling into ESG funds for a while now. Renewable energy companies are commercializing new technologies and scaling up existing ones. Extreme weather events are further tilting public opinion. Combined with COP 26 pressure and ultra-low interest rates earlier in 2022, these developments encouraged government leaders to alter energy policies with little political risk. For them, it is an opportunity not to be missed. Consequently, the dynamic between governments and the energy industry has rapidly changed.
What does it mean for the GR leaders in the energy industry? We see five themes that require a response from the government relations function in energy companies with oil and gas interests.
Each (energy) company has a single reputation. The consumer, ESG investor, government official and NGO member are all the same person. A legal challenge in one country (e.g. Nigeria) is decided upon in the courts of another (e.g. the Netherlands). Inside energy companies, the Government relations, Investor relations, Communications and Sustainability functions need each other more than ever to address this single reputational reality. Engagement strategies must be built to address multi-faceted stakeholders. It means those responsible need to agree on common objectives, share information and work together. We see energy companies expect more from state-of-the-art stakeholder management & monitoring systems. We also see a them restructure the Government relations, Investor relations, Communications and Sustainability departments to become more effective, oftentimes bringing these functions under the accountability of a single role at C-suite level.
Added value and affordability
For renewable energy companies, the market has forced a frugal Government relations set-up from day one, if the function was created at all. Energy companies investing in renewables at the expense of traditional oil and gas assets have expected profit margins from renewables assets to be systematically lower than from oil and gas projects. Therefore, all support functions in energy companies, including Government Relations, will experience cost pressure. We therefore expect Government Relations to be challenged to develop credible value and performance management concepts and systems that help it report value-added, value at risk, and control costs. It means GR professionals need to become more articulate about the financial impact of their efforts in relation to the costs. As challeging as this may seem, this is far from wishful thinking. It is very possible to credibly measure what GR adds to the busines. A world-class GR function develops annual plans that define the value it will add to the business and report measurable outcomes to the executive committee and board.
Competencies, Priorities and Speed
Energy companies with oil and gas assets could be expected to spend increasing time to object to regulatory change (e.g., divestment approvals, decommissioning rules or the tax code). But to support the growth of the renewables business, energy companies should be expected to focus on supporting regulatory change (e.g. re. permitting, grid capacity expansion or – also – the tax code). To protect their Oil & Gas interests, energy companies may benefit from the experience of GR staff in the tobacco, alcohol & fizzy drinks industry in defining these dualistic strategies. Energy companies can also learn from GR executives in the utilities and tech industries to drive their renewables interests. Because regulatory change is accelerating, GR needs to add rigour to the priority setting process (and allocate resources more precisely to where they add/defend most value) and spend more time on the front-foot influencing the regulatory framework than on the back-foot defending the status-quo. GR also needs to make better use of state-of-the art monitoring and sensing systems to stay on top of developments.
As energy companies make different portfolio choices, they can no longer rely on the traditional trading association to represent them on all policy positions. Instead, it means they collaborate on specific policy themes in new coalitions and through novel channels, preferably with a broad support base. Sometimes with NGOs and sometimes with companies in other industries. The same cross-sectoral collaboration that has emerged in the private sector occurs in the public sector where departments collaborate in new ways and with more intensity with eachother. Despite the energy transition, energy companies adopting this broad collaborative strategy, provided they have enough clout to convene the parties, appear to retain influence. In addition, it has enhanced their public profile and allowed them more control over the narrative, which includes making contributions to society. Thanks to a professional GR function, we see energy companies successfully leading these coalitions. The GR function can thus become a competitive differentiator.
Regulators in some geographies (e.g., the US, UK & EU) essentially ask for costs and facetime involved in lobbying activities to be recorded. Many countries, however, lack regulation in this space. Looking at the history of anti-trust rules, anti-bribery and corruption laws and privacy regulation, it is plausible for lobbying regulation to be tightened. We believe it is a matter of time before a regulatory push will require companies to show more information about their advocacy activities as part of the public record. If the concept of ‘plausible deniability’ changes to something like ‘provable innocence’, it would move the burden of proof to the regulated. Companies will tighten their information management policies to drive improved record-keeping and allow auditors to test practices. GR professionals need to prepare to report more details about their engagement activities.
What can GR-IQ bring to the table?
At GR-IQ, we believe there is tremendous value to be unlocked when government and the private sector in the energy business better understand each other and collaborate more effectively. Our contribution? We use our GR expertise to identify opportunities for improvement for the corporate GR function whilst being culturally sensitive and experienced in guiding change. Are any of the themes in this note applicable to your situation, or would you like to exchange thoughts on other challenges? We’d love to hear from you and set up a strictly confidential conversation!