Equinor: Profitability on the Way to Net Zero… Starting Now!

We continue our series on our portfolios companies that we believe are at forefront of current trends in their respective areas, characterized by innovation, technological advances and superior management.

In our view, there are few companies better strategically positioned than Equinor¹ to be a reliable, sustainable source of natural gas, while also being a first mover into offshore renewable and carbon solution technologies.

Equinor, a Norwegian energy company, has long established itself as one of the most reliable and predictable global suppliers of natural gas while also driving profitability. Critically, it has accomplished this while producing energy with the lowest carbon intensity of any major oil and gas company in the world. At the same time, the company is transforming itself to take center stage in accelerating the energy transition. It is powering its oil and gas production with renewable energy, pioneering offshore wind farms and developing carbon capture utilization and storage (CCUS) technology. The next step is the development of the company’s groundbreaking energy hub network that will integrate its oil and gas production, offshore wind energy and low-carbon solutions across borders.

Previously known as Statoil, the company has demonstrated a long track record of superior expertise in supplying natural gas, which it is now leveraging to pioneer new technologies that capitalize on the opportunities presented by the energy transition.

Gas as the Keystone in the Energy Transition

Natural gas will remain an important part of transitioning the world to a lower emissions future. Countries worldwide have set goals to reach net zero greenhouse gas (GHG) emissions,² which will require transitioning their respective energy supply from fossil fuels to renewable sources. This shift will be gradual as countries slowly phase out more polluting sources like coal, and eventually oil, while introducing more renewable energy. Natural gas will serve to bridge the gap from “dirtier” to “cleaner” sources, as it produces fewer emissions compared to other fossil fuels. The International Energy Agency (IEA) expects the demand for natural gas to stay (approximately) steady until 2050 while it serves as the keystone in the energy transition.³

For decades, Equinor has established itself as one of the most reliable natural gas suppliers in the world. The company is Europe’s largest “domestic” supplier of natural gas, providing the continent with over 15% of its gas.⁴ Equinor has provided an uninterrupted supply of gas at an affordable price to the continent and continues to try to boost supply amid the urgency to replace Russian flows, which have been suspended due to the Russia-Ukraine war.⁵

European Natural Gas Supply Market Share

Source: BloombergNEF, VanEck. European Gas Supply Demand Balances. As of September 2022.

Equinor has provided a steady supply of energy while also transforming its operations to make them the cleanest in the world. The company’s upstream oil and gas operations have the lowest carbon intensity, i.e., the lowest amount of carbon dioxide (CO₂) emitted for each unit of energy produced.⁶ Since 2015, the company has reduced its upstream carbon intensity by approximately 30%, bringing it below half the current industry average.⁷ Equinor has achieved this by using renewable energy as the power source at its offshore platforms, instead of or in addition to gas.⁸ This renewable energy comes through power cables from land or from its own offshore wind farms. Beyond reducing its environmental impact, powering its operations with renewable energy also makes Equinor’s operations both cheaper and safer.

Beyond Gas to Wind and CCUS

Countries around the world are aggressively setting targets to reduce their emissions and are adopting legislation to work towards achieving them. Annual climate summits have mobilized more than 70 countries to pledge to reach net zero emissions, including the U.S., Europe and China, which together account for more than 75% of global emissions.⁹ In order to meet these goals, countries and regions are passing ambitious legislation that should accelerate the energy transition, including the Green Deal in Europe and the Inflation Reduction Act in the U.S. As an increasing number of countries set climate targets, they can be expected to pass similar legislation that will decarbonize their energy supplies. Equinor will play an important role in helping countries reach these goals through its trailblazing expansion into offshore wind and CCUS.

Equinor’s offshore expertise uniquely positions it to pioneer offshore wind energy, allowing it to capitalize on the headwinds of the energy transition. Offshore wind farms are groups of wind turbines placed out at sea where the wind blows faster than on land. Offshore wind is a reliable, emissions free source of energy that is able to provide the same amount of energy per unit as some gas and coal power plants.¹⁰ The IEA estimates that offshore wind will become a $1 trillion industry over the next two decades.¹¹ The next frontier for offshore wind is floating wind, where turbines are placed even farther offshore where wind blows faster.¹² Equinor installed the world’s first floating wind farm off the coast of Scotland in 2017 and is in the process of installing another off the coast of Norway.¹³ The project, Hywind Tampen, will be the world’s largest floating wind farm. It will supply more than a third of the electricity for five of Equinor’s oil and gas platforms, which will also make it the world’s first floating wind farm to power offshore oil and gas platforms.¹⁴ Once all the wind turbines are installed for Hywind Tampen, Equinor will operate nearly half of the world’s floating wind capacity.¹⁵ In our view, Equinor’s pioneering technology will allow new regions to harness the potential of floating offshore wind, with plans for the company to expand its offshore wind business to South Korea, Vietnam and the U.S.

Beyond its expansion into offshore wind, Equinor is spearheading the development of large-scale CCUS projects. The company’s CCUS projects capture carbon dioxide (CO₂) emissions from its oil and gas production and transport them to be stored permanently underground.¹⁶ Equinor has long been a leader in CCUS, operating multiple projects in Norway for over 26 years.¹⁷ The company continues to be at the frontier of CCUS developments with its new state of the art Northern Lights project. The project will be the first open source transport and storage network in the world, capturing emissions from powerplants and factories across Europe and transporting them to be stored under the North Sea.¹⁸ It is scheduled to be operational in 2024,¹⁹ which is earlier than most other major CCUS projects globally, which have targeted timelines beyond 2025.²⁰ Northern Lights will first capture, transport and store CO₂ from industrial emitters in Norway, with plans to expand to 16 partners across seven European countries in the future.²¹

Companies Leading in CCUS Development in Europe

Source: BloombergNEF. 2022 CCUS Market Outlook. October 18, 2022 (Y-Axis = # number of projects).

Now, Equinor is seeking to reshape the way the world addresses its energy needs through the development of its energy hub network. Each energy hub will integrate Equinor’s oil and gas operations, renewable energy production and low-carbon solutions in one location. The company will be able to simultaneously power its oil and gas operations with its wind energy and capture and store emissions from its own business as well as those from other industrial emitters. The energy hub network will share infrastructure and capture supply chain synergies across country borders as has never been done before. The first energy hub is planned in the North Sea, placing Norway as Equinor’s first stepping stone in expanding this approach to Europe and the U.S. east coast.

Source: Equinor. Norway Energy Hub. 2022.

Stable, Renewable, Profitable

Equinor has transformed its upstream oil and gas business into the cleanest in the world. In parallel, it is pioneering offshore wind and CCUS technologies to become an early entrant in these high growth markets.

Now, Equinor is taking its approach to the energy transition one step further through the development of energy hubs. These hubs will create a groundbreaking energy network that will integrate the company’s oil and gas operations, renewable energy production and low-carbon solutions across borders. By integrating its operations and infrastructure, Equinor can capture supply chain synergies, develop new and material markets and ultimately reshape the way the world addresses its energy needs. Norway and the North Sea are its first stepping stones.

While global climate ambitions grow, energy companies that are supplying secure sources of energy in a more sustainable way, while pioneering new technology, are where we look to be positioned. Equinor is spearheaded by superior management that continues to drive profit and remain competitive in an ever-evolving environment while providing executive compensation that is far below the median of its peers. As a result of its business foresight and management style, we believe that Equinor has much to provide in the energy space.

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