GUEST COMMENT: There could hardly have been a starker illustration of how far the oil industry has to go to start meaningfully contributing to combatting the unfolding global climate crisis: among the myriad bar and pie charts in the Oil & Gas Industry in Energy Transitions report published last week by the International Energy Agency (IEA) was a funereal black circle broken by the slimmest sliver of red, depicting the percentage of the sector’s capital investment in 2019 that was funneled into fossil fuels (99.2%), versus renewables and carbon capture and storage (0.8%).
IEA executive director Fatih Birol was politic when launching the study at the World Economic Forum in Davos, Switzerland. He said international oil companies had a “crucial role” to play in accelerating the shift to the renewables-based worldwide energy system needed to slow global warming – both by rapidly cutting emissions levels from their operations and ratcheting up investment in a range of key clean-energy technologies.
Birol has been overseeing the IEA’s own ongoing shape-shifting from an oil-market watchdog – its raison d'etre at its formation in response to the 1973 oil crisis – to a global all-energy advisory body. He underscored that “no energy company [would] be unaffected” by the energy transition, a transformation to which “every part of the industry needs to consider how to respond”. Failure to answer the growing public demand for greenhouse gas emissions reduction “could threaten their long-term social acceptability and profitability”, he said.
“Doing nothing is simply not an option,” he said, though of course, the international oil companies – and indeed national oil companies – have been doing as close to ‘nothing’ as possible despite knowing for decades of the coming environmental impact of exploration, production, transport, refining and consumption of fossil fuels.
Recent calculations from analyst group Rystad Energy shows that Europe’s five largest oil companies – Shell, BP, Total, Eni and Equinor – have to date together spent the grand sum of $5.5 billion on renewables, compared to a combined total energy project budget of almost $90 billion in 2019 alone. Widening that calculation to include US petro-giants ExxonMobil and Chevron adds little to the clean-energy pot.
International oil company delaying tactics and pro-oil government lobbying efforts look to be running out of steam. HSBC in a recent research note called management of the energy transition “the defining issue” for oil and gas majors in the coming years, one predicated on a “core dilemma: [how] to adapt quickly enough to thrive in the transition, without compromising returns or shareholder value”.
On one level, it is not a question of money. Outgoing Shell New Energies chief Mark Gainsborough told a session at last year's BNEF Summit in London that his company will “have an even stronger role to play in a subsidy-free world” given the “bigger balance sheets” that evolving energy companies like his could bring to bear on the energy transition.
Nor is the Anglo-Dutch oil giant alone. By HSBC’s calculus, international oil companies are set to generate $600 billion of investible capital over the next 30 years that could be “redeployed as significant energy landscape uncertainties loom”.
But to channel some pie-chart-changing percentage of this expenditure into clean energy would require that another equation is reconfigured: an internal rate of return deemed acceptable to international oil companies and their shareholders, who have grown accustomed to roughly 20% coming back from oil and gas assets and could only count on 5% to 9% from renewables projects, as their economics are now.
Of the wider international oil sector views on the transition coming down the pipeline, a new survey by consultancy DNV GL reveals the deeper contradictions in expectation. Some 44% of those polled by the consultancy for its New Directions, Complex Choices: The outlook for the oil and gas industry in 2020 report said they would be boosting their clean-energy spend, up from 34% last year.
Of those polled, 60% expected capital spending on large oil and gas projects to be reined in during 2020, up from 44% two years ago, as their organisations “actively adapted to a less carbon-intensive energy mix”.
Yet two-thirds (66%) of the 1000 senior oil and gas professionals contacted by DNV GL for its report were confident of the oil industry’s growth this year, down a mere 10 percentage points on 2019.
And here’s the rub. Although the IEA made clear that low-carbon electricity would “undoubtedly move to centre stage in the future energy mix”, it cautioned that investment in oil and gas production could not stop completely as this would result in a decline in supply of around 8% a year, which would be “larger than any plausible fall in global demand”, meaning expenditure on “existing fields and some new ones remains part of the picture”.
The DNV GL 2019 Energy Transition Outlook’s numbers make for even plainer reading on this: As it stands, oil and gas will be at the heart of the global energy system in the coming decades, accounting for 46% of the energy mix in 2050 compared with 54% today – a contribution that will result in emissions creating global heating that will far overshoot the 1.5°C target set out in the Paris Agreement.
As Ditlev Engel, chief executive of DNV GL - Energy, said in a recent interview with Recharge: “Right now we are on a road to a place nobody wants to go.” Whether for profit or planet – or both – international oil companies must now wait no longer to lead from the front in changing this.
This opinion article was first published in Upstream's sister publication, Recharge.