Oil and gas producers must re-gain the trust of all stakeholders alike is they are to effectively meet the dual challenge of delivering more and cleaner energy while keeping returns to investors high, delegates at this week's International Petroleum Week conference in the UK heard.
BP chief executive Bernard Looney said that, since taking over the head at the UK supermajor, the “hardest message to hear” from both supporters and critics has been: “We don’t trust you”.
To tackle the issue, Looney promised that “from now on [BP] will not be asking you to trust us. We will be showing that you can. And ultimately you will judge."
Ending IP Week, which had climate change as a key theme, Looney said: “I felt a warm reaction to our net zero ambition … the opportunity is tremendous. Some say our industry is on the wrong side of the climate challenge [debate]. I want to prove through our actions that we can — and will — change.
Looney said the chance to make meaningful changes presents opportunities.
"We have the most incredible chance to help re-wire the world’s energy system. I feel optimistic because we know our destination already,” he said.
As a result and following an in-depth review examining the alignment of their climate-related policies, BP, which pledged to become a net zero emissions company by 2050 or sooner, said it will leave a trio of trade bodies: the American Fuel & Petrochemical Manufacturers (AFPM), the Western States Petroleum Association (WSPA) and the Western Energy Alliance (WEA).
It also informed other trade bodies, including the American Petroleum Institute (API), of its “clear expectations with regards to climate positions and transparency”.
The same message was echoed by other industry giants, which said peers need to step up their energy transition plans if efforts to tackle climate change and global carbon dioxide and methane emissions are going to pay off.
Sinead Lynch, UK country chair with supermajor Shell, said: “This transformation that we need to make is going to be harder if all the players in the energy systems are not aligned and not working together with an unprecedented level of collaboration.”
She said the industry and stakeholders — including trade associations — should focus on finding “common ground” on low-carbon strategies in electrification, carbon pricing, energy efficiency, carbon capture and storage (CCS) and new fuels.
“There is a role to play for companies that want to be more transparent, which is an important point. Also, set net zero ambitions that can set the bar, and hopefully you would expect industry to want to rise to meet this bar,” Lynch said.
Nevertheless, while speakers praised actions by European players, including Equinor, Repsol, Total, noticeably absent were US companies.
From an investor’s perspective, Edward Mason, sector lead for oil and gas engagement for the Climate 100+ initiative, said the industry still needs to demonstrate its commitment to significant emissions reduction.
The Climate 100+ initiative received a boost last month when BlackRock, the world’s largest investment firm, came on board, bringing the value of the joint portfolios pushing for climate action to more than $41 trillion.
“The issue that we have as investors is that we are not seeing change happen on a global scale, with companies like ExxonMobil and Chevron having no long-term targets embracing Scope 3 emissions,” he said, referring to indirect emissions in the value chain.
“Investors want the capital expenditure of the companies they are investing in to be consistent with the goals of the Paris Agreement," said Mason, who is also head of responsible investment at Church Commissioners for England.
“Investors are asking companies to produce disclosures on how they are lobbying, or that of their trade associations, is consistent on climate change, and to take action if this is not,” he explained.
However, Mark Gyetvay, chief financial officer and deputy chairman of Russia gas independent Novatek called for a different, more “realistic” approach.
“The industry has done a tremendous job of taking people out of poverty and delivering economic prosperity. Yet, we constantly apologise…We have got to be more aggressive in our stand and how we deliver our message to the world,” Gyetvay said.
“We have a debate going on where we have the energy industry on the right side and the greens on the left. Without doubt, the energy industry has moved to the middle. The industry has made tremendous strides.
“[US Democratic senator] Bernie Sanders is talking about a trillion dollars of tax on the US oil and gas industry to pay for a green movement. That’s insane. The US energy industry for the last decade has been negative free cash flows. They’re dying at these types of prices. There’s no way they’re going to be able to fund a push to this green society,” he said.
Gyetvay added: “In my opinion, we have done a great job. But we are not getting recognised…because there are too many chief executives that sit in front of audiences and apologise for being in the oil and gas industry.”
Meanwhile, for energy-hungry Africa, IP Week speakers focused on the 600 million people on the continent, particularly in the sub-Saharan region, still without access to electricity.
The continent holds huge volumes of gas — more than 200 trillion cubic feet in fast-growing Nigeria, for example — but most is exported as liquefied natural gas or flared.
There are only a few examples of gas being used domestically in countries such as Cameroon, Tanzania, Congo-Brazzaville and Nigeria.
A panel conversation was heavily focused on gas-to-power schemes with discussions about the potential of renewables largely focused on very remote communities.
Khady Dior Ndiaye, Kosmos Energy’s country manager for Senegal said one key issue for potential African consumers is the cost of electricity from oil-fired power stations. The US independent is a minor partner in gas projects off Senegal and Mauritania, along with operator BP.
She said that “it’s very expensive” and described gas as a cheaper solution while the continent is making the transition to renewables.
An executive of Nigerian independent Seplat Petroleum Development said that in Nigeria, power generation has made little progress, partly because market forces are not allowed to determine prices and argued that high prices are not the issue.
“It is said that tariffs (in Nigeria) need to be low to give people access to electricity, but that hasn’t worked,” pointing out that about 10GW of power is generated outside the grid at about four times the costs of grid-based power.
“The problem in Nigeria,” said the Seplat executive, “is not an inability to pay but the unavailability of energy,” adding that micro and mini gas grids could offer a partial solution.
He also argued that consumers do not want to pay for energy in Nigeria because they do not trust metering systems.
Loss of value
While companies debate the best way to continue to deliver cleaner energy, the loss of value for the industry is slowly becoming evident. According to consultancy Boston Consulting Group (BCG), from the perspective of shareholder value creation, for now, the industry appears to have much to support it.
The discovery and development of major new reserves have substantially increased the industry’s access to resources in the past decade, companies’ balance sheets show billions of dollars available to fund investment, and production costs have generally fallen, driven by technological innovation, the adoption of more efficient manufacturing processes and client pressures on the supply chain.
In addition, while demand for hydrocarbons is forecast to fall in the decades ahead, the volumes required to meet demand will still be huge.
But investors have been largely underwhelmed, because among the 33 industries BCG tracks, oil and gas has the worst median five-year total shareholder return, behind metals and even the mining sector, and the industry’s share of the S&P 500 Index, which is based on market capitalisation, is shrinking.
“We look at a lot of different companies and what we are seeing is that oil and gas players like to compare themselves with their peers, saying they’re first in class compared to their peers, which is a very small, pre-defined peer group,” said Rebecca Fitz, a senior director at the BCG Center for Energy Impact.
“But for overall context, it’s worth keeping in mind that first-in-class in a sector that is delivering the worst results in the world across sectors is a small bar.
“An oil and gas company that is robust and durable in a lower carbon future, could look many different ways: it could not be an oil and gas company any more; or really focus on what it does best and become the cleanest and most sustainable producer of oil and gas,” Fitz said.
However, she added that the industry does have to overcome the trust deficit.
“It’s a high risk, high reward sector. But if you have an investor community that does not believe in high reward any more or demands change, it’s a vicious cycle. If investors don’t believe you, does it count?”
Selling the story
Ed Williams, chief executive Europe, Middle East and Africa for public relations firm Edelman, said its trust barometer for 2020 revealed that, despite a strong global economy and near full employment, none of the four societal institutions that the study measures —government, business, non-governmental organisations and media — is trusted.
The cause of this paradox can be found in people’s fears about the future and their role in it, which are a wake-up call for institutions to embrace a new way of effectively building trust — balancing competence with ethical behavior, he said.
“If maximising shareholder returns was ever enough for businesses, it’s not anymore. The public and investors are demanding that companies think about more than just profits,” Williams argued.
“My advice is to take seriously the shift from shareholder to stakeholder because 93% of people globally believe that stakeholders are the most important group to engage with for long-term business success. Stakeholders are employees first, customers second, local communities in which you operate, and then shareholders.
“This view is evident with institutional investors as well, as 85% of investors agree now that maximising shareholder return can no longer be the primary goal of business leaders who should instead commit to balancing the needs of shareholders with those of customers, employees, suppliers and local communities,” Williams said.