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The “Twin Threats” Facing Big Oil

The global oil and gas industry is facing the “twin threats” of the loss of profitability and the loss of social acceptability as the climate crisis continues to worsen. The industry is not adequately responding to either of those threats, according to a new report from the International Energy Agency (IEA).

“Oil and gas companies have been proficient at delivering the fuels that form the bedrock of today’s   energy system; the question that they now face is whether they can help deliver climate solutions,” the IEA said.

The report, whose publication was timed to coincide with the World Economic Forum in Davos, critiques the oil industry for not doing enough to plan for the transition. The IEA said that companies are spending only about 1 percent of their capex on anything outside of their core oil and gas strategy. Even the companies doing the most are only spending about 5 percent of their budgets on non-oil and gas investments.

There are some investments here and there into solar, or electric vehicle recharging infrastructure, but by and large the oil majors are doing very little to overhaul their businesses. The top companies only spent about $2 billion on solar, wind, biofuels and carbon capture last year.

Before even getting to the transition risk due to climate change, the oil industry was already facing questions about profitability. Over the past decade the free cash flow from operations at the five largest oil majors trailed the total sent to shareholders by about $200 billion. In other words, they cannot afford to finance their operations and also keep up obligations to shareholders. Something will have to change. Related: Libya Is Facing A New Oil War

But, of course, as climate policy begins to tighten, oil demand growth will slow and level off. Most analysts say that it won’t require a big hit to demand in order for the financial havoc to really begin to devastate the balance sheets of the majors. Demand only needs to stop growing.

The IEA said there are things the industry can do right now – and should have done a long time ago. Roughly 15 percent of the energy sector’s total greenhouse gas emissions comes from upstream production. “Reducing methane leaks to the atmosphere is the single most important and cost-effective way for the industry to bring down these emissions,” the IEA said. But, the Permian is flaring more gas than ever, and methane leaks at every stage of the extraction and distribution process. Drillers have promises improvements, but the industry’s track record to date is not good.

Meanwhile, the IEA also noted that while attention is often focused on the oil majors, national oil companies (NOCs) account for more than half of global oil production. The majors only account for about 15 percent.

It is one thing for ExxonMobil or Chevron to face an existential crisis – which, absent an attempt to transition to a low-carbon business, they certainly do – but it’s an entirely different thing for the NOCs who will struggle to deal with the energy transition. The threat from the energy transition is not just to a specific business, but to whole governments and entire populations. “Some are high performing, but many are poorly positioned to adapt to changing global energy dynamics,” the IEA said. “None of the large NOCs have been charged by their host governments with leadership roles in renewables or other noncore areas.” Related: Has Natural Gas Hit Rock Bottom?

Ultimately, the report from the IEA should be worrying for the industry. The agency itself has faced criticism for not being more at the forefront of calling for a clean energy transition, and its forecasts for renewables have consistently undershot actual improvements for renewable technologies. The agency also continues to call for more upstream oil and gas investment. In other words, the IEA is somewhat conservative, and has been slow to recognize major shifts in the energy sector.

As such, the majors should probably take note when the IEA says something like “the transformation of the energy sector can happen without the oil and gas industry.” They can drag their feet, and will become increasingly ravaged by policy change and a deterioration in their core business. Or, they could proactively transform themselves, as the IEA says they should. Solutions to climate change “cannot be found within today’s oil and gas paradigm,” the agency said.

By Nick Cunningham of Oilprice.com

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Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon.  More

Comments

  • Lee James - 22nd Jan 2020 at 12:10am:
    What say those who are intimately involved in the oil industry? Is the EIS report accurate? Is the industry really not doing much to further clean energy and prepare for weakening petroleum demand? What is the role and responsibility of the oil industry in providing a suitable product for today and tomorrow?

    There's lots to digest in this article. I suspect it's going to be a tough one to chew on.
  • Mamdouh Salameh - 22nd Jan 2020 at 3:44am:
    The recent report by the International Energy Agency (IEA) on climate change is no more than a cheap attempt by the IEA to burnish its environmental credentials at the time of the World Economic Forum in Davos. The fact that the IEA has been hyping most about US shale oil industry whose record on natural gas flaring is among the worst in the world renders its recent report worthless.

    While global energy transition is already taking place spearheaded by natural gas, the transition will be gradual during the 21st century. There could never be an imminent energy transition. If energy transition to accelerate, it should have three realistic objectives: benefit to users, practicability and lucrative financial returns from renewables comparable to those from oil and gas. Any mandatory transition measures would only achieve limited success.

    Still, Big Oil is investing in clean energy solutions and has accelerated such investments in recent years partly to be genuinely involved in the clean energy solutions. Shell’s spending on new energy solutions for instance at $2 bn amounts to 8% of its total annual capital spending.

    And while Big Oil is facing increased investor pressure to start addressing climate change risks and set emission-reduction targets, three pivotal principles will continue to govern the global energy scene well into the future, namely there will neither be a post-oil era nor peak oil demand either or an imminent energy transition throughout the 21st century and far beyond. Oil and gas will continue to be the core business of the global oil and gas industry well into the foreseeable future.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
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