“The world is in a transition between an era dominated by fossil fuels and one focused on a low-carbon economy,” David Koranyi wrote in a report for the Atlantic Council. “While the speed, timing, and details of the transition are highly uncertain, the direction should be clear: toward a low-carbon future.”
Koryani argues that there are a several drivers pushing the world in this direction, including falling costs for clean energy technology, consumer preferences, government policy, international agreements and pressure from various stakeholder groups. Even shareholders of oil companies are pressing executives to make the transition to cleaner energy.
Oil companies are responding in different ways with varying levels of urgency. Some companies are making significant investments in renewable energy, electric vehicles and associated infrastructure, and utilities. Others are dragging their feet, clinging to their oil and gas assets while fighting public policies that promote energy transition.
One key strategy from the oil majors is to make big bets on natural gas. The prospect of plateauing demand for oil in transportation has oil executives eyeing natural gas, which they view as a safer long-term investment due to the resilience of demand for gas in the electricity sector as coal phases out.
Most oil companies are also investing heavily in chemicals and petrochemicals. Environmental groups would correctly note that this is hardly a strategy for a clean energy transition, but oil executives (and analysts including the IEA) see demand for plastics, fertilizers and other petrochemical products as a larger source of demand growth going forward than the transportation sector. Shell is building a massive ethane cracker in Western Pennsylvania to build plastics from shale gas, for instance. ExxonMobil and others are doing the same on the Gulf Coast.
Another strategy for the oil majors is to invest in short-cycle shale rather than conventional, offshore or other long-term projects such as oil sands. Shale drilling can return capital within a matter of weeks or months; an offshore project has a multi-decade time horizon. Due to the enormous uncertainty over peak demand, shale is seen as comparatively low risk. For example, Chevron just announced that it would spend $9 to $10 billion on short-cycle investments through 2022. “Most of our assets are competitive when tested against aggressive scenarios,” Chevron said in a presentation, referring to the possibility of an early onset of peak demand.
Finally, the oil majors – in fits and starts and to varying degrees – are beginning to invest in renewables. The European oil majors in particular have their hands in solar, offshore wind and electric vehicles.
Generally speaking, however, the forays by international oil companies (IOCs) into cleaner forms of energy remains marginal. “By and large, all IOCs are continuing to bank on sustained oil and gas demand and are proceeding cautiously when it comes to more ambitious diversification away from their core business,” Koryani wrote in the Atlantic Council report. He noted that even Royal Dutch Shell, which has made some of the more notable ventures into clean energy and is arguably doing more than its peers, still spends less than 10 percent of its capex budget on renewables.
Doubling-down on oil and gas drilling is problematic given the scale of the climate crisis. A report from Oil Change International argues that the U.S. oil and gas industry “is gearing up to unleash the largest burst of new carbon emissions in the world between now and 2050.” Unsurprisingly, a huge chunk of those emissions (39 percent) will come from the Permian, with 19 percent coming from the Appalachian basin (Marcellus and Utica shales).
Over the next few decades, the report says, the U.S. oil and gas industry will add the equivalent greenhouse gas emissions of nearly 1,000 coal-fired power plants. In short, the plans for drilling in U.S. shale alone will likely ensure the world blows past even the more modest climate goals contained in the Paris agreement. Oil Change International’s report, aptly titled “Drilling Towards Disaster,” calls for a ban on new leases and permits, ending subsidies for fossil fuels, and a plan for a phase out of existing projects.
Needless to say, the gap between what is needed and what the oil industry is doing is overwhelming. It is no wonder then that both sides see this as an existential fight.
By Nick Cunningham of Oilprice.com
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