Is the era of Big Oil coming to an end? Worldwide, industry and policy leaders are finally making earnest pledges to decarbonize. The United States has passed a $1 Trillion Infrastructure Bill that includes heavy investment and incentives for the increased development and adoption of renewable energies. At last month’s COP26 climate summit, a Beyond Oil and Gas Alliance (BOGA) was formed by a group (Costa Rica, Denmark, France, Greenland, Ireland, Quebec, Sweden and Wales) that committed to phasing out oil and gas entirely, and 25 countries and five financial institutions committed to putting an end to public financing for most fossil fuel projects by the end of 2022.
Indeed, the past two years have marked a major turning point for the global energy industry and the carbon-based economy writ large. Last year, the spread of the novel coronavirus pandemic battered oil markets around the world and gave oil prices an unprecedented hit, driving the West Texas Intermediate crude benchmark well below zero on April 20, 2021. While oil prices have bounced back since, the pandemic only served to catalyze the green energy transition and redirected the global conversation about climate change.
As global energy markets shift, Big Oil has begun to follow. European oil majors have embraced this change rather more aggressively than their U.S. counterparts. European majors are already transitioning to become Big Energy, and Royal Dutch Shell, in many ways, has been leading the charge.
Shell has been making major moves to diversify its portfolio. The company recently struck a deal to buy energy from what will be the world’s largest offshore wind farm. The 15-year agreement involves 240 megawatts from Dogger Bank C, an enormous wind farm that will operate off the coast of England. Just last week the oil supermajor also announced it would be cutting its Singapore oil refining capacity in half, changing its focus to chemical feedstocks in order to meet Shell’s goals of halving its carbon footprint by 2030 and achieving complete carbon neutrality by 2050. In February the company announced that its total oil production peaked back in 2019 and that its carbon emissions peaked even before that at 1.7 metric gigatons in 2018.
Transitioning away from fossil fuels is never simple, however, and Shell’s operations are no exception. For Shell, reaching net zero doesn’t necessarily mean ditching oil and gas - in fact, they say the company’s ability to decarbonize depends on fossil fuels. Ben van Beurden, the Chief Executive of Royal Dutch Shell, told the BBC in a recent interview that the company aims to pay for its transition to net zero with the income from oil and gas. “At this point in time [the cash] comes from our legacy business,” van Beurden said in his interview at the Pernis oil refinery near Rotterdam. Shell says it plans to convert the mammoth gasoline and diesel plant into a biofuels and hydrogen plant over the next ten years. “If we have to build a hydrogen plant from a wind farm that we build in the North Sea for a billion dollars, that is not going to be funded by a hydrogen business - it will be funded by the oil and gas business.” This approach, however, is going to face resistance from both activist shareholders and even, potentially, Dutch courts.
Shell’s dual approach to decarbonization is indicative of the extreme complexity of the green energy transition. It would be naive to think that the world can wean itself off of fossil fuels overnight, and the road toward 100% renewable energy - or anything close to it - will be full of supply crunches and other serious bumps in the road. Fossil fuels have a role to play in the energy transition, but the extent to which they should continue to be extracted is an issue of major debate. What’s more, the widening divide over environmentalism, energy, and economic security is now threatening to break up oil majors like Shell. Only time will tell which of the oil majors has the right strategy going forward.
By Haley Zaremba for Oilprice.com
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Oil and gas will continue to be the core business of the global oil industry well into the future. While the oil industry is investing huge amounts in renewables, such investment pales in size when compared with that in oil and gas. The slower pace of oil majors toward alternative energies is due to two key reasons. The first is that they all believe that oil and gas will continue to be needed well into the foreseeable future. And the second reason is that financial returns from renewables are nothing compared to those for oil and gas.
Therefore, the best way to combat climate change is for the global oil industry to focus on reducing carbon emissions from fossil fuels and not their actual use.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London