Extinction Rebellion demonstrations in central London helped focus minds at last week’s Oil & Money conference, raising the pressure on oil and gas companies to front up to the rising public disquiet around climate change.
There is a sliding scale: at the most advanced level, supermajors like BP, Shell and Total recognize that despite shareholders’ desire for steady dividends, there is a ground shift in sentiment among investors and, crucially, the broader public and oil customer base. This is no knee-jerk reaction and a credible strategy is mission critical. As share prices lag the broader market, they sense the reluctance of investors to endorse production growth absent carbon mitigation; and they can also feel the rising pressure to address carbon emissions full stop.
Oil companies might be reducing emissions from their operations, but the next phase will be a strategic refocus on low- or zero-carbon energies – something that will in time limit investment in new oil and lead to the divestment of oil assets and any other high-carbon operations (Figure 1).
As Oil & Money sponsor Energy Intelligence noted, liquids growth from the supermajors has already stalled over the last decade. Investors are supportive of short-cycle oil (US shale) but there is no appetite for long-lead, capex-intensive projects anymore – especially with uncertainty about the medium- to long-term demand outlook. It is difficult to see capital-intensive gas or oil projects getting done beyond the sponsorship of state-owned oil companies. With fear of stranded assets rising, there is simply no appetite for that kind of capex and lead time.
Of course plunging into a clean energy focus for oil companies may mean accepting reduced return on capital that in many cases falls below benchmark investment levels. Also, are oil companies really going to be the champions in these clean energy projects? Does it play to their strengths? Maybe not so much.
National oil companies (NOCs) have adopted some of the energy transition language of their international oil company (IOC) peers. But scratch beneath the surface and the commitment looks patchy. It looks less like a strategy and more like a tactic to undermine the international approach, pointing to its shortfalls (of which we must accept there are many).
Saudi Aramco, in the news for all the wrong reasons in recent weeks as it builds up for a local share issue, offers a good insight into this mindset. Senior company leaders continue to push against the replacement of fossil fuels and want consumer government support for reducing carbon in fossil fuels, as well as the focus on new energies.
Saudi Aramco may have had little experience yet of activist shareholders but the looming IPO may change that. Even Aramco investors, likely to be dominated by local Saudi families, strategic investors and sovereign wealth funds, are likely to demand a more coherent approach from the company board.
Aramco and its Gulf Arab peers such as Kuwait Petroleum Corp. (KPC) and Abu Dhabi National Oil Co. (ADNOC) face the same climate pressures as IOCs – but they are barely at first base when it comes to strategizing a response. The risk is rising they will be cornered by aggressive emissions policy further down the road. If Aramco engaged sensibly now, it could still carve out the niche as one of the world’s lowest-cost and lowest-carbon operators. But being seen to argue the case against EVs and other global carbon mitigation efforts is not a good look. From a reputational perspective, NOCs have got more work to do here.
FIGURE 1 | EIA Forecasts Renewables Will Generate Nearly Half of World Electricity by 2050