There are signs that the oil and gas industry may be undergoing a historic transformation. Or is this history being made only on the other side of the Atlantic?
BP has generated headlines recently with efforts “to reinvent itself as an energy company in the age of climate change,” as The Washington Post’s Steven Mufson put it. “The company is shrinking its oil and gas business, revving up offshore wind power and developing solar and battery storage. It is even considering installing electric car charging kiosks at its gas stations, part of a drive to eliminate or offset its carbon emissions to a net zero level by 2050.”
BP's plan will "start with a five-year sprint to dramatically boost wind and solar power," according to Bloomberg. By 2025, the company intends to have approved more than 20 gigawatts of renewable energy projects, an eightfold increase from 2019.
In its annual outlook paper, the company’s new CEO, Bernard Looney, said that “the world is on an unsustainable path and its carbon budget is running out.”
Royal Dutch Shell is planning similar steps. As Reuters’ Ron Boussa reported, “the review, which company sources say is the largest in Shell’s modern history, is expected to be completed by the end of 2020, when Shell wants to announce a major restructuring. Other European-based giants--Eni of Italy, Total of France, Repsol of Spain and Equinor of Norway--are also on the bandwagon.
“European oil executives have said that the age of fossil fuels is dimming and that they are planning to leave many of their reserves buried forever,” The New York Times’ Clifford Krauss wrote. “They also argue that they must protect their shareholders by preparing for a future in which governments enact tougher environmental policies.”
You may recall that BP tried a transition in the late 1990s and early 2000s under the leadership of John Browne, then chief executive. But financial results from renewables were disappointing, and the company eventually dropped its moniker “Beyond Petroleum.”
In an interview with The Post’s Mufson, Browne said this time would be different. “There are many more voices now,” he said, adding that the Paris agreement was a watershed, the economics of renewables have improved, and investor pressure was building.
U.S.-based oil and gas majors take a different view, however. They publicly agree with their European counterparts that climate change is a threat and that they must play a role in the kind of energy transition the world last saw during the industrial revolution. But the urgency with which the companies are planning to transform their businesses could not be more different, Krauss wrote.
A key factor for the majors as they assess the urgency of shifting focus is the trajectory of demand for oil. Daniel Yergin, whose newest book is The New Map: Energy, Climate, and the Clash of Nations, believes that the world won’t reach peak oil demand for another 10 to 12 years. “Then when we hit the peak it's not a plummet and collapse, it just starts to decline,” he told Politico’s Ben Lefebvre. “Just one number to keep in mind is that the average car in the United States now stays on the road for 12 years, so those cars aren't going away. But it is a time of uncertainty. A big uncertainty is how the world will change when Covid is behind us.”
Chevron and Exxon Mobil, Krauss reported, “are doubling down on oil and natural gas and investing what amounts to pocket change in innovative climate-oriented efforts like small nuclear power plants and (carbon capture technology).”
“Despite rising emissions and societal demand for climate action, U.S. oil majors are betting on a long-term future for oil and gas, while the European majors are gambling on a future as electricity providers,” David Goldwyn, a top State Department energy official in the Obama administration, told Krauss. “The way the market reacts to their strategies and the 2020 election results will determine whether either strategy works.”
Maybe it’s time for ExxonMobil and its American brethren to think more creatively. This summer the energy sector became the smallest component (just 2.3 percent) of the S&P 500-stock index, and ExxonMobil, once the world's biggest publicly traded company, was dumped from the Dow Jones industrial average. The oil giant’s market value is now about a third of what it was in 2008.
Concerned about the financial threats that climate change poses, the Commodity Futures Trading Commission (CFTC) conducted research to determine how such risks could be met and issued its findings September 9. “Financial markets today are not pricing climate risk,” wrote Bob Litterman, a leading national authority on risk management and chairman of the subcommittee that produced the report. (He is a member of our Advisory Board.)
One promising way to accelerate the transformation of the oil industry is to put an honest price on carbon dioxide emissions. The CFTC report recommended that Congress take such action, and in its annual outlook paper, BP wrote that “a rapid and sustained fall in carbon emissions is likely to require a series of policy measures, led by a significant increase in carbon prices.” Without tax-driven increases in carbon prices, oil and gas use will continue to rise, the report said. “Delaying these policies,” BP observed, “may lead to significant economic costs and disruption.”