The target of countless climate protests, the oil and gas industry has put in place a set of decarbonisation initiatives that generally tinker around the edges of the problem. But with a big step up in ambition, it could play a central role in tackling the climate crisis, reaping benefits in the process, argues Daniel Litvin.
Few industries provoke as much division and emotion as oil and gas. Activists accuse it of recklessly pushing ahead with projects that will wreak climate havoc, wielding malign influence on climate negotiations, and subverting climate science. In the eyes of critics, the fact that the upcoming UN climate conference, COP28, is being led by the CEO of ADNOC, the United Arab Emirates’ state oil company, has doomed it from the start.
Within the industry itself, a profoundly different worldview dominates. By this account, energy from hydrocarbons has unlocked huge global economic progress over the last century, the industry is now rising to the challenge of decarbonisation, and – whatever its detractors might wish for – oil and gas will remain economically essential for decades to come.
Amid such arguments, it can be difficult to discern where the truth lies. What follows are five basic, and hopefully balanced, observations in that respect, drawing from my experience analysing and advising on the sustainability and geopolitical strategies of large firms, including energy and resource companies.
1. Industry initiatives on climate are multiplying, but they mostly skirt around the biggest challenge.
A flagship initiative of the UAE’s COP28 team is expected to be a broad coalition of oil and gas firms – the ‘Global Decarbonization Alliance’ – committed to, among other things, achieving net-zero emissions from their own operations and also from the energy they purchase (so-called scope 1 and 2 emissions) by 2050. It runs alongside multiple other industry-led climate pushes. The Oil and Gas Climate Initiative, for example, brings together 12 of the world’s largest oil and gas firms. Among its programmes, it seeks to eliminate methane leaks from industry facilities, and also to scale up carbon capture, utilisation and storage (CCUS). A growing set of individual oil and gas firms, meanwhile, are directly investing billions in low-carbon technologies, including CCUS, hydrogen, biofuels, solar and wind power.
There is much activity, then – but the bulk of it is focused on reducing emissions from the production of oil and gas rather than from the burning of hydrocarbons in downstream sectors such as transport and power (these amount to the industry’s scope 3 emissions). Yet the latter constitute some 80 to 95 per cent of total carbon emissions from the sector.
Oil and gas firms range from progressive to recalcitrant in their approach towards climate action. Importantly, however, for the vast majority, maintaining or increasing their production for years ahead in order to meet expected customer demand remains central to their business model. This makes it difficult in their minds even to contemplate absolute scope 3 targets (see, for example, this analysis from Carbon Tracker). Even for those companies investing relatively heavily in cleaner energy sources such as renewables, this is still typically a small fraction of their total capital investment – oil and gas continues to get the lion’s share. The industry as a whole is investing only about 2.5 per cent of its total capital spending on clean energy, as an important new analysis from the International Energy Agency (IEA) highlighted last week.
Powerful short-term pressures have recently been entrenching this status quo. Many shareholders have been urging energy firms to stick with oil and gas production, given its current outsized returns compared with renewables. Anxious about geopolitical conflict and security of supplies of oil and gas, governments have similarly been pushing many firms to accelerate production, not restrain it.
2. Activists’ campaigns aimed at shifting Big Oil firms away from oil and gas production have also often missed the big picture.
Headline-grabbing campaigns to push individual oil and gas firms to focus on renewable energy have had some successes to a degree, notably in nudging big European energy giants such as Total, Eni and BP in this direction. But US oil and gas firms have moved only slightly away from their focus on oil and gas. The same is true of the big national oil companies (NOCs). A group dominated by the Middle East producers, NOCs sit on most of the world’s oil and gas reserves.
Meanwhile, global demand for oil and gas remains stubbornly high for the time being. In this context, any future reductions in supply from those western firms beginning to make the shift away will be compensated by the many other producers willing to step in. The problem will be simply shifted to a different (and in some cases, more opaque) set of producers. There is also a risk that energy insecurity worsens as a result, with the West more dependent on producers in unstable and potentially hostile regions.
An obvious solution here is for governments to ramp up their efforts to reduce oil and gas demand – for example, through higher carbon taxes. But that is clearly a long-term project. In the meantime, campaigners need somehow to work out ways to tackle the overall system of hydrocarbon supply.
3. The industry’s collective approach to climate change is held back by narrow, competitive dynamics and short-term mindsets.
Many Big Oil CEOs these days recognise that tackling climate change requires the world to wean itself off hydrocarbons, but they also expect governments to partly fail in their efforts to curb demand: so they put off curbing their own firms’ supplies, believing that competitors would simply step into the breach were they to take such action now. The IEA estimates that the $800 billion oil and gas firms are investing each year in supply is double what would be required in 2030, were demand to decline in line with a 1.5°C scenario. Intense competition within an industry is generally a good thing for consumers. From a climate perspective, however, the result has the makings of an unedifying free-for-all, in which many firms seem to be betting on climate chaos.
Linked to this, the industry is now likely investing below what is in its collective interest in technologies that could make oil and gas use more climate-friendly over the long term. Approaches such as CCUS and ‘blue hydrogen’ – hydrogen made using gas and CCUS technology – are not without their critics. But they have the potential to protect markets for oil and gas, at least to a degree, in a world that achieves its climate targets. It is often beyond the interests and capabilities of firms acting alone, however, to invest heavily in making these technologies work at scale. Again, there are initiatives aplenty in this area, but not at the level that one might expect from an industry with annual revenues over $5 trillion a year.
Similarly, while institutions for industry collaboration exist, these currently seem inadequate to the task at hand. OPEC+, the Middle East-dominated oil producers’ alliance, is focused above all on keeping oil prices up in the near term, and less on the long-term climate issue. And the ambition of newer groupings such as the Oil and Gas Climate Initiative (OGCI) have clearly been moderated by the competitive instincts and short-term commercial constraints of their members.
4. A far more ambitious approach could serve the industry well.
Though it seems far-fetched currently, imagine that much of the world’s oil and gas industry finds a way to unite at some point in the future around a hard-edged, collective commitment to tackle its downstream (that is, scope 3) emissions and ultimately reduce them to net zero. That is far from the commercial disaster many firms might assume.
It would push firms to invest far more, both individually and collaboratively, in the technologies such as CCUS needed to make that commitment real. But that would drive down the costs of those technologies, protecting downstream markets for more oil and gas over the long term.
Intriguingly, a collective scope 3 commitment would also provide the basis for a potential industry-wide system for firms to cooperate in curbing supplies of oil and gas when global demand finally does begin to tail off. A clear risk for the industry currently is that when that point is reached, the existing free-for-all among firms, each racing to keep production up, leads to oversupply and thereby a price collapse. Firms will have different commercial positions to protect, of course. But much better for the industry as a whole if it can find some way to wind down supplies in an orderly way, in step with diminishing demand, to protect its prices and profit margins.
A clear parallel today is OPEC+, which seeks to limit production among its members to put a floor under the oil price – albeit the arrangement suggested here would need to cover a much broader cross-section of the industry to achieve the impact and realise the opportunity on offer.
A parallel proposal to this also exists outside the industry. For several years now, there have been calls for a global ‘Fossil Fuel non-Proliferation Treaty’ on phasing out oil, gas and coal production. But less remarked so far is how a similar arrangement, linked to scope 3 targets, could be driven by, and work in the interests of, the oil and gas industry as a means to create an orderly, less commercially damaging, process of supply shrinkage in the decades ahead.
5. Such a step up in industry leadership and collaboration will not come easy – but the stakes could not be higher.
The concept, then, is easy enough to articulate. The oil and gas industry needs to come together in a more ambitious collaboration, focused on its scope 3, not just scope 1 and 2, emissions. This should trigger a big ramp-up in joint investments (alongside downstream industries and governments) in technologies to tackle these emissions. It could also ultimately lead to the development, albeit step by step, of an industry regime to bring global supply discipline in the decades ahead. Such a grand-scale collaboration could grow out of current partnerships, such as the OGCI or Global Decarbonization Alliance, or it may require new collaborative bodies.
All this will be extraordinarily challenging to pull off. Governments will need to be heavily involved alongside the industry in driving the collaboration – and providing the right legal frameworks. For example, firms involved in any supply regime will need a tightly defined exemption from anti-trust rules. Governments will need to continue working to reduce oil and gas demand.
Designing any supply regime also will raise complex questions within the industry. For example, how should firms’ different starting points and portfolios influence the reductions in supply they are expected to make? How should ‘just transition’ concerns be factored in – for example, should companies based in countries that are poor and have low historic emissions be given longer to wind down their output? More broadly, how to cushion the blow for workers and regions dependent on continued oil and gas production?
Leaders of the biggest oil and gas companies will need to create a powerful vision across the industry of the need for transformation, showing even recalcitrant players how they can benefit, and navigate multiple, conflicting commercial agendas. The intense industry discussions needed to get existing collaborations off the ground may prove to be light work in comparison.
But the prize for the industry is substantial. It faces an inescapable existential challenge as the world, sooner or later, moves away from fossil fuels. For the big national oil companies and the countries that rely heavily on their revenues, the eventual crisis could be particularly acute. Better for the industry to have managed its decline as proactively, responsibly and profitably as possible.
As for global action to tackle climate change, having the oil and gas industry realign its collective strategy to help underpin international emissions goals, rather than breaching them, could be hugely positive. It would no longer feel the need to lobby against many of the shifts in government policy needed. Opportunities for change this big are surely worth a Herculean effort to secure.
- This blog post is published in collaboration with LSE’s Grantham Research Institute on Climate Change and the Environment.
- The post represents the views of its author(s), not the position of the Grantham Research Institute, ERM, Critical Resource, LSE Business Review or the London School of Economics and Political Science.
- Featured image provided by Shutterstock.
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