It’s been a chastening few weeks for Big Oil over the past couple of weeks, with shareholders, activists and even courts pushing for a major change of direction.
The magnitude of this change is set to be massive, but it’s not clear how the new goals will be achieved.
The oil major plans to appeal the decision but, with only eight and a half years left, time isn’t on its side should it have to comply with the ruling.
To hit a target of a 45% reduction would mean a 45% drop in oil sales, a decline in natural gas sales and a much larger increase in carbon offsets such as spending on reforestation, according to analysts at Credit Suisse.
Royal Bank of Canada calculated that a 45% cut in absolute emissions would lead to a 30% drop in oil products sales from last year and a 3% drop in oil and gas production.
Meanwhile, Shell continues working on heavily polluting plans, such as LNG Canada, Penguins in the UK North Sea, the Pennsylvania Petrochemicals Complex and the Vito deep-water project in the US Gulf of Mexico.
All these projects involve fossil fuel extraction and haven’t even started production yet – how could they be scrapped without having even made the tiniest return on investment?
Looking elsewhere in the sector, Exxon Mobil Corporation (NYSE:XOM) is facing a board overhaul as environmental activist fund Engine No.1 won its lobby to have its own candidates nominated as board directors.
Engine No.1 wants Exxon, America’s largest oil company, to move away from fossil fuels so it pushed for people with experience in successful and profitable energy industry transformations.
However, Exxon hasn’t set concrete plans to change its business model yet.
“In short, even the most advanced carbon capture is highly unlikely to enable ExxonMobil to avoid transforming its business model over the long-term”
(+ my own visualisation of Exxon’s carbon capture) pic.twitter.com/F7nCs7iOBp
— Ketan Joshi (@KetanJ0) May 28, 2021
Last month, the International Energy Agency (IEA) released its first-ever effort to model a comprehensive energy pathway towards limiting global warming to 1.5°C by 2050.
The intergovernmental group said there is no need for investment in new fossil fuel supply, which is a major change from its previous stance. It now needs to push companies and governments to follow suit.
Meanwhile, the Biden Administration released a budget proposal that includes an end to tens of billions in subsidies to fossil fuel production.
“Subsidies to oil, gas, and coal companies have lined the pockets of fossil fuel executives and harmed communities for decades,” said Collin Rees, senior campaigner with Oil Change International.
“Big Oil’s continued existence is the single biggest threat to our climate, and it’s long past time to end giveaways of public money to fossil fuel companies once and for all.”
A tortuous path
Activists are calling for the end of oil and gas extraction, but the world isn’t ready to be powered entirely by renewables as we don’t have the necessary infrastructure yet.
Also, it would mean the loss of investment already made, while the returns on the renewables are low for shareholders, below what they would be getting from hydrocarbon activities.
The current dividends are predominantly supported by oil and gas projects, according to analysts, most of which were established decades ago because they are long-cycle businesses: so the investments happening now are the ones supporting dividends in ten years’ time.
“The question will become over the next six to 12 months, now that oil prices have recovered, where does the extra cash flow go? Some of it will be used to pay down debt but beyond dividend increases will they reinvest more in hydrocarbon or more in alternative energy?,” Peter McNally, analyst at Third Bridge, told Proactive.
“People making [environmental pledges] are unlikely to be running these companies when the targets are set… There’s lots of work to be done and lots of investments to be made.”
McNally said “there’s no doubt” companies are putting more money in green energy projects, but in the end of the day they respond to customers’ demand.
And even though it has plummeted during the pandemic, oil demand is expected to continue growing and is recovering faster than previously forecast.
More transparency needed
Oil and gas emissions targets differ among companies, so financial think tank Carbon Tracker is calling for an industry-standard approach to reporting, to allow equal comparison and evaluation of progress.
“Net-zero goals are not in themselves sufficient – it’s the pathway to net-zero emissions, and the resulting cumulative emissions, that matters in determining the warming outcome for the planet,” analysts said.
They added that companies should not rely heavily on unproven technologies, such as carbon capture, utilisation and storage and negative emissions technologies to reduce or offset emissions, to be “credible”.
“Corporate climate goals in the oil and gas industry must link to finite limits that the energy transition places on current business models,” they continued.
“Accountability and transparency is critical for emissions mitigations, both to avoid double-counting and to ensure that ‘offsets’ have the intended effect.”