UK: The Strategy Dilemma Faced By Oil And Gas In The Energy Transition

It is clearly a challenge for the oil and gas sector to answer the call for a clean energy transition whilst the demand for energy sources continues to grow.  There are many technological advancements required that will be difficult to implement due to the hydrocarbon-centric infrastructure.  This technological "revamp" will need substantial funding by governments and corporations alike.  Corporate funding will require investor approval, but maximising profits for these investors remains a priority for such companies.  Although some energy companies have shown success by committing to the renewables sector, given the continued and potentially growing dependence on hydrocarbons in existing energy systems, it is understandable why many are still sticking to what they know.  Without political and societal support, big oil and gas will not be able to achieve the goals.  Until governments commit both in policy and spending to overhaul an infrastructure in which hydrocarbons play an integral role, it is unlikely that there will be an appetite for oil and gas companies to truly commit, in both marketing and action, to the Net Zero 2050 goal.

This chapter will examine sustainability reports and press releases relating to emissions from several major oil and gas companies from 2018 through 2020, models from the International Energy Association ("IEA") and BP, as well as data provided to the Climate Action 100+ investor group by InfluenceMap.

Since the Paris climate accord in 2015, more than 100 countries have joined an alliance setting a global goal to reach net zero emissions by the second half of the century. 

In 2019 the UK became one of the first major economies to bring the 2050 net zero target into legislation, a more ambitious target than the previous 80% reduction from 1990 levels.  The UK is now one of the leaders of the Climate Ambition Alliance with an increasing number of governments translating a carbon-free future into national strategies.

Following the Paris agreement, the Sustainable Development Goals ("SDGs") were adopted by all United Nations ("UN") member states in 2015.  The 17 SDGs aim to address the global challenges faced, with Goals 7 and 13 having direct relevance to the energy transition:

• Goal 7: Access to affordable and clean energy.
• Goal 13: Climate action – to limit warming to 1.5 ^?C by 2050 and reduce global CO₂ emissions by 45% between 2010 and 2030.

Improving access to energy whilst reducing carbon emissions creates various dilemmas.  Ever-increasing population and improving living standards are continually driving a need for more energy, with ExxonMobil projecting that energy demand will grow by 25% through 2040.  This can be seen in figure 1 (located at the end of the chapter), which shows the global CO₂ emissions from different sectors from 1990.  The bulk of CO₂ emissions arise through the generation and consumption of energy, which at present is heavily reliant on hydrocarbons.

To understand the implications of a decline in the use of hydrocarbons as an energy source, we must understand how entrenched they are within our society.  Generation and consumption of energy includes the burning of:

• hydrocarbon fuels to generate electricity;
• oil in our cars; and
• gas to heat our homes and cook our food.

Figure 2 allocates energy use in the UK by sector and shows how dependent each of these sectors are on hydrocarbon fuels.  Since hydrocarbons are used in all sectors, meeting a net zero target by 2050 will require significant change.

Oil and gas majors generate their revenue from the sale of these products and have a duty to their shareholders to maximise profits, all while adhering to the changing policy requirements, which can vary significantly in different parts of the world.  The change required is extensive, on a political, technological, and societal level, and will require huge investment from corporations and governments alike.  It even requires individuals to chip in by insulating their homes and perhaps trading in their hydrocarbon-fuelled car for an electric model.

The IEA has stated that the energy future depends also on people's behaviour, which is ultimately a matter of personal choice.  Yet, despite all these factors, a huge portion of this global responsibility is placed in the hands of oil and gas companies and thereby, their investors. 

While there is demand for hydrocarbon products, there is incentive for oil and gas producers to supply them.  Phasing out reliance on hydrocarbons is ultimately dependent on changes to infrastructure and technology, combined with societal behaviours.  These, in turn, will necessitate changes to government policies and large investment in public spending.

Given that demand for hydrocarbons will continue for the next several decades:

• Can we realistically expect oil and gas companies to completely overhaul their business strategies and technological experience to move entirely away from hydrocarbon fuels?
• How will these major oil and gas players adapt to the transition to net zero energy and deliver the promise of affordable clean energy to an ever-increasing population, while meeting the expectations of their shareholders?

Models and simulations of energy demand and supply over the coming decades have been created by international organisations and corporations alike, to gain a view of how the global energy system could develop over coming decades.  They also provide insight into possible pathways to achieve the common goal of "Net Zero by 2050".  These are referred to as energy outlook models.

Many companies and organisations have developed their own energy outlook models, including those of the IEA and BP.  These models are by no means an accurate prediction of the years to come, but rather a way to understand the possible implications and uncertainties in a range of different scenarios.  Although there is variation within the models themselves, there is a commonality in the fact that many of these models consider some sort of "Business as Usual" scenario and a scenario to achieve the "Net Zero by 2050" target.

The "Business as Usual" scenarios generally work on the assumption that current technological solutions and emissions policies are implemented and continue to develop at the rate they have in the recent past.  These scenarios are often conservative in their approach, considering economic and political obstacles.  The IEA's and BP's 2020 scenarios showed that, with current policies implemented, emissions by 2050 would be far off the net zero mark, with BPs model showing only a 10% drop in 2050 from 2018 levels and the IEA's model showing the potential of CO₂ emissions rising from 34Gt to 36Gt through 2050.

The "Net Zero by 2050" scenarios aim to meet the goals of the Paris agreement by 2050.  These scenarios require:

• a new series of policy measures to be implemented; combined with
• a significant shift in societal behaviour.

To be achieved, all the energy outlook scenarios, whether extreme or conservative in their reduction of emissions, would require an increasing role for renewables in primary energy sources and a rapid decline in hydrocarbon fuels over the coming years.  The "Net Zero by 2050" scenarios require this increase to occur, as stated by BP, "at an unprecedented rate".  Historically, the incorporation of new energy sources has progressed both slowly and steadily.  Figure 3 shows the global share of primary energy stretching back to the 1900s, with renewable sources seen to be slowly increasing their energy share since 2000.

The shift from coal has taken decades but was relatively easy because substitution with nuclear and gas did not present major technological hurdles.  The intermittent nature of renewable energy poses different challenges and new energy storage solutions will be needed to cope.  Since the largest share of UK energy is spent on transportation, a significant shift away from hydrocarbons will come from the electrification of the transport sector (including hydrogen).  This will require a different scale of change, both societal and technological, with drastic changes to our infrastructure to meet the surge in electricity demand.

There are several drivers encouraging oil and gas companies to embrace and adapt to the clean energy transition.

In recent years, the oil and gas sector has come under increasing media scrutiny.  Protests demanding action to tackle climate change have dominated the news and media, none more so than the protests of September 2019 in which children skipped school to march for urgent action.

Since the Paris agreement, legal pressure on climate issues both from individuals and government has increased.  These legal proceedings have been compared to those against Big Tobacco in the 1990s.

One example is in the Netherlands, where a civil case has been raised against Shell.  In this case, it is demanded that Shell urgently reduce their CO₂ emissions and produce controls in line with the global climate of the Paris agreement.  On the other side of the Atlantic, US states, counties and cities are suing oil companies to hold them responsible for the climate damage they say their products have caused.

However, many of these cases have been dismissed, including New York State's case against ExxonMobil.  In a Washington Post article of September 2020, Scott Segal, an attorney with Bracewell LLP, stated: "Lawsuits are precisely the wrong mechanisms to determine the appropriate way to address climate change.  It is impossible to determine what emissions source results in what harm, meaning that causation is impossible to determine."

Probably the most pressing concern for oil and gas is the shift of investor attitudes in favour of renewable energy.

Although, five years ago, clean power was still viewed as a tumultuous business, today clean energy is considered a safe bet that pension funds and insurers compete for.  Even amongst independent affluent investors, renewable energy is favoured.  Granite Shares surveyed 1,000 people with over £50,000 on average to invest, and all age groups favoured the renewable energy sector, beating technology and property.  According to Goldman Sachs Group Inc, spending on renewable power will overtake that of oil and drilling for the first time in 2021.

Figures 4 and 5 show the share price growth for four of the biggest players in the clean energy sector compared to oil and gas.

It is easy to see that renewable energy companies have seen dramatic increases in share price over the last 10 years, versus the relatively stable prices of oil and gas companies.  Investor sentiment seems to be favouring the renewable sector, mirroring global aims to combat climate change, as well as investors' increasing inclination to support environmental, social and governance ("ESG") initiatives.

In 2018 the Climate Action 100+ investor initiative was formed which currently consists of 545 institutional shareholders representing US$52 trillion in assets.  The initiative is targeting the most climate-critical businesses to drive the clean energy transition and help achieve the Paris agreement goal.  It was with pressure from Climate Action 100+ that Royal Dutch Shell made a statement on climate in late 2018, followed by BP in early 2019.

So, considering this background, how are the oil and gas juggernauts reacting to the call for clean energy?  Reviewing the sustainability reports and press releases from several of the major oil and gas players, there are numerous ways in which they are addressing the goals set out by the Paris agreement and UN SDGs.

The approaches taken can be categorised under three broad branches:

• those that are showing a strong commitment to switch to renewables;
• those sticking to what they know with increased hydrocarbon production; and
• those who fall somewhere in between.

Champions of renewables

Some oil and gas companies have achieved success by turning toward the renewable sector, most notably DONG (the "Danish Oil and Natural Gas" company).

Since 2010 it has undergone a strategic change including a new name, transforming itself into Ørsted, a renewables-led utility company.  Since 2006 they have phased out the use of coal by 73% and aim to be coal-free by 2030.  They now have a renewables generation capacity of 11GW, predominantly in offshore wind, with a goal of increasing this to 30GW by 2030.

Ørsted has seen financial success with its move to renewables, seeing share price growth and market capitalisation that has jumped from US$108 billion in June 2016 to US$435 billion by December 2020.

Sticking to oil

Saudi Aramco, ExxonMobil, Chevron and Gazprom are amongst those standing firm with their known experience within oil and gas.

Although they have made general statements regarding the reduction of greenhouse gas emissions, none have publicly committed to the Paris agreement goal of "Net Zero" by 2050.  Chevron's chief executive officer, Mike Worth, said that Chevron will take a more realistic path to reduce carbon emissions.  In fact, Bloomberg claims that leaked internal ExxonMobil documents show a pre-COVID-19 plan of increasing carbon emissions by 2050 to meet growing energy demands.

Instead of moving away from hydrocarbons, these companies are focussing on business strategies that pursue technologies to enhance existing operations and develop energy solutions with lower carbon density.

This includes large investment in the development of biofuels, which provide a more familiar alternative to transport fuels but are carbon-neutral when burnt.  These investments are working towards resolving the technical and commercial issues to make biofuels available at a scale and prices that are competitive with petroleum-based fuels.

These companies also advertise pioneering research into carbon capture, usage, and storage ("CCUS") with Saudi Aramco sponsoring the first international CCUS conference in Riyadh in 2020.  CCUS is a set of technologies that capture carbon dioxide at source, transporting and storing the captured carbon, followed by measures to prevent emission to the atmosphere.  After a rocky start with a two-year delay and threats of US$100 million in fines, Chevron's CCUS Gorgon project reached a milestone of 3 million tonnes of carbon dioxide extracted and buried in September 2020.  The 40-year CCUS project, which is also backed by ExxonMobil and Shell, is the largest worldwide.

All the companies have also put a focus on the reduction of methane and flaring intensity within their plans to reduce greenhouse gas emissions, aligning with the World Banks's initiative to eliminate routine flaring by 2030.

Public supporters of "Net Zero" policies

In contrast, BP, Petronas, Total, Repsol and Shell have all made public pledges that are in line with the Paris accord declaring ambitions to be "Net Zero" by 2050, with Equinor aiming to reach the goal by 2030.

Although they continue to be predominantly oil and gas-led, playing a similar tune regarding CCUS, methane emissions and biofuels, they are bolder in their marketing of renewable energy.

• BP advertises its solar projects which will bring 10GW in generation capacity by 2023 as well as nine US wind generation sites with a net capacity of 926MW.
• Equinor has plans to increase its renewables capability tenfold by 2026.
• Shell emphasises that a third of its 10,000MW capacity in the US comes from renewables.
• Total has announced three new renewable projects with a projected 5GW of capacity.
• Petronas' acquisition of Amplus Energy Solutions means that it is now generating over 600MW of renewable energy.

BP and Shell, who also have retail branches, have stated their support for the electrification of transport systems.  Shell currently has 70 electric vehicle ("EV") charging points in the UK and intends to raise that number to 200 by the end of 2021.

A more common theme amongst many of the players, including those who have not committed to the "Net Zero" pledge, is the push for natural gas as a solution to reducing carbon emissions.  Liquefied natural gas ("LNG") is still a hydrocarbon fuel and as such is already an established part of existing business strategies and benefits from emitting between 45–55% less greenhouse gas emissions than coal.  This provides an easier route to reduce rather than eliminate carbon emissions.

Whilst the overall message on renewable power and sustainability is positive, actual operating plans and budgets towards the diversification of energy sources remain vague.  With the push for a clean energy transition being heavily influenced by investor pressure such as Climate Action 100+, there remains some scepticism as to whether these pledges of net zero are truly believed to be realistic by the companies themselves.  Surely if that were the case the likes of ExxonMobil, Saudi Aramco, Chevron, and Gazprom would have jumped on board as well? Indeed, the frustrated departure of several of Shell's clean energy executives over recent weeks implies a discrepancy between the public appearance of acceding to a "Net Zero" policy against what may be rather more conservative action which followed.

Actions and voices of climate activist groups have become increasingly dominant over recent years, with protests in the US already putting pressure on President-elect Biden for having hired key staff with connections to the oil and gas industry.  However, they do not have the lobbying history and experience of oil and gas trade groups that still hold a strong global sway on political policy.

In their 2019 report, InfluenceMap, the data partner of Climate Action 100+, was rather scathing of the lobbying practices of the five major oil companies, Shell, BP, ExxonMobil, Chevron, and Total.  The organisation, which uses the best-available disclosures and intensive research of corporate messaging to evaluate spending both directly and through key trade groups, found that US$1 billion had been spent on lobbying the climate agenda since the signing of the Paris agreement.

This included the lobbying trade group American Petroleum Institute's successful campaign to deregulate methane standards in 2018 contrary to the current narrative of many companies to reduce methane emission intensity.

It also stated that oil and gas-funded groups appear to have coordinated efforts in California, at the US federal level and in the European Union to oppose policy on the electrification of the transport sector – a key step needed to move away from dependence on hydrocarbon energy.

It is notable that the oil and gas lobbying strategy has also been complemented by an annual US$195 million invested by the five companies in branding campaigns aimed at convincing stakeholders that they are on board with ambitious action on climate.

Whilst climate activists may be gaining increased traction within the media, InfluenceMap's most recent report shows that there remains a distinction between the success of pro-climate lobbying and the oil and gas sector.  Over 121 tracked instances of corporate and industry lobbying in 2020, oil and gas had a success rate of 64% in interventions seeking deregulation and support for hydrocarbon recovery packages, compared to the 28% success rate seen by pro-climate lobbyists.

The five companies have all since stated in their sustainability reports that they intend to work closely with governments to reduce carbon emissions, with the encouragement of carbon pricing policy being singled out.

There is increasing demand for the oil and gas sector to answer the call for a clean energy transition.  There are, however, substantial technological, societal, and political challenges in the aim to achieve "Net Zero" by 2050 in line with the Paris agreement.

Historically the shift between energy sources has taken decades.  From a technological standpoint, the integration of renewables and the electrification of the transport sector into an energy network that has been designed for hydrocarbons only add additional struggles.  Although some energy companies have shown success by committing to the renewables sector, given the continued dependence on hydrocarbons in existing infrastructure, it is understandable why many are still sticking to what they know.  Instead, they are banking on large technological progress in fields such as CCUS and restricting flare emissions to bring down their output of carbon.

Society also needs to change its habits to meet these ambitious goals.  Individuals will have to switch from their hydrocarbon-fuelled vehicles to electric and hydrogen vehicles, reconsider their home heating and insulation systems and change from gas to electric cookers.  Until governments commit both in policy and spending to overhaul infrastructure in which hydrocarbons play an integral role, it is unlikely that there will be an appetite for oil and gas companies to truly commit, in both marketing and action, to the Net Zero 2050 goal.  Shareholders should also see the benefits of a switch to renewable sources and use their positions to drive the change within the businesses they invest in.  The drive to maximise profits for investors remains paramount and without political and societal support, the largest oil and gas companies will not be able to achieve these goals.

With the political influence that oil and gas companies hold, perhaps the most significant strategic change towards the clean energy transition will be in the fulfilment of statements to work closely with governments to positively influence and implement such policies, as well as educating shareholders on the positive impact on company longevity that adapting with changing climate-related policies can have.