The oil industry can grow old gracefully or leave a chaotic legacy
Some people grow old gracefully, planning decades ahead for their retirement. Others struggle to plan ahead and leave a chaotic legacy. This is the choice of paths now facing the oil and gas industry.
If we are to achieve the target of limiting the rise in global temperatures to 1.5C, retirement of much of the world’s oil and gas production over the next two to three decades now looks unavoidable. But, so far, notwithstanding growing investments in renewables by some oil and gas companies and collaborations such as the Oil and Gas Climate Initiative, the sector’s efforts to tackle its emissions trajectory are decidedly patchy.
True, a handful of big, mostly European, companies have recently set ‘net zero’ targets for not just the emissions from their operations, but also for those from supply chains, the so-called “scope 3” emissions. However, even for them, definitions of what is covered by the targets vary, while the pathways to achieving them can be ill-defined and rely on intentions to “offset” much of their emissions.
Others in the industry are either setting net zero targets solely for their operational emissions or are not yet setting them at all. Many reject the notion of setting “scope 3” targets, arguing that end-use emissions are the responsibility of customers.
Meanwhile, a disparate army of climate activists and green-minded investors has been winning a series of extraordinary shareholder resolutions and lawsuits demanding swifter action by Big Oil. Non-industry groups are also leading the way in developing methodologies to assess whether companies’ climate plans are truly aligned with global emissions-reduction goals.
All this activity has its own limitations. The main targets so far have been large, western-listed companies, sensitive to brand-damaging campaigns. But the bulk of the world’s oil and gas is produced by state-owned or private groups. Also, key questions remain about how to share the burden of reducing oil and gas output. For example, should lowest-cost producers be allowed to continue pumping or is there a moral case for privileging exports from poorer countries?
Amid all this, the industry now has the opportunity to take back the initiative and plan more ambitiously for retirement. Three pushes could have a powerful effect.
First, the sector needs to develop a disclosure standard for current and projected emissions as the profusion of approaches makes it hard to discern corporate spin from substance.
Second, the industry should develop its own methodology for individual companies to ensure that their climate plans are aligned with global emissions-reduction goals. As part of this, companies should be expected to target their scope 3 emissions over the long term.
This methodology should allow them to devise their own strategy as they wind down oil and gas production — whether diversification into clean energy, or returning cash to shareholders. Likewise, they would be free to deploy some offsets and carbon capture projects, but their plans would need to be detailed and verifiable, not vague statements of intent.
The methodology also would need to be adaptable enough to apply to all producers (including state and privately owned), with companies expected to take on a greater or lesser burden in reducing emissions depending on development needs in their host countries. Importantly, by tackling such issues head on, this approach would have the potential to achieve greater climate impact than any number of campaigns focused on single entities.
Third, the industry should look to underpin the winding down of oil and gas through some sort of collaborative mechanism to limit global output, backed by governments. Critically, this could be a way to protect industry profits in a shrinking market. As demand for oil and gas declines, many companies will probably race to maximise production before the good times end. But that could trigger a future collapse in prices deeply damaging to all in the industry.
Just as Opec seeks to limit production among its members to put a floor under the oil price, an arrangement covering a broader cross-section of the industry could look to ensure that companies stick to production limits aligned with emissions goals. Indeed, climate activists are currently promoting a similar idea of a global “Fossil Fuel non-Proliferation Treaty” between governments. The industry’s own interests could be served by developing a parallel concept.
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All these measures, of course, would be hugely challenging and complex to implement, with oversight required from independent parties. Oil and gas is a fractious, competitive industry, so collaboration would be painstaking. But planning a graceful retirement of a multitrillion-dollar sector was never going to be easy.
Daniel Litvin is the founder of Critical Resource, advising energy and resource companies on climate, ESG and geopolitical risk, and author of ‘Empires of Profit: Commerce, Conquest, and Corporate Responsibility’. He writes here in a personal capacity.
This article is based on a more detailed paper
The Commodities Note is an online commentary on the industry from the Financial Times