The Twin Threats Facing Big Oil

Oil tankers in the Houston Ship Channel, Oct. 9, 2019 (Photo by Bill Word)


By Nick Cunningham

LONDON, UK, January 25, 2020 (ENS) – The global oil and gas industry is facing the twin threats of the loss of profitability and the loss of social acceptability as the climate crisis continues to worsen. The industry is not adequately responding to either of those threats, according to a new report from the International Energy Agency, IEA.

Oil tankers in the Houston Ship Channel, Oct. 9, 2019 (Photo by Bill Word)

“Oil and gas companies have been proficient at delivering the fuels that form the bedrock of today’s energy system; the question that they now face is whether they can help deliver climate solutions,” the IEA said in the report, “Oil and Gas Industry in Energy Transitions.”

The report, released January 20 presented the next day at the World Economic Forum in Davos, critiques the oil industry for not doing enough to plan for the transition.

The IEA said that companies are spending only about one percent of their capex [capital expenditure] on anything outside of their core oil and gas strategy. Even the companies doing the most are only spending about five percent of their budgets on non-oil and gas investments.

There are some investments here and there into solar, or electric vehicle recharging infrastructure, but by and large, the oil majors are doing very little to overhaul their businesses. The top companies only spent about US$2 billion on solar, wind, biofuels and carbon capture last year.

“No energy company will be unaffected by clean energy transitions,” said IEA Executive Director Dr. Fatih Birol, a Turkish economist. “Every part of the industry needs to consider how to respond. Doing nothing is simply not an option.”

Before even getting to the transition risk due to climate change, the oil industry was already facing questions about profitability. Over the past decade, the free cash flow from operations at the five largest oil majors trailed the total sent to shareholders by about $200 billion.

In other words, they cannot afford to finance their operations and also keep up obligations to shareholders. Something will have to change.

Gas flare on top of a flare stack at Preemraff Lysekil 2 , and oil refinergy near the Swedish city of Lysekil. June 25, 2018 (Photo by CJ)

But, as climate policy begins to tighten, oil demand growth will slow and level off. Most analysts say that it won’t require a big hit to demand in order for the financial havoc to really begin to devastate the balance sheets of the majors. Demand only needs to stop growing.

The IEA said there are things the industry can do right now – and should have done a long time ago. Roughly 15 percent of the energy sector’s total greenhouse gas emissions comes from upstream production.

“Reducing methane leaks to the atmosphere is the single most important and cost-effective way for the industry to bring down these emissions,” the IEA said in its report.

But operations in the Permian Basin of West Texas and elsewhere are flaring more gas than ever, and methane leaks out at every stage of the extraction and distribution process.

Drillers have promised improvements, but the industry’s track record to date is not good.

Meanwhile, the IEA also noted that while attention is often focused on the oil majors, national oil companies, or NOCs, account for more than half of global oil production. The majors only account for about 15 percent.

It is one thing for ExxonMobil or Chevron to face an existential crisis – which, absent an attempt to transition to a low-carbon business, they certainly do – but it’s an entirely different thing for the NOCs who will struggle to deal with the energy transition.

The threat from the energy transition is not just to a specific business, but to whole governments and entire populations.

“Some are high performing, but many are poorly positioned to adapt to changing global energy dynamics,” the IEA said. “None of the large NOCs have been charged by their host governments with leadership roles in renewables or other noncore areas.”

Pumpjack pulls oil from beneath the ground in West Texas, March 13, 2019 (Photo by Jonathan Cutrer)

Ultimately, the report from the International Energy Agency is worrying for the industry. The agency itself has faced criticism for not being more at the forefront of calling for a clean energy transition, and its forecasts for renewables have consistently undershot actual improvements for renewable technologies.

The agency also continues to call for more upstream oil and gas investment. The IEA has shown itself to be somewhat conservative and has been slow to recognize major shifts in the energy sector.

So, the majors will probably take note of what the IEA warned in its report, “…the transformation of the energy sector can happen without the oil and gas industry.”

“They can drag their feet and will become increasingly ravaged by policy change and a deterioration in their core business.” Or, they could proactively transform themselves, as the IEA says they should.

The agency concludes that solutions to climate change “cannot be found within today’s oil and gas paradigm,”

[This article was originally published by Republished with permission]

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