When thinking about the energy transition of oil and gas companies, there tends to be some amount of cautious optimism. Many activists celebrated when Shell was ordered by a Dutch court to step up its climate action, or when ExxonMobil and Chevron came head-to-head with climate activist shareholders. The bits of positive news amidst all the talk about inaction reinforces the impression that while there is considerable and undeniable inertia, a long-term transition seems to be underway.
The optimistic reasoning goes like this: Fossil fuel players are increasingly feeling the pressure to establish themselves as legitimate partners in the energy transition. Citizen protests in many parts of the world indicate that public sentiment is rapidly turning against polluting energy sources. Public and private investors alike are pulling money out of fossil fuel companies to avoid the risk of stranded assets. What’s more, renewable electricity generation is now cheaper than both existing and new fossil fuel-based power. So for any fossil fuel company that wants to live, a reorientation toward renewable energy seems a logical way forward, right?
It would appear so. Let’s look at all the ways in which oil and gas companies are responding to these developments. Many have changed their names and branding in order to reflect that the energy transition is now a priority. They are also making big splashes in the press, announcing commitments to reduce their emissions. Some even target net zero! Even if one hesitates to take these statements at face value, let’s consider how many companies have actually put money into renewable energy. Most oil and gas majors have either purchased renewable electricity, installed renewable capacity, acquired renewable energy companies or built their own renewable energy business ventures. Some companies – such as Repsol, Shell and TotalEnergies – even link executive remuneration to emission reduction measures. Doesn’t all of this point towards a positive trend?
New evidence from the Renewables 2021 Global Status Report paints quite a different picture.
First of all, the notion that oil and gas companies are feeling a lot of pressure to change is false.
Ten years ago, oil and gas major BP rebranded itself from “British Petroleum” to “Beyond Petroleum” to show how serious it was about the energy transition. This kicked off the trend among a host of other companies, leading to a decade of name changing, emissions reduction target setting, and general talk about transitioning oil and gas businesses.
The unusual example of Ørsted (previously Danish Oil and Natural Gas) shows what it looks like when an oil and gas company goes beyond rebranding and transitions into a large player in renewable power, predominantly offshore wind. However, the majority of other companies still seem to be comfortable putting off their emissions reduction responsibilities for as long as possible.
The reality as shown in the Renewables 2021 Global Status Report (GSR 2021) is that the share of fossil fuels in global energy consumption has barely changed in the past decade.
This raises the question: To what extent do these companies really feel the pressure to change how they do business? When citizens grow concerned about climate change or take to the streets protesting against pipelines, this undermines oil and gas companies’ social license to operate. Similarly, when institutional investors and credit rating agencies revoke their votes of confidence in oil and gas, this is not good for business. However, a clever public relations strategy in response can go a long way in winning goodwill points. And the oil and gas industry enjoys substantial government support, which serves to cushion such blows. GSR 2021 found that fossil fuel subsidies amounted to nearly USD 500 billion in 2019, compared to just over USD 300 billion investment in renewables in 2020. Provisions of international trade pacts like the Energy Charter Treaty protect the fossil fuel industry at the expense of the renewable energy sector, and since several oil and gas companies hold membership in industry associations that lobby against climate action, the status quo is easily preserved. All of this amounts to little incentive to transition.
Targets are tricky and their value is questionable.
The wave of 2050 net zero emission targets among oil and gas companies could seem promising, but appears to be just another form of greenwashing. By the end of 2020, European majors BP, Eni, Equinor, Repsol, Shell and TotalEnergies had all announced net-zero emission targets for 2050. However, the lack of a uniform definition for a net zero target leads to vast differences in coverage and ambition. For instance, while BP, Eni and Equinor have committed to absolute reductions in emissions, Repsol, Shell and TotalEnergies aim to cut their emission intensities instead. Intensity-based targets refer to the amount of emissions per unit of energy, which means they can be achieved simply by increasing the share of low-carbon production, without having to actually cut fossil fuel production. Even if a company achieved its intensity-based emissions target, this does not necessarily mean they have reduced their emissions in absolute terms.
Such targets prompt half-measures for emissions reduction. For instance, Chevron, ExxonMobil and Shell (all of which have intensity-based emission reduction targets) have started sourcing renewable electricity to power their oil and gas operations by signing long-term PPAs with renewable energy companies. This is a move that lowers their emission intensities but may not greatly impact their absolute emissions. Similarly, Shell revealed in early 2021 that it had committed far more to oil and gas exploration and production than to renewables. On the other hand, BP, which has an absolute emission reduction target, announced in 2020 that it aims to slash oil and gas production 40% by 2030 from 2019 levels.
We don’t even know how much oil and gas firms are actually investing in renewables, but we do know it is next to nothing.
Most oil and gas companies with net zero targets also have clear and direct targets for renewable energy, where there is less scope for confusing terminology. For instance, BP aims for 50 GW by 2030, TotalEnergies plans to install 35 GW of renewable power capacity by 2025, Eni and Repsol are both targeting 15 GW by 2030, Equinor is targeting 12-16 GW by 2035. However, even the most ambitious of such targets are not meaningful unless these companies actually put the money on the table.
There is evidence that oil and gas companies still hesitate to diversify very much into renewable energy and remain more inclined to protect their core businesses. The figure below attempts to show how much oil and gas companies spent on renewable energy compared to their total spending in the year 2020. Of the seven major companies shown in the figure, Eni was the only one that reported exactly how much it spent on renewable energy in its financial statement. All others either conflated this expenditure under “low-carbon” or “environmental” categories (without explaining what else these categories include) or they grouped it under expenditure on power generation, which would naturally include fossil-based generation. In short, it is impossible to isolate what proportion of spending under these broad categories was allocated to renewable energy. Looking at the length of the colourful bars in the figure, this amount is likely not much.
Government support for fossil fuels increased during the COVID-19 pandemic
The COVID-19 pandemic had a significant impact on energy demand and the renewable energy transition during 2020 and 2021. Nevertheless, governments are pouring COVID-19 recovery funds into the struggling fossil fuel industry rather than in renewables, resulting in carbon lock-ins. In fact, fossil fuels attracted 6 times more COVID-19 recovery funds than renewables did in 2020. There is a complex system of relationships between governments, businesses and technology that has led to very little action on the energy transition in spite of the obvious and urgent need for such action. In other words, government actions are far from pressuring companies to make a complete energy transition.
The renewable energy transition of oil and gas companies is far from a visible trend.
Clearly, a number of things would need to change in order for this transition to take place. Government support for fossil fuels needs to be dismantled. Absolute emissions reduction targets need to become the norm. Oil and gas companies need to reallocate significant capital to address the investment gap in renewable energy, especially in sectors like geothermal energy and offshore wind power where opportunities for technical skill transfer exist. Until then, it will be difficult to maintain optimism about their transition.
This article has been sourced from REN21 and can be accessed here
