Oil Companies Are Thinking About a Low-Carbon Future, but Aren’t Making Big Investments in It Yet
The global oil industry stands at a crossroads. Corporate leaders are weighing how closely to stay wedded to their legacy business – finding, extracting and refining fossil energy – versus preparing for an uncertain low-carbon future.
There are signs of an impending pivot. Most of the largest multinational oil companies have formally supported the Paris climate agreement. Total has purchased electric power company DirectEnergie and charging solutions provider G2Mobility. Shell has acquired e-mobility company NewMotion; its CEO, Ben van Beurden, has expressed support for a zero-carbon world target.
The companies least willing to shift focus today tend to be national companies and nationally owned firms, such as those in Kuwait and Venezuela. Such companies control nearly 90% of all the oil in the world. However, some, such as Saudi Aramco, are looking at a range of green projects including solar, carbon capture and hydrogen.
As transportation/energy scholars, we are most interested in decisions by major private oil companies that are subject to greater public pressure. What should shareholders expect from these companies? And what can policymakers do to encourage further investment in more sustainable options? Oil companies clearly are thinking about a low-carbon future, but many are still exploring ways to get there.
Opportunities in Transportation and Renewables
Discussions about Big Oil's interest in sustainability center on continued global demand for petroleum. Industry and independent scenarios anticipate rising oil use until at least 2040, though at a slowing pace.
These predictions contrast starkly with calls to limit climate change to a 1.5 degrees Celsius (2.7 degrees Farenheit) increase above pre-industrial levels. As the Intergovernmental Panel on Climate Change and other expert analyses have shown, to reach that goal, oil use will likely have to peak around 2030, then decline to much lower levels by 2050.
However, large oil companies also have a leg up on the competition when it comes to creating infrastructure for some low-carbon fuels. Since they are essentially massive engineering companies, they have an advantage in the areas of hydrogen fuels and carbon capture and sequestration, which offer new uses for existing fossil fuel infrastructure. For example, hydrogen can be made from natural gas and transported along traditional pipelines and shipping routes.
In contrast, solar generation, batteries, onshore wind and nuclear power do not offer oil companies the same structural or expertise advantages. Thus shifting into these new areas may be seen as problematic.
Any Pivot Will Take Time
Oil companies cannot change course overnight, even if policymakers want them to. They must be responsive to shareholders in making such moves.
An analysis by the Carbon Disclosure Project shows that investor-owned oil companies currently are spending 1% to 4% of their capital investment on low-carbon energy sources, while national oil companies average a mere 1%. These numbers must increase significantly for the industry to claim any real pivot is occurring.
Proportion of oil company capital expenditures invested in low-carbon energy from 2010 to the first quarter of 2018. Fletcher et al., Beyond the cycle (London: CDP, 2018)., CC BY-ND
Shareholders Speak Up
Numerous reports have described climate-related shareholder resolutions at oil and gas companies. But many such resolutions initiated in the last five years have failed a vote, and the number of actions declined from 2016 to 2018.
Still, these efforts led to increased discussion of climate-related concerns between shareholders and management. The recent uptick in corporate climate strategy and investments undoubtedly reflects investor interest, societal pressure, the public policy environment and the growing competitiveness of other technologies. The question is how much change can emerge without much stronger signals from one or more of these sources.
Action and Inaction Both Have Risks
Big Oil must consider not only the economic advantages of investing in clean energy, but also the financial risk of pursuing a fossil energy source strategy rather than diversifying.
Several scientific studies have shown that nearly 85% of remaining fossil fuel reserves must remain in the ground to keep global temperatures from rising more than 2 degrees C (3.6 degrees F) above pre-industrial levels. When the first peer-reviewed article making this case was published in a major journal in 2009, oil company stock values fell by more than 2% over the next two weeks. This amounted to a shareholder loss of $16.5 billion.
Fossil fuel companies have underperformed the broader S&P index in recent years. This trend is led by U.S. coal companies, which have lost 80% of their value since 2007.
Investors plan to triple fossil fuel divestment rates over the next decade https://t.co/cZsdFBZZ8y— Divest Ed (@divesteddotorg) October 16, 2019
Each oil company will address climate change pressures in its own way. Some with resources to develop in-house renewable energy expertise will do so. More likely, however, we expect that large companies like Total and Shell will continue to purchase smaller companies that have the strategic know-how to help them make the switch.
On a positive note, oil companies are increasing their low-carbon investments each year. While they are starting from a low baseline, rapid growth rates suggest that with sustained commitment, they could be quite large within a decade. For example, Total and BP each are prepared to spend $500 million per year on renewables over the next several decades. Total expects to grow its low-carbon business to 20% of its asset base over the next 20 years.
Ultimately, however, investment strategy will always be driven by expected returns. If available oil and gas investments have an expected return of 15% and low-carbon investments are only expected to make 7%, money will likely continue to flow towards fossil fuels. Changing this reality will require major market and pricing shifts, which may have to be driven by government policies such as carbon taxes.
A Pale-Green Forecast
Our discussions suggest that companies are interested and feel compelled to explore their options, but there is no clear road map for transforming them into low-carbon energy providers.
Some observers might conclude that oil and gas companies' limited investments to date in low-carbon technology and business ventures are hindering this transition. Others may view any such investments as a plus, so long as these investments grow and companies don't simultaneously advocate against policies to reduce emissions.
We believe it is vital for the energy industry and climate stakeholders to continue this conversation, and to identify policy changes that can make it economically advantageous for oil companies to pursue low-carbon futures.
Lewis Fulton is co-director of STEPS (Sustainable Transportation Energy Pathways) at the University of California, Davis.
Daniel Spurling is a professor of civil and environmental engineering and founding director of the Institute of Transportation Studies at the University of California, Davis.
Disclosure statements: Lewis Fulton directs a research group that receives consortium funding from transportation and energy companies, government agencies that fund or regulate transportation agencies and companies, and private foundations engaged with mobility issues.
Daniel Sperling receives funding from government agencies that fund or regulate transportation agencies and companies, and private foundations engaged with mobility issues. He is a board member with the California Air Resources Board.
Reposted with permission from our media associate The Conversation.
- BP to Cut Oil and Gas Production 40%, Invest 10x More in Green Energy - EcoWatch ›
- Major Utility Companies Lag Switching to Clean Energy - EcoWatch ›
- Oil Demand May Have Peaked in 2019, BP Report Says - EcoWatch ›
- New Clues Help Monarch Butterfly Conservation Efforts - EcoWatch ›
- Monarch Butterflies Will Be Protected Under Historic Deal - EcoWatch ›
EcoWatch Daily Newsletter
California faces another "critically dry year" according to state officials, and a destructive wildfire season looms on its horizon. But in a state that welcomes innovation, water efficacy approaches and drought management could replenish California, increasingly threatened by the climate's new extremes.
- Remarkable Drop in Colorado River Water Use Sign of Climate ... ›
- California Faces a Future of Extreme Weather - EcoWatch ›
Wisdom the mōlī, or Laysan albatross, is the oldest wild bird known to science at the age of at least 70. She is also, as of February 1, a new mother.
<div id="dadb2" class="rm-shortcode" data-rm-shortcode-id="aa2ad8cb566c9b4b6d2df2693669f6f9"><blockquote class="twitter-tweet twitter-custom-tweet" data-twitter-tweet-id="1357796504740761602" data-partner="rebelmouse"><div style="margin:1em 0">🚨Cute baby alert! Wisdom's chick has hatched!!! 🐣😍 Wisdom, a mōlī (Laysan albatross) and world’s oldest known, ban… https://t.co/Nco050ztBA</div> — USFWS Pacific Region (@USFWS Pacific Region)<a href="https://twitter.com/USFWSPacific/statuses/1357796504740761602">1612558888.0</a></blockquote></div>
By Hui Hu
Winter is supposed to be the best season for wind power – the winds are stronger, and since air density increases as the temperature drops, more force is pushing on the blades. But winter also comes with a problem: freezing weather.
Comparing rime ice and glaze ice shows how each changes the texture of the blade. Gao, Liu and Hu, 2021, CC BY-ND
Ice buildup changes air flow around the turbine blade, which can slow it down. The top photos show ice forming after 10 minutes at different temperatures in the Wind Research Tunnel. The lower measurements show airflow separation as ice accumulates. Icing Research Tunnel of Iowa State University, CC BY-ND
While traditional investment in the ocean technology sector has been tentative, growth in Israeli maritime innovations has been exponential in the last few years, and environmental concern has come to the forefront.
theDOCK aims to innovate the Israeli maritime sector. Pexels<p>The UN hopes that new investments in ocean science and technology will help turn the tide for the oceans. As such, this year kicked off the <a href="https://www.oceandecade.org/" target="_blank" rel="noopener noreferrer">United Nations Decade of Ocean Science for Sustainable Development (2021-2030)</a> to galvanize massive support for the blue economy.</p><p>According to the World Bank, the blue economy is the "sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem," <a href="https://www.sciencedirect.com/science/article/pii/S0160412019338255#b0245" target="_blank" rel="noopener noreferrer">Science Direct</a> reported. It represents this new sector for investments and innovations that work in tandem with the oceans rather than in exploitation of them.</p><p>As recently as Aug. 2020, <a href="https://www.reutersevents.com/sustainability/esg-investors-slow-make-waves-25tn-ocean-economy" target="_blank" rel="noopener noreferrer">Reuters</a> noted that ESG Investors, those looking to invest in opportunities that have a positive impact in environmental, social and governance (ESG) issues, have been interested in "blue finance" but slow to invest.</p><p>"It is a hugely under-invested economic opportunity that is crucial to the way we have to address living on one planet," Simon Dent, director of blue investments at Mirova Natural Capital, told Reuters.</p><p>Even with slow investment, the blue economy is still expected to expand at twice the rate of the mainstream economy by 2030, Reuters reported. It already contributes $2.5tn a year in economic output, the report noted.</p><p>Current, upward <a href="https://www.ecowatch.com/-innovation-blue-economy-2646147405.html" target="_self">shifts in blue economy investments are being driven by innovation</a>, a trend the UN hopes will continue globally for the benefit of all oceans and people.</p><p>In Israel, this push has successfully translated into investment in and innovation of global ports, shipping, logistics and offshore sectors. The "Startup Nation," as Israel is often called, has seen its maritime tech ecosystem grow "significantly" in recent years and expects that growth to "accelerate dramatically," <a href="https://itrade.gov.il/belgium-english/how-israel-is-becoming-a-port-of-call-for-maritime-innovation/" target="_blank" rel="noopener noreferrer">iTrade</a> reported.</p><p>Driving this wave of momentum has been rising Israeli venture capital hub <a href="https://www.thedockinnovation.com/" target="_blank" rel="noopener noreferrer">theDOCK</a>. Founded by Israeli Navy veterans in 2017, theDOCK works with early-stage companies in the maritime space to bring their solutions to market. The hub's pioneering efforts ignited Israel's maritime technology sector, and now, with their new fund, theDOCK is motivating these high-tech solutions to also address ESG criteria.</p><p>"While ESG has always been on theDOCK's agenda, this theme has become even more of a priority," Nir Gartzman, theDOCK's managing partner, told EcoWatch. "80 percent of the startups in our portfolio (for theDOCK's Navigator II fund) will have a primary or secondary contribution to environmental, social and governance (ESG) criteria."</p><p>In a company presentation, theDOCK called contribution to the ESG agenda a "hot discussion topic" for traditional players in the space and their boards, many of whom are looking to adopt new technologies with a positive impact on the planet. The focus is on reducing carbon emissions and protecting the environment, the presentation outlines. As such, theDOCK also explicitly screens candidate investments by ESG criteria as well.</p><p>Within the maritime space, environmental innovations could include measures like increased fuel and energy efficiency, better monitoring of potential pollution sources, improved waste and air emissions management and processing of marine debris/trash into reusable materials, theDOCK's presentation noted.</p>
theDOCK team includes (left to right) Michal Hendel-Sufa, Head of Alliances, Noa Schuman, CMO, Nir Gartzman, Co-Founder & Managing Partner, and Hannan Carmeli, Co-Founder & Managing Partner. Dudu Koren<p>theDOCK's own portfolio includes companies like Orca AI, which uses an intelligent collision avoidance system to reduce the probability of oil or fuel spills, AiDock, which eliminates the use of paper by automating the customs clearance process, and DockTech, which uses depth "crowdsourcing" data to map riverbeds in real-time and optimize cargo loading, thereby reducing trips and fuel usage while also avoiding groundings.</p><p>"Oceans are a big opportunity primarily because they are just that – big!" theDOCK's Chief Marketing Officer Noa Schuman summarized. "As such, the magnitude of their criticality to the global ecosystem, the magnitude of pollution risk and the steps needed to overcome those challenges – are all huge."</p><p>There is hope that this wave of interest and investment in environmentally-positive maritime technologies will accelerate the blue economy and ESG investing even further, in Israel and beyond.</p>
- 14 Countries Commit to Ocean Sustainability Initiative - EcoWatch ›
- These 11 Innovations Are Protecting Ocean Life - EcoWatch ›
- How Innovation Is Driving the Blue Economy - EcoWatch ›