Amid declining profits and pressure from investors, oil companies are looking to reduce write-offs by using ‘smart’ workarounds to the climate change problem that are not entirely environment friendly. Advocacy groups like Greenpeace are calling for greater oversight and are trying to mobilize public opinion against this charade.
The writing is on the wall for big oil producing companies of the world. While on the one hand, the coronavirus pandemic has throttled demand in almost all major economies, on the other, world leaders are pushing forward with plans to cut carbon emissions of their respective economies sharply by 2030, as outlined in the Paris Agreement.
This has brought about a tectonic shift in how the oil majors see themselves in the so-called ‘green economy’ of tomorrow. Big Oil – the world’s top five oil-producing companies – are already doubling down on ‘smart energy technologies’. However, this is essentially a stop-gap measure until they can completely pivot to renewable energy by the 2040s.
Big Oil – the world’s top five oil-producing companies – are already doubling down on ‘smart energy technologies’.
Shell and BP, for example, have made several niche acquisitions in the renewable energy sector over the last few years. While it remains to be seen whether these acquisitions will help the oil giants of the world turn the corner on a decade of declining profits, environmental campaigners like Greenpeace could not be happier. Investing heavily in wind, solar, hydrogen and biofuel along with associated energy storage and mobility solutions is a “necessary and encouraging” start, according to Greenpeace spokesman, Mel Evans. He was referring to BPs recent announcement that it would cut its oil and gas output by 40% over the next 10 years.
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But does this mean that the world is now on course to becoming a cleaner, greener place? Has the environmental sustainability agenda finally won over crony capitalism? Greenpeace isn’t too optimistic.
Has the environmental sustainability agenda finally won over crony capitalism? Greenpeace isn’t too optimistic.
The cost of reversing climate change
The 2020s will be a time of transition for a world addicted to fossil fuel consumption. Naturally, there will be some rather pronounced withdrawal symptoms. For oil companies, the biggest triggers will be poor returns on investments in the short term. The uncertainty is likely to be intensified by shareholders wanting to make the most of a possible surge in demand for fossil fuels before the sprawling infrastructure built up by the oil industry – estimated at some $25 trillion by experts – is slowly dismantled or repurposed for producing clean energy instead.
2020s will be a time of transition for a world addicted to fossil fuel consumption.
To be fair, market forces will exert pressures that may be well beyond the control of oil companies or even the respective governments. The strain on balance sheets on account of increasing asset liabilities may severely impact financial markets, experts fear. Countries like Iran or Russia – already reeling under crippling US economic sanctions – could face an existential crisis. Kingsmill Bond, a climate change researcher with the Carbon Tracker Initiative, a financial think tank, sounds prescient when he says that the next decade “will be the decade of fossil fuel demand peaks, as one bastion after another is stormed and overwhelmed by the rising renewable tide”. He further warns that this could “inevitably lead to trillions of dollars of stranded assets across the corporate sector and hit petro-states that fail to reinvent themselves.”
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While Greenpeace activists agree that the upfront costs of a transition to clean energy will be huge, they also warn that the urge to offset costs by leveraging less than optimal solutions must be scrupulously avoided. Case in point: under pressure from investors, oil companies will want to get the most out of their substantial investments before phasing out their offshore and onshore infrastructure. Most analysts expect to see a wave of restructuring and consolidation across the industry as oil companies look to offset the costs by ramping up the production of ethanol or other types of biofuels.
Greenpeace says that this may be counterproductive in the long run , leading to deforestation and pollution. Carbon dioxide is emitted in significant quantities during the production of ethanol or fossil-fuel based hydrogen. Besides, generous government subsidies on ethanol production in countries like India, could make matters worse. It is perhaps for these reasons that BP is only talking about investing in “low-carbon” as opposed to zero-emission technology.
A smoother transition without compromising on climate
BP and Shell have already set the ball rolling by leveraging acquisitions to accelerate their transformation into “energy companies”. Intra-industry alliances can help unlock economies of scale and reduce the overall operating costs for oil companies and intermediaries. Executed well, the cost savings of such strategic partnerships could be as high as 30 to 50 per cent, according to experts. For one, standardizing processes and workflows could result in greater efficiency across the value chain. On that same note, adopting AI and greater digitization could optimize supply chain management and reduce manpower costs. This will be particularly critical as oil producers adapt to the ground realities of the new normal.
BP and Shell have already set the ball rolling by leveraging acquisitions to accelerate their transformation into “energy companies”.
Greenpeace says it will continue to press for reforms with renewed vigor until Big Oil falls in line.