Oil and gas companies could play a major role in the energy transition but their ability to act is not a simple affair
DEADLY BUSINESS
The oil and gas sector is making massive profits from an activity with dire impacts
ENCOURAGING CHANGE
Stakeholder action may be needed before oil companies’ green credentials match their hype
KEY QUOTE
People are saying we will continue to spend, if not more—the problem is, it’s not right now
Visit Aramco’s website and you would not immediately guess you are looking at the world’s largest polluter. In September 2022, the site was publicising a corporate beekeeping scheme, work with the Aston Martin Formula 1 team on sustainable fuels and backing for “technologies to meet the world’s energy demands ever more reliably”.
Tucked in the news section is a press release on record second quarter and half-yearly results, with quarterly income rising 22.7% to $48.4 billion. This is more than ten times the money spent on the latest phase of the 3.6-gigawatt (GW) Dogger Bank site, the world’s largest offshore wind project.
The figures relating to Saudi Aramco’s environmental impact are no less staggering. According to the Climate Accountability Institute, just 20 companies are responsible for 35% of the 1.4 trillion tonnes of global man-made carbon emissions added to the atmosphere between 1965 and 2018. Aramco, officially called the Saudi Arabian Oil Company, tops the list.
Since 1965, when the climate impact of fossil fuels became known to industry leaders and politicians, Aramco’s activities have added some 61 billion tonnes of carbon dioxide equivalent to the air—more than 4% of global emissions.
All the other companies in the Climate Accountability Institute’s most-polluting list are also oil and gas players, with Russia’s Gazprom and Chevron of the United States coming second and third. These two companies alone have added a combined 6% of emissions.
In other words, three oil and gas companies have contributed 10% of total global emissions since 1965, knowing their activities could have devastating environmental and financial consequences.
Oil money Countries and companies that profit from fossil fuels could invest more in the energy transition
CLIMATE ALARM
In April 2021, a report from Swiss Re, the world’s largest reinsurer, warned climate change could wipe out 10% of global gross domestic product (GDP) by 2050 if net-zero emissions targets established under the 2015 Paris Agreement on climate change are not met. “Global temperature rises will negatively impact GDP in all regions by mid-century,” says the report. “In a severe scenario of a 3.2°C rise in temperatures, the global GDP loss could be as much as 14% higher than that under the Paris targets.”
Climate change science is even more unequivocal. In April 2022, the United Nations Intergovernmental Panel on Climate Change (IPCC) published the final study in its Sixth Assessment Report, with a stark message. Without immediate and deep emissions reductions across all sectors, it said, limiting global warming to 1.5°C is beyond reach. Meanwhile, the effects of climate change are becoming more visible.
An August 2022 analysis of 504 extreme weather events and trends by climate science and policy information service Carbon Brief showed that 71% were made more likely or more severe by human-caused global warming. Given the scale of these impacts, it is reasonable to question what the oil and gas industry is doing, or aiming to do, to avoid them.
There is no question that the sector’s historical impact has been for good. Fossil fuels have powered humanity’s development since the Industrial Revolution, allowing society to record levels of affluence and well-being. Today, fossil fuels meet 77% of the world’s need for primary energy. Nevertheless, it is hard to escape the sense that the oil and gas sector has been profiting from this need while shirking any responsibility to address its negative impact on the environment.
Aramco is not only the most polluting company on the planet but also one of the richest. It came third in the Forbes Global 2000 list of largest companies in the world, published in May 2022, with ExxonMobil and Shell also making the top 20. The oil and gas sector’s historical attempts to discredit the science behind climate change have been widely publicised, and the industry cannot say it does not have the tools to deal with emissions.
TOOLS AVAILABLE
Carbon-capture technology in one form or another has been available to the sector since the 1920s and it started storing the carbon underground in the 1970s, but mainly to enhance oil recovery rates. Apologists could argue that modern carbon capture and storage (CCS) facilities should be installed by the industrial customers that use fossil fuels, rather than the oil and gas companies themselves.
Yet it remains an uncomfortable fact that most of the CCS plants in operation today are still used for enhanced oil recovery. The main tool that the oil and gas sector could use to combat climate change is instead being used to make it worse. Furthermore, evidence suggests most oil and gas companies are still committed to worsening the effects of climate change in pursuit of profit, despite public pledges to the contrary.
In September 2022, the climate think tank InfluenceMap analysed company disclosures from BP, Chevron, ExxonMobil, Shell and TotalEnergies. It found that 60% of the companies’ public messages made green claims, compared to 23% promoting oil and gas. Yet the companies were only found to be spending an average of 12% of capital expenditure on low-carbon investments in 2022.
The biggest divergence between claims and reality was at Shell, which boasted of sustainability in 70% of its communications while only putting 10% of its capital towards low-carbon investments. While these data sets are not mutually exclusive, they indicate these companies are paying mere lip service to the challenge of climate change. “The world’s big oil and gas companies are spending huge amounts of time and money talking up their green credentials, while their business investments and lobbying activities tell a very different story,” InfluenceMap’s Faye Holder says.
“These companies talk about cutting emissions and transitioning the energy mix, but at the same time continue to invest heavily in new fossil fuels,” she adds. “These companies are out of step with science-based pathways to net zero.”
UNCERTAIN GOALS
Furthermore, 41% of Fortune Global 500 companies in the oil and gas sector have yet to commit to net-zero emissions targets, and only 5% have set 2030 goals, according to Climate Impact Partners, a carbon offset provider. Of those that have targets 63% have made pledges that only cover so-called scope one and scope two emissions, which are those produced directly by company operations and energy use.
However, scopes one and two only cover around 11% of the sector’s emissions, Climate Impact Partners data shows. Most oil and gas emissions fall under scope three, which relates to how a company’s products are sourced and used. Despite a worsening climate and ever-more dire warnings from bodies such as the IPCC, the oil and gas sector’s stance on emissions reduction has if anything become more ambiguous in recent months.
The invasion of Ukraine in February 2022 sparked a rush for oil and gas to replace Russian supplies. Oil and gas companies such as Aramco have profited handsomely from this bull market. At the same time, new drilling plans are being tabled as lawmakers temper the need to reduce emissions with a desire to shore up energy security through fossil fuels.
Experts have warned that new projects could be unwise not only from an environmental but also from an energy security point of view. When the UK government announced a new oil and gas licencing round in September 2022, for instance, Alyson Harding of analyst firm Westwood Global Energy Group said: “This will not be a short-term fix for UK energy security.”
“For licences awarded since 2002, the average time taken from award of the licence to first production is seven years and requires the drilling of many exploration and appraisal wells to confirm commerciality of discoveries,” she added.
UPPING PRODUCTION
In the US, meanwhile, a community action group called the Louisiana Bucket Brigade has sounded the alarm over proposals to increase gas export terminal capacity on the Gulf Coast. “Each proposed terminal, if constructed, would liquefy and export billions of cubic feet of gas per day for sale on the global market,” says the group in a briefing note.
“Gas, a fossil fuel extracted by drilling, is non-renewable, and the US’s reserves are finite,” it adds. “The gas industry is looking to drive even higher profit margins by selling greater volumes of gas on the lucrative European and Asian markets.”
In what could be a further sign of the oil and gas sector’s current priorities, Shell in September 2022 announced it was pulling out of two offshore wind projects in Ireland. “This is a portfolio decision for Shell, for whom offshore wind remains a key growth area and integral to the delivery of their Powering Progress strategy,” insisted Shell’s erstwhile partner, Simply Blue, in a press statement.
LOWERING EMISSIONS
The oil and gas sector has immense potential to curtail its global emissions even without abandoning oil and gas production. The industry could significantly reduce emissions this decade by trapping methane—a gas responsible for around 30% of the rise in global temperatures since the Industrial Revolution, the International Energy Agency (IEA) says. Yet methane is routinely vented or flared when extracted alongside natural gas.
The energy sector accounts for roughly 40% of manmade methane and the industry’s emissions grew by 5% in 2021, says the IEA. However, “None of the oil majors have lobbied to strengthen the stringency of methane emissions reduction regulations since 2021, despite the importance of methane mitigation being a key claim from the industry,” says InfluenceMap.
CASH RICH
More importantly, the oil and gas sector is one of the few with the money and the expertise to deliver the energy transition on time. In the first six months of 2022, the industry’s top 25 players earned $341 billion, according to a report from Westwood.
This is enough to cover almost a quarter of the $1.4 trillion being spent on clean energies in 2022, based on figures from the IEA. Getting oil companies to channel more of their cash into the energy transition is not a straightforward affair, though, for various reasons. One is that it is quite hard to work out how much they are spending already.
“The transparency and consistency in reporting on new energies is not the same as for the core hydrocarbon business,” says David Linden of Westwood. “To come up with a consistent way of finding out exactly who is spending what and where is quite difficult.”
Another issue is the amount of money the companies may have to spend might not be as much as it seems. In 2020, the coronavirus pandemic hit the sector with force, with a Haynes Boone analysis of North American oil and gas producers showing that debt levels and bankruptcies soared.
Linden says a chunk of recent revenues in the US have gone towards paying off these debts. However, more broadly in the industry revenues have been used less on paying off debts than on rewarding shareholders for their loyalty. Beyond this, he says, many oil and gas companies seem to be stepping up their commitment to the energy transition—but some complain of a lack of adequate opportunities.
“People are saying we will continue to spend, with some majors now committing more capital than before—but the step up is not consistent with the rise in recent earnings,” says Linden. “Part of the argument for this misalignment is that large-scale projects, that you really want to see big dollars being spent on, just aren’t there.”
INCREMENTAL PATHWAYS
Oil and gas investment committees may be naturally drawn towards exploration and production projects because some of these opportunities can be completed more quickly and with more attractive returns than the current set of renewable energy hydrogen or CCS projects, he says.
Perhaps because of this, “Every single net-zero strategy of the international oil majors, except BP, envisions incremental change until you get to 2025, 2030 maybe, when there’s more drastic change,” says Linden. “Hydrocarbon production will grow in the next few years for the majority of companies, if not all.”
The narrative being followed by the industry is that it needs to continue satisfying global fossil fuel demand until alternatives have become viable in terms of scale, which oil and gas companies believe will happen in the 2030s. What this means in practice is, “We’re essentially now committing to an overshoot scenario,” says Linden.
One final point is that the current response to the climate crisis varies quite widely across players in the oil and gas industry. The term “oil and gas” encompasses a wide range of businesses and business models, from publicly traded supermajors such as ExxonMobil and Shell to national oil companies such as Aramco, which dominate the market in terms of production.
Within this diverse ecosystem is an even more diverse set of corporate strategies. National oil companies are focused on increasing a nation’s wealth and with state administration lifespans usually measured in years rather than decades there tends to be scant focus on long-term sustainability.
US supermajors, meanwhile, enjoy a relatively benign regulatory environment thanks to decades of investment in lobbying. This means they too seem relatively untroubled about deviating from business as usual. In Europe, however, growing regulatory and consumer pressure is forcing oil and gas companies to take sustainability more seriously.
[caption id=“attachment_222477” align=“alignnone” width=“2560”] 
Efficient Equinor
Carbon emissions from Equinor’s extraction activities are falling[/caption]
LOSING OUT
They also risk losing their grip on energy markets as European utilities race ahead with transition plans, attracting investors in the process. The Italian power company Enel provides a glimpse of what Europe’s oil and gas players could be missing out on. In 2021, the company brought its net-zero emissions pledge forward by a decade, from 2050 to 2040.
“Enel’s actions and commitments are increasingly attracting the attention of socially responsible investors, whose stake in the company is steadily growing,” says an Enel spokesperson.
These investors represented 14.6% of the group’s share capital in 2021, more than double 2014 levels, “Enabling the group to further diversify its investor base,” the spokesperson says.
Such considerations have encouraged European oil and gas companies to take the lead in the industry’s move towards net-zero emissions. European players took the first seven places in a January 2022 analysis of the top renewable energy performers in the oil and gas sector, carried out by research body GlobalData.
CARBON EFFICIENT
Among these was Norway’s state-owned multinational Equinor, which has a uniquely pro-transition stance thanks to Norway’s generally progressive view of environmental affairs.
“Equinor is committed to long-term value creation in support of the goals of the Paris Agreement,” says Equinor’s Sissel Rinde. “Our strategy consists of three pillars and combines focused, carbon-efficient oil and gas production with accelerated, value-driven expansion in renewables and leadership in building out new low carbon technologies and value chains.”
The company is living up to its commitments with important investments in offshore wind, a stake in solar developer Scatec and significant CCS and hydrogen projects.
The carbon emissions from extraction activities at its Johan Sverdrup oil field are also 95% lower than the world average, mostly because the energy for production comes from shore-based electricity rather than gas turbines on rigs. The company’s Snorre and Gullfaks fields, meanwhile, will be the first in the world to be powered in part using a floating offshore wind farm.
“Equinor’s strategy is backed up by clear actions to accelerate our transition while growing cash flow and returns,” Rinde says. “We are optimising our oil and gas portfolio to deliver even stronger cash flow and returns with reduced emissions from production and we expect significant profitable growth within renewables and low carbon solutions,” she adds.
Such comments reflect a common sentiment within oil and gas: producing carbon-free energy would be nice, but right now stakeholders are demanding results that can only be achieved with fossil fuels.
Since those stakeholders are the people who invest in oil and gas companies, buy oil and gas products and elect oil and gas-friendly administrations, it may be that the key to getting companies to change lies not with the oil and gas sector, but with society as a whole. •
TEXT
Jason Deign PHOTO
Equinor/Peregrino Bravo and Johny Goerend