ENERGY WATCH #2 - November 29, 2018
For many years, oil and gas companies downplayed or outright denied the dangers of climate change and worked on the assumption that they would be able to continue with business as usual for the foreseeable future.
Going into this year’s COP24 climate conference, they have changed their tune.
This year has seen a slew of investments by the oil majors into renewable energy and electric vehicle infrastructure – Shell has announced it plans to invest $1bn-$2bn a year in its New Energies division in areas including wind and solar power, charging points for electric vehicles and biofuels, while BP has returned to solar with the purchase of Lightsource Energy.
Total, ExxonMobil and Chevron, along with Repsol, Enel and Eni, have all made significant investments in clean energy, charging points or energy storage, and even the US oil majors, in a market where the President openly doubts the existence of climate change, have started making changes.
In September, Occidental, Chevron and ExxonMobil, long the most outspoken climate-sceptic company in the sector, announced they would join the Oil and Gas Climate Initiative (OGCI), a group of global oil and gas groups that has committed to invest $1 billion initiatives.
There are a number of reasons for the change in heart. Firstly, since 195 countries signed up to the Paris Agreement on climate change in 2015, it has simply not been credible to deny or downplay the existence of man-made climate change, while a host of natural disasters around the world – from multi-year droughts to more intense hurricanes and heatwaves in the Arctic – have reinforced anecdotally the increasingly certain science behind climate change warnings.
Another impact of Paris was that governments – currently with the notable exception of the US, where Donald Trump has pledged to withdraw the country from the agreement (something he cannot do until 2020, after the next presidential election) – agreed to put in place policies to decarbonise their economies.
This has led to moves such as the UK, Canada, Denmark and Spain, as well as the European Union, considering the introduction of a net-zero emissions target by 2050, Germany committing to phase out coal power and China meeting its target to cut its energy intensity by 45% in 2017, three years ahead of schedule.
One reason governments are making these pledges is that they have become increasingly possible because the cost of renewable energy has fallen so quickly. The latest report on the levelized cost of energy from Bloomberg New Energy Finance says that “solar and/or wind are now the cheapest new source of generation in all major economies, except Japan. This includes China and India, where not long ago coal was king. In India, best-in-class solar and wind plants are now half the cost of new coal plants.”
In India, best-in-class solar and wind plants are now half the cost of new coal plants
In markets as far apart, in every sense, as India and Texas, onshore wind is now as cheap as $27/MWh, without subsidy. “In most locations in the US today, wind outcompetes combined-cycle gas plants (CCGT) supplied by cheap shale gas as a source of new bulk generation,” BNEF adds, cutting off one way that the energy giants hoped to compensate for lower oil sales.
This fall in costs has led to another development – through initiatives such as RE100 and the Science Based Targets, companies are driving demand for more renewable energy so they can meet their own climate targets and show customers that they are acting. In markets where corporate procurement of clean energy is difficult or impossible, such as China and Japan, the business community is forcefully lobbying governments to reform markets.
Meanwhile, the rapid development of the battery storage sector is further undermining the business case for using fossil fuels in power generation and also making rapid progress in making electric vehicles (EVs) more economical.
If the move towards EVs were based on cost competitiveness alone, the sector could afford to be reasonably complacent about the trajectory of the transition away from petrol and diesel. But much of the pressure is not climate-related at all – rather cities around the world have proposed banning fossil fuelled cars in response to growing levels of air pollution caused in large part by vehicles.
The industry increasingly recognises that this will hit demand – Shell predicts that demand for oil will start falling as early as 2025, with demand for gas following suit by 2030.
Finally, there is increasing pressure on the oil companies as a result of a number of legal challenges. New York recently sued Chevron, BP, ConocoPhillips, ExxonMobil and Shell, and while that suit was dismissed, a group of Oregon crab fishermen have followed suit while a number of states have launched fraud investigations against ExxonMobil saying that it misled citizens and investors over the impacts of climate change. Other cases are likely in future.
All of this is making it clear that some oil and gas investments could be stranded assets as climate regulations tighten further, the cost of renewables and storage continue to fall and governments increase their decarbonisation ambitions.
So, there are plenty of incentives for oil companies to change their business models, and they have started to do so. Shell may be investing up to $2bn a year in clean energy, but that is only a fraction of its total spending. It aims to spend $25bn-$30bn a year in total. All the majors could do far more given the stakes and the conditions.
The future of power, transportation and heating will be increasingly electric. The oil majors dominated energy in the 20th century, but it is far from guaranteed that they will do so in future with such a long way to go.
Mike Scott is a freelance journalist who has written for the Financial Times, Forbes, Bloomberg and a range of other titles. He specialises in writing about energy, investment and business.