Oil giants are waking up to carbon bubble risks
With grand speeches, new climate strategies, the offloading of carbon intensive assets and even changes in executive pay structures, the last few weeks have provided some intriguing evidence that oil firms finally may be starting to take the climate threat seriously.
First came Chevron, which earlier this month admitted climate factors could pose significant liability and regulatory risks to its financial returns, confirming its fears to investors that climate-related lawsuits and tighter restrictions on carbon emissions could have a significant impact on its bottom line. In a filing submitted to the U.S. Securities and Exchange Commission (SEC), Chevron admitted it could be at risk of "governmental investigations and, potentially, private litigation" from increased attention to climate risks, while stricter emissions legislation might render future oil extraction "economically infeasible."
"In the years ahead, companies in the energy industry, like Chevron, may be challenged by an increase in international and domestic regulation relating to greenhouse gas emissions," Chevron said.
The admissions prompted Greenpeace's senior climate adviser, Charlie Kronick, to cheer the firm's shift in position, from "barely acknowledging the danger of climate change to being the first oil major to explicitly warn investors about the material risk from potential climate lawsuits against the company."
"The combined effect of the Paris Agreement and the Exxon investigation seems to have brought home for Chevron the financial and legal implications of their denial," he added, in reference to the ongoing legal action against ExxonMobil over its alleged failure to inform investors about its early understanding of climate risks.
Chevron's stance offered evidence that for all the attempts by many oil executives to downplay the so-called carbon bubble hypothesis and its assertion that climate policies and clean technologies will leave many fossil fuel assets stranded, some of their colleagues are starting to take the risk very seriously. Even those who continue to reject the carbon bubble premise soon could find they have to engage with it more fully, given the international Financial Stability Board is consulting on proposals that would require firms to provide investors with much richer information on the climate-related risks they face.
The sense that a new trend is emerging was further reinforced last week when Shell released its annual reports containing details of how 10 percent of executive bonuses are linked to performance against the firm's climate targets, a move which coincided with the announcement it is selling $7.25 billion of investment in Canadian oil sands (although the latter move was billed as a debt reduction, rather than a climate-motivated decision).
The report was swiftly followed up by an address Thursday evening from Shell boss Ben van Beurden, who told an audience of oil experts at the CERAWeek energy conference in Houston that the industry risks losing the support of the public if it does not support the clean energy transition.
"I do think trust has been eroded to the point that it is becoming a serious issue for our long-term future," he warned. "If we are not careful, broader public support for the sector will wane."
He urged the industry to accept that "peak oil" is imminent. "We have to acknowledge that oil demand will peak, and it could already be in the next decade," he said. "It could happen. There are people who believe it will grow forever but I don't subscribe to that."
Van Beurden also used the speech to announce an increase in Shell's renewable energy investments to $1 billion a year by the end of the decade and renew calls for a robust carbon price to regulate emissions.
Meanwhile, a new report published by Norwegian energy giant Statoil set a target to cut its carbon emissions by 3 million tons a year by 2030, in addition to existing plans to shift 15 to 20 percent of its capital spending to renewables and low-carbon energy solutions over the next 10 years.
Statoil aims to cut carbon emissions per barrel of oil produced from 10kgs today to 8kgs by 2030, declared the firm's president and chief executive, Eldar Sætre.
"Statoil is committed to developing its business in support of the ambitions of the Paris Agreement," he said in a statement. "We believe that being able to produce oil and gas with lower emissions while also growing in profitable renewables will give competitive advantages and provide attractive business opportunities in the transition to a low-carbon economy."
The flurry of activity has led some in the green economy to feel optimistic about the progress of the global energy system aligning with the Paris goals. "The increase in talk about climate change within the oil sector since the Paris Agreement has been quite marked," said Richard Black, director of the Energy and Climate Intelligence Unit. "Last year we saw two oil companies producing 2-degree scenarios for the first time, and now we have for the first time the boss of a major player acknowledging for the first time that they are slowly losing their social license. This would have been unthinkable just a couple of years ago."
However, while positive news, it is not the case that these oil giants have become climate warriors overnight. In Chevron's filing, the firm still insisted that even if greenhouse gasses are heavily regulated, there will still be "significant demand" for oil and gas in the future.
And in a report (PDF) posted to the firm's website Wednesday, "Managing Climate Change Risks: A Perspective for Investors," Chevron concluded its exposure to climate risk is "minimal" because it invests in lower-cost assets that could remain competitive in a carbon-constrained world.
Released in response to rising shareholder concern over the firm's exposure to climate risk, the report stated its current risk management policies are "sufficient to mitigate the risks associated with climate change," adding that its investments have all been stress-tested against a low-demand environment such as the International Energy Agency's 450 Scenario, which is consistent with a 2-degree Celsius pathway.
And while Shell's promise to spend $1 billion a year on renewable energy is a significant commitment, it still represents only a small fraction of the oil giant's $25 billion annual spend.
However, the developments are likely to be welcomed by the Carbon Tracker think tank, which has pioneered thinking on the carbon bubble and has called for fossil fuel firms and investors to stress test their plans against a range of scenarios, including one where clean technologies become mainstream and deep decarbonization occurs.
The group's founder, Mark Campanale, argued oil companies needed to recognize that they could become more successful by becoming smaller and successfully managing the energy transition. "The work we [have done] around 2 C value shows that if you slice off the top of the most expensive fossil fuel projects and just stick to the high margin projects you might produce less, but what you are producing is more valuable and you can become more valuable as a company," he said.
But while change may be in the air, no oil giant is still fully prepared for the low-carbon transition, warned Black. "It is, of course, PR-driven to a large degree, and no oil major has a strategy for avoiding climate risks altogether by switching the focus of its activity — but that must logically come," he said. "Meeting the Paris targets means leaving coal, oil and gas in the ground, period — and so at some point companies have to decide how much risk they're prepared to accept."
It seems the oil industry is nudging towards a broad acceptance of low-carbon energy as a mainstream future, but still stops short of a full, public recognition of the scale of the impact this will have on its high-carbon industry. The tide is turning, but still more slowly than many in the green economy would like.