The party is far from over for investment by the oil and gas sector in the energy transition


Joan MacNaughton CB HonFEI, Climate Group Chair and former Energy Institute President

Anyone in oil and gas who still thinks they can ride out the energy transition should look to the decline of coal for a salutary lesson, says Climate Group Chair and former Energy Institute President Joan MacNaughton CB HonFEI

It seems almost incredible that the energy transition was the predominant theme at IP Week only last month, with an oil price consistently above $60. In his opening keynote, IEA Executive Director Fatih Birol had remarked that, in 14 years of attending the WEF at Davos, he had never observed such a strong consensus on the need for vigorous and accelerated action on climate change.

Now COVID-19 has upended a lot of assumptions about our priorities. Is the urgency of low carbon investment one of them – especially for a sector reeling from a price plunge caused by ramping up of supply at a time of surplus stocks?

The sector might do well to heed the fate of the coal industry. As long ago as the early 2000s, some policymakers and businesses recognized the need for carbon capture and storage to control emissions from fossil fuels, and from industrial processes, as the world replaced its legacy capital stock (a process that is bound to take decades). I have been active in the debate of how to progress this, first in government, then in business, and now in the NGO world. Efforts to support those willing to invest included the use of Carbon Emission Reduction allowances from the European Emissions Trading Scheme, as well as government support from the US, Canada and the UK.  There were large-ish scale field trials such as the AEP-Alstom 50 MW Mountaineer project at the end of that decade. But they faltered for lack of financial support. Although the coal industry was approached to put their shoulder to the wheel they were decidedly uninterested.

Roll forward a decade.  We see, from analysis (Carbon Brief, February 2020) of scenarios gathered by the Intergovernmental Panel on Climate Change (IPCC), and other data, that the ambition gap between the track we’re on and the emissions implied by the Paris Agreement is particularly large for coal. Emissions from coal have to fall by around four-fifths this decade on a 1.5C pathway, twice as fast as for oil or gas. And even to keep warming ‘well below’ 2C, CO2 from burning coal must still be roughly halved over the next 10 years.

That’s not a great place to be. Perhaps they thought they were ‘too big to fail’? Maybe. But notwithstanding  a strong commitment from President Trump to save our beautiful (ok, I may have made that up) coal industry, more than half of all coal companies in the United States have gone into administration since 2016 – the year he was elected. And there is no evidence of any investor wishing to ride to the rescue with a proposal to build a new coal-fired power station. Admittedly there is still some coal generation being built in Asia, but the pipeline of projects just keeps shrinking.

With oil dominant as a transport fuel, that fate surely cannot befall the oil industry. Hmm, think again. According to the BNP Paribas report ‘Wells to wheels’, the cost of mobility per distance travelled will on a lifecycle basis be nearly seven times greater for petrol (and over 3 times as much for diesel) than for electric mobility sourced from a renewables powered grid – in the 2020s. That’s this decade, of course. Solar and wind are now the cheapest power source in more than two thirds of the world and by 2030 they will undercut commissioned coal and gas almost everywhere.

Given that the cost of running EVs on solar or wind power is dropping so rapidly, the only way petrol powered cars can compete with renewable energy-powered EVs will be if the price of oil were to drop to $11 to $12 per barrel. Be careful what you wish for – that now seems all too possible. But it scarcely looks like a sustainable business model. And offsetting gains from the fastest growing part of the sector – petrochemicals – may not buy much time, given bans on single use plastic in so many countries and on so many continents.

So the party is far from over for making the clean energy transition in the oil and gas sector. We all of course face the most difficult immediate challenge any of us can remember in terms of the dreadful impact of COVID-19. That has to be governments’ top priority for the foreseeable future.

The downturn it has engendered in emissions has come at a frightful cost, not one any campaigner could have wished for. Nor is it any kind of solution to the threat of climate change. Albeit that that will crescendo over a longer time frame, it too will be frightful in its impact. The businesses which in future will thrive will be those who use their resources – financial, entrepreneurial, and scientific – to tackle it. Otherwise the party – for all of us – will be well and truly over.

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