Oil and gas companies are reviewing policies on climate change

It was years ago since BP said it was “beyond petroleum.” Nick Butler writes a very good article in the Financial Times about four reasons why oil and gas companies are reviewing their policies on climate change.

How oil and gas majors are rethinking on climate change

Almost all the major oil and gas companies I know are undertaking substantial reviews of their policies on climate change. That is true in Europe and in the US. Why now, and what will be the outcome?

First, it is important to stress that the rethinking is not being driven by the recent attacks on the companies. Describing Shell and its chief executive Ben van Beurden as “narcissistic, paranoid and psychopathic” is just childish and reduces what should be a serious debate to playground abuse. The reviews began before the latest media campaigns and are driven by corporate strategic concerns.

There are four principal reasons for the reappraisal of policy statements that have mostly been in place for a decade or more.

First, the Paris conference in December will put climate issues back on the agenda. Expectations of a real agreement are low but it is clear that the spotlight of scrutiny will fall on the corporate sector that accounts for the bulk of emissions. Even if the level of public and political interest varies widely between one country and another, global businesses cannot avoid the need for coherent and consistent messages.

Second, the companies are unhappy with their existing policies which rely in almost every case on the establishment of a cap-and-trade system and the global deployment of carbon capture and storage, neither of which is likely to be implemented on the scale required if emissions are to be kept below the level of serious risk.

Third, there is the question of reputation. The companies don’t take very seriously the notion that they are liable to end up sitting on huge volumes of stranded assets as the world stops using hydrocarbons. Oil, gas and coal will continue to be needed for several decades to come. With so much of the industry’s potential resource base rendered inaccessible by politics there is still a clear need for new supplies. But reputation does matter, not least for morale within the company. Without a clear forward strategy on climate change, companies start to feel defensive. As one rising executive in one of the companies said to me last week – “I don’t want to work for the tobacco industry”.

Fourth, and for some outsiders perhaps surprisingly, the reviews are being undertaken because the industry takes climate change seriously. Most energy companies are run by engineers and scientists who can (and do) read the work of IPCC and the leading climate scientists. They can recognise the uncertainties and the known unknowns but they can also calculate risks. In general, they share the prudent approach adopted by the Royal Society and other independent scientific bodies. The risks, even if imperfectly known, are too great to ignore.

But what, then, can the companies do? There have been a number of strands to the response up to now. Some companies have concentrated on reducing the impact of their own operations and products. That is constructive but hardly earth shaking. Some are rebalancing their portfolios – exiting heavy oil and other activities that produce high levels of emissions. Some are focusing on gas, which produces less carbon than coal or oil. One or two seem happy to lay out the problem, to say that it is all down to governments and to conclude that without a strong public policy framework nothing can be done.

All these strands contain some element of truth but none, especially the last, is terribly satisfactory. The culture of the big companies is about solving problems – not about passing the buck to someone else or tolerating a deteriorating situation. Faced with a challenge that they believe to be real the companies are not naturally passive.

I would therefore expect something more substantive to come out of the current reviews. The reality is that the energy sector is changing thanks to advances in science and technology, some of which I have written about in recent posts. I would expect most if not all the big companies to embrace these changes. Different companies will make different choices but the common outcome will be major investments in some combination of solar, wind, biofuels and energy storage.

You may well say that this has been tried before and produced very little. Several companies invested in alternative energy 10 or 15 years ago and then pulled back. That is true, but one thing has changed. Technology is moving the low carbon sector beyond its current dependence on subsidies and public policy and into a new world of direct and genuine competition. The advances in solar which I wrote about three weeks ago are just one example of that process in action. There are several others. The energy market is global and the oil and gas majors have the international reach to deploy very quickly whatever technology breaks through. The economies of scale could be tremendous.

Conspiracy theorists believe that the big oil, gas and coal companies will always block change because change would undermine the value of their existing assets. The reality is that in the oil and gas sector at least the companies are not sentimental about the past, or naïve enough to think that they can hold back technical change. The issue now is precisely what mix of activity matches each company’s current skills and geographic spread, and how to take territory and market share in a business sector that is still forming. Part of this, of course, is competitive. Several companies have a nagging fear that those who hold back for too long will wake up to find that someone else has come from nowhere and reshaped the game.

The response to climate change from most of the majors is therefore shifting from making statements to making money. We are moving beyond the point where the issue is a matter of defensive PR. I would expect the companies to create subsidiaries and spin offs and to use the huge cash mountains they have built up to buy themselves into the best of the low carbon and storage companies. They will do so as part of a long-term 20- to 30-year strategy which positions them to make the transition from one set of fuels to another. Some have begun this journey, and some have not, but I expect most if not all to move soon in a way that could bring a very large amount of new money into a new sector which is still splintered and disorganised. The situation is fluid, dynamic and fascinating.