Navigating climate concerns and the COVID-19 crisis in the oil and gas sector

The oil and gas sector has taken a hard hit during the COVID-19 crisis. The unprecedented halt in global mobility resulting from months of lockdown in most countries, followed by persisting travel restrictions, has crushed demand for energy, leading to record-low oil prices. According to the International Energy Agency (IEA), global energy demand is estimated to have decreased by 5% in 2020 compared to 2019, a figure not seen in the past seven decades, with coal and oil suffering the most significant losses, with estimated falls of 7% and 8% respectively[1].

Companies in the sector made downwards revisions to their long-term oil price outlook, cut tens of thousands of jobs and significantly reduced investments.

This is not the only major challenge that the sector is facing. Even before the health crisis, the pressure to shift towards a more sustainable business model was mounting from both consumers and investors. Environmental NGOs have been highly active in monitoring and raising awareness about the environmental impact of new oil and gas projects, and even taken companies to court for delaying progress regarding the 2 degrees Celsius objective set out by the Paris Agreement. Once hailed as key contributors to the spectacular economic growth after World War II, the oil & gas industry is now losing its dazzle, increasingly being associated with greenhouse gas emissions and environmental damage. Investors are also becoming more cautious with regard to the carbon footprint of their portfolios, as multiple fossil fuel projects are at risk of becoming stranded assets.

Major companies are aware of this radical shift in public perception and are not willing to die out as polluting dinosaurs in a world focused on combating climate change.

One of the defining features of the industry is its capacity to orient itself for the long term, so naturally they cannot ignore the existential risk that climate change mitigation entails for their business model. In recent years, oil & gas companies have stepped up investments in low carbon technologies, from renewable energy sources, to electric vehicle batteries and charging stations, and alternative fuels (hydrogen, biofuels). They have also contributed to research on emerging technologies such as carbon capture and storage. This is mostly the case with European companies, that have set specific targets for the growth of their low carbon businesses and revamped their discourse to include climate change as one of their concerns. Their American counterparts have so far rejected the idea of a significant transformation of their business model, continuing to focus on fossil fuels.

This change of strategy has been embodied by the adoption, this year, of climate neutrality targets for 2050 by all European majors (BP, Shell, Total, Eni and Repsol), to varying degrees of ambition. However contradictory it might seem to associate climate neutrality with fossil fuel companies, the targets are arguably reachable should they equate emissions output with emissions that can be absorbed by carbon sinks. Achieving the net zero targets will involve a mix of solutions to reduce emissions from their operations, by increasing efficiency and reducing flaring; through investments in renewable energy and other low-carbon technologies; and by offsetting remaining emissions. A company has some degree of flexibility regarding the amount of emission reductions when it fixes a carbon neutrality target, because it can choose how much of its remaining emissions it will offset; at global level, this is not possible, as the planet’s carbon sinks are limited[2]. In responding to these targets, companies are often criticized for failing to outline a clear roadmap, and to what extent carbon offsets and/or carbon capture and storage will contribute to their targets[3].

Another key issue is whether companies are including so-called scope 3 emissions (coming from their entire value chain, notably the end use of the products they sell) in their net zero targets, which weigh the heaviest in their carbon footprint. The net-zero targets mostly cover scope 1 emissions (“direct emissions” generated by company facilities) and scope 2 emissions (stemming from the generation of energy the company uses, such as electricity or heat), which represent on average less than 10% of their total emissions[4]. With increasing pressure to step up their climate ambitions, all European majors partially incorporated scope 3 emissions in their climate objectives, either by pledging to reduce the emissions intensity of the products they sell, or, for the more ambitious, to reduce emissions on scope 3 in absolute terms, either worldwide or within a geographical perimeter. This is a positive development, but it falls short of providing a clear picture of the reductions in emissions that will be achieved. Notably, in the case of the intensity-based approach, it does not guarantee that overall emissions will decrease if production increases[5].

Looking beyond the sustainability push from investors and consumers, could this new climate-oriented approach from oil and gas companies be seen as a result of the market telling them that their golden days are over?

The energy sector’s weight in the S&P 500 index has plummeted to a historic low of 2 percent this year[6], but this decline started long before the pandemic, and has disproportionately impacted fossil fuel companies. This is a worrying trend for an industry that needs to mobilize huge amounts of investment to continue projects and accelerate plans for a low carbon transition. On the other hand, renewable energy stocks have seen strong performances this year, benefiting from rapid sector growth, driven by plummeting technology costs and enabling policies, as well as from growing interest in sustainable investments.

The outlook for oil demand, a long-debated matter with important implications for the industry, is now the subject of renewed evaluation, as the pandemic continues to disrupt mobility patterns. BP sent shockwaves across the industry as the first oil major to commit to cutting oil and gas production by “at least” 40% by 2030; in this year’s edition of their flagship Energy Outlook, the company went as far as calculating that peak oil was already reached, with oil consumption not  returning to 2019 levels. The other majors did not rush to confirm BP’s forecast, indicating they will continue to increase fossil fuel production until 2025[7].The newly released World Energy Outlook 2020 of the IEA also shows caution in forecasting peak oil in the near future. In the Stated Policies Scenario and the Delayed Recovery Scenario oil demand flattens out no earlier than 2030, motivated by rising demand for mobility in emerging markets, as well as for petrochemicals.

With the current price environment and the rather grim future prospects, could an overhaul of the oil& gas sector be envisaged?

Oil majors have made it clear that they will continue to produce oil and gas to satisfy current and future demand, and they argue that these revenues are crucial to finance their energy transition. Demand in advanced economies might have stabilized, but it is still poised to rise in developing economies – Asia will account for 77% of oil demand growth through 2025[8]. The diversification of their portfolios to include more low carbon options is an important step in adapting to a carbon-constrained world, but it is still too early to assess whether it will lead to a transformation of business models.

There are some key changes emerging: non-conventional oil & gas projects are on hold, due to high production costs and low global prices, but exploration and production will continue in conventional reserves, privileging low-cost projects with low production costs. Natural gas will be the main driver of growth in the sector, with most companies anticipating a significant increase in gas demand. While prospects for gas in established markets start to deteriorate by mid-2020, emerging markets in Asia will provide robust growth through 2030[9]. There are several drivers of growth: the push to replace coal in industry and power generation with a dispatchable, less carbon-intensive energy source and decreasing LNG costs, which make gas accessible to emerging markets in Asia. Moreover, companies still prove capable of securing funding for new projects –  for example, Russia’s giant Arctic LNG 2 project, led by non-state Russian company Novatek, in partnership with Total, has managed to secure $9.5 billion in financial support from international lenders this year[10]. It is the high-cost, high-risk projects that will struggle to obtain financing.

The energy transition must include oil& gas majors.

With their innovation capacity and established reputation, they can play an important role in the radical transformation of the energy sector, that requires mobilization from everyone in the game. Some crucial technologies require more research& innovation and companies have a critical contribution to make. Examples include carbon capture and storage and offshore wind, technologies in which oil & gas majors can apply know-how from their traditional activities. They can also adapt existing infrastructure to less carbon-intensive activities – oil refineries can be converted to biofuels, service stations can provide electric charging facilities.

Although not yet the sign that systemic change is underway in the oil and gas sector, the climate neutrality goals represent an important step ahead in quantifying climate ambitions and keeping companies accountable to their pledges. The urgency of tackling climate change is clearer than ever, and the energy sector as whole will need to strike a balance between satisfying the energy needs of the future, while also significantly cutting its greenhouse gas emissions. For companies to truly rise to the challenge, governments will have to be more ambitious and consistent regarding climate policies, that would change consumption patterns and shift investments from fossil fuels to low carbon solutions.

[1] IEA (2020). World Energy Outlook 2020.

[2] Carbon 4 (2020). Total, Shell, BP: Une compagnie oil & gas peut-elle être neutre en carbone?

[3] Transition Pathways Initiative (2020). Carbon performance of European Integrated Oil and Gas Companies: Briefing paper.

[4] Bloomberg (2020). Why company carbon cuts should include ‘scope’ checks.

[5] Carbon Tracker (2020)Absolute impact: Why oil majors’ climate ambitions fall short of Paris limits.

[6] Bloomberg (2020)Energy’s Plunge Is Now Worst Among S&P Sectors Dating to 1928.

[7] Novethic (2020)[Infographie] Total, Eni, Shell, BP, Repsol: Découvrez le pétrolier le plus vert.

[8] IEA (2020). Oil 2020.

[9] IEA (2020)World Energy Outlook 2020.

[10] Reuters (2020)Exclusive: International lenders back $9.5 billion financing for Russia’s Arctic LNG 2 – document.

*Laura Camarut is an EPG Fellow. The views expressed in this paper are those of the author and do not necessarily reflect the opinions of EPG.

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