As the world continues its transition toward a low-carbon future, some industries are facing larger challenges than others. Currently, the production and use of oil and gas accounts for over half of all global greenhouse gas emissions associated with energy consumption according to CDP (the Carbon Disclosure Project), a non-profit which manages the world’s largest database of greenhouse gas emissions reported by corporations and cities around the globe. This means the largest companies supplying the world with oil and gas, often referred to as “oil majors”, must rethink their business models in order to stay relevant in a future low-carbon economy.[1]
A CDP report published in November of last year analyzed 24 oil majors and their “readiness” for a low-carbon transition. The results were mixed and one can see a clear geographic divide: The European majors account for 70% of the total current renewable capacity – and nearly all capacity under development. While the European firms’ investment in renewable solutions represent about 7% of their total capital expenditure, overall, the 24 companies invested only 1.3% of their total capital expenditures in low carbon technologies in 2018.[2]
However, growing sustainability pressure from consumers, investors, and regulators, as well as improvements in renewable technologies, are pushing oil companies to adapt their business models or risk being left behind. Wood Mackenzie, an energy consultancy group, forecasts that installed wind and solar capacity will see annual growth rates of 6% and 11% respectively for the next 20 years, while total primary oil demand will grow only 0.5% per year. This brings us back to the European oil majors, which are beginning to update their business models to ensure they remain relevant in a future low-carbon economy.[3]
This shift in sentiment is perhaps best symbolized by Statoil, which is expecting to spend about 15-20% of its total capital expenditure on low-carbon energy solutions by 2030. As a testament to its commitment to the new business strategy, Statoil last year even changed its name to Equinor (“Equi” referring to equal, equality, and equilibrium, and “nor” referring to Norway). The firm, which is publicly traded but majority-owned by the Norwegian state, is already one of the world’s most carbon efficient oil producers. Although oil and gas will remain a core part of its business model for the foreseeable future, Statoil’s (Equinor’s) new strategy involves leveraging its expertise in off-shore drilling and exploration to build massive off-shore wind power farms – including a planned project off Long Island, NY, which could power up to 1 million homes.[4]
Another notable example is Shell, the world’s second-largest oil and gas explorer by market cap. The firm has decided to redefine itself as a power company, as opposed to an oil and gas company, as it recognizes that the easiest form of energy consumption that can be carbon-free is electricity. Shell estimates that by 2070, 50% of all end-user energy consumption will be electric, compared to 22% today. In order to take advantage of this anticipated shift in consumer behavior, Shell has acquired an electric utility that it calls Shell Energy Retail to deliver 100% renewable energy to customers in the U.K. The idea is to create a holistic experience where customers can buy all their energy from Shell, whether it’s electricity to power their homes or gasoline to power their cars. As a reminder of why oil majors are crucial to a successful low-carbon shift, Shell’s Director of Integrated Gas and New Energies says: “Shifting the global energy system is a big task, and it needs big companies with big balance sheets to really go after it. You can’t just subsidize your way into it, or do it through startups only. It needs also the power of big companies.”[5]
Resources:
[1] CDP.net – Press Release (11/12/2018)
[2] CDP.net – Report: Beyond the Cycle (November 2018)
[3] GreenTech Media (9/24/2018)
[4] Equinor.com – Press Release (3/15/2018)
[5] GreenTech Media (4/1/2019)
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