• Financial Times opinion piece declares petroleum-based economy beginning to unravel, but reports of demise might be premature

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      Patrick Lavery

      Combustion Industry News Editor

The Financial Times has published an opinion piece outlining what it describes as a month in which “the wind changed” for Big Oil, demonstrating that the “petroleum-based economy is beginning to unravel”. Four events are seen as pivotal:

  1. The addition of two climate conscious members to the board of ExxonMobil. This was through a shareholder election; CEO Darren Woods reacted by saying that the company would listen to investor’s demands to do more to reduce emissions, and that the company is “well positioned to respond”.
  2. Shareholders at Chevron approving the setting of a strict target for emissions reductions from its products. 61% of shareholders supported a resolution for the company to set such a target, while 48% supported a resolution calling for a report on the financial impact of achieving a net-zero by 2050 target.
  3. A Dutch court ordering Royal Dutch Shell to cut greenhouse gas emissions faster than planned, with the company’s existing and conditional target of 20% by 2030 (from 2016 levels) being deemed by the court to be inadequate and not sufficiently concrete. The court ordered Shell to reduce emissions by 45% by 2030; Shell will appeal against the ruling.
  4. The release by the International Energy Agency of its Net Zero by 2050 report, which amongst other things stated that no new oil and gas fields should be opened after this year. For more on this report click our IFRF blogpost. 

These events are undoubtedly important, but it is probably a stretch to say that the petroleum-based economy is beginning to unravel. It is perhaps more accurate to state that expectations about the industry changed significantly over the month, particularly through the release of the IEA report. The movements at Chevron and ExxonMobil are more of a continuation of a slower transition that has been taking place for years, and in which the companies themselves have been active participants, having realised for years that oil will decline as a commodity, as will, perhaps more slowly, gas. A fifth news item, in which 92% of Total’s shareholders backed its management’s plans to decarbonise by 2050, and to change its name to TotalEnergies, supports the idea of the industry being well aware of the need for change. (That Total has had little in the way of shareholder discontent may be reflective of its stronger recent financial performance than ExxonMobil or Chevron’s, but it may also be a cultural difference between European and US oil majors.)

The Shell news is more striking. Much will depend on what happens when the ruling is appealed, but Shell may be forced into a faster transition of its business than it had planned, so fast that it might incur losses it was hoping to avoid, and it is that potential which will worry its more traditional investors. The recent ruling of the German court that the country must adopt stronger greenhouse gas emissions targets is in line with the Dutch finding, and there may indeed be more court action in the future in various countries producing similar results. (The German finding might be better identified as a turning point.)

But what would really signal a turning point for Big Oil would be a radical change in demand for its products, and nothing in May has suggested this has occurred. At present, a gradual decline in the demand for petroleum products over multiple decades still appears the most likely scenario, with perhaps some increase over the next decade before an accelerating rise of electric vehicle ownership alongside improved energy efficiency leaves oil being used mostly for chemicals and materials manufacturing and mechanical uses, rather than as a fuel. As mentioned, this is a transition Big Oil will have been highly conscious of and planning for already; the pace of the transition is now what is at issue. One does get the feeling, from the news of the Shell court ruling, that at some point in the next 5-10 years, governments or courts may face a decision between ordering a halt to some activities on the part of companies, or in allowing the continuation of the immediate functioning of the economy and serving citizens’ pressing requirements. Probably there will be some fudging of this by companies moving their activities into other jurisdictions, courts being helpless against the moves, and governments turning blind eyes. Yet it seems that governments and courts will be pushing companies to the limit in the pace of their transitions, which may well be a good thing, though one wonders what the pace of change can be.