Is the COVID-19 crisis spurring a transition to net-zero emissions in the oil and gas sector?

Almost all economic sectors have suffered due to the evolving COVID-19 crisis. For the oil and gas industry, already battered on one side by low prices due to an oil price war between Russia and Saudi Arabia, and on the other by the push to decarbonise the global economy, the crisis hit at an especially challenging time.

Nevertheless, an increasing number of international oil and gas companies have set out seemingly ambitious goals to transition to “net-zero” carbon emissions by 2050. What is behind these new announcements?  Are they just greenwashing, or do they represent a genuine intent to transform firms in the face of the accelerating energy transition?  What do the commitments mean for achieving the Paris Agreement goals, and can they help to convince governments to be bolder and to really deliver on their plans for a “green recovery” after COVID-19?

Well before COVID-19, there were clear signs that change was coming to some parts of the oil and gas industry. In 2014, CEOs of 12 major firms came together form the Oil and Gas Climate Initiative, later pledging support for the Paris Agreement. In September 2019, coinciding with the UN Climate Summit in New York, the UK Offshore Oil and Gas association (OGUK) published Roadmap to 2035: A Blueprint for Net-zero. In December 2019, Repsol was the first to pledge to become carbon neutral by 2050. By January 2020, the IEA stressed that the driving question for the industry was “should today’s oil and gas companies be viewed only as part of the problem, or could they also be crucial in solving it?”

When COVID-19 hit, the picture changed dramatically. With much of the world on lockdown, demand plummeted. Oil prices even went briefly negative in some US oil futures contracts and investment went into free-fall. With global COVID-19 case numbers still rising in late 2020, with many countries facing a second wave of the virus, it’s clear that the economic impacts of the pandemic will not disappear overnight. Latest numbers from the IEA point to a 35% decline in upstream oil and gas spending in 2020 compared to 2019, compared to an 18% decline in energy investment overall.

And yet in the midst of this turmoil, with the whole oil and gas sector under severe financial stress, more major European integrated oil and gas companies (such as BP, Eni, OMV, Shell, Total and Equinor) have joined Repsol in pledging to achieve net-zero carbon emissions by 2050.

At a time when it might have been tempting to retreat from the climate change debate and focus on shoring up near-term financial performance, these multinationals appear to have decided to step up rather than step back, albeit with varying levels of ambition and depth.

This is not the first time that oil and gas companies have put forward transformational ambitions. Nearly 20 years ago, BP rebranded to “beyond petroleum”, pledging to control emissions and become leaders in promoting environmental sustainability. Investments did follow, but by 2013 most of BP’s renewable energy assets had been sold off. So, will this time be different?

There does appear to be more momentum than ever before. At least two of the recent commitments – those of BP and ENI – crucially include Scope 3 emissions. Scope 3 emissions encompass indirect emissions across a company’s value chain, including from the use of their products. For an oil and gas company, this implies a radical change of business model, well beyond reducing emissions from the companies’ own operations.

BP in particular made two startling announcements as the pandemic started to take hold. First, the firm cut its long-term oil price forecast for oil by 30%, leading to a write-down of assets by between USD 13 and USD 17.5 billion.  Perhaps more surprising than the write-down itself was the reason given: that the pandemic will “accelerate the pace of transition to a lower-carbon economy and energy system”.  Second, BP has begun planning with expectations of a carbon price of USD 100 per tonne by 2030 – a big step up from the current USD 40.

And yet key questions remain about the nature of the pledges and how they will be achieved. What does the “net” actually entail – what level of residual emissions, and what kind of offsets or carbon removal?  How will firms go about reinventing themselves?  Does this mean shifting towards renewable electricity (an entirely different business model), producing low-carbon fuels, eliminating methane emissions (currently around 15% of all energy-related GHG emissions), developing carbon capture, utilisation and storage (CCUS), or all of the above and more? Crucially, when will the necessary investment be forthcoming? As recently as 2019, 99% of firms’ capital investment was flowing into core oil and gas projects – a far cry from reinvention. Even among those firms that have net-zero plans for mid-century, most of them do not include intermediate targets. Clarity on some of these questions may come from the forthcoming Science-based Targets methodology for the oil and gas sector.

Further, the footprint of oil and gas majors that have announced ambitious climate plans remains small relative to overall production. In particular, nationally owned oil companies have been much slower to join the party. But these state-owned firms account for over half of global production (and even greater share of reserves) and control a larger proportion of low-cost oil, making them more likely to continue producing in a low oil price world. That said, October 2020 saw a promising sign of change with Malaysia’s Petronas becoming the first NOC to pledge net zero by 2050.

While the devil is in the detail of these pledges, it is clear that they imply a transition to energy firms with little resemblance to those of today, requiring new skills, new business models, and new technologies. What is driving firms to think about such reinvention now, even at a time of severe financial difficulty?             

Investor activism is part of the picture, as environmentally conscious stakeholders such as Climate Action 100+ and socially active pension funds like the Church of England have raised pressure for reform. Reputation management, staff retention and anticipation of future regulation are also at play. But changes are also being driven by the market and the need to ensure access to finance in a world where oil is worth less as demand peaks, carbon prices rise, climate risk disclosure becomes the norm, and high-emission and high-cost projects face real risks of becoming stranded assets.

Market signals are already picking up on this new reality. In early October, NextEra, the biggest wind energy producer in the US and one of the biggest solar energy producers, overtook ExxonMobil as the most valuable US energy company by market capitalisation. More broadly, renewables have been more resilient than fossil fuels in the face of the Covid-19 crisis and renewable energy firms in Germany, France, the UK and US have outperformed oil & gas stocks since the onset of the COVID 19 crisis, as well as over the previous ten years.

To put these pledges in context, the challenge of heading off dangerous climate change is still immense. Because of COVID-19, global emissions are expected to drop steeply in 2020. But to stand a good chance of keeping the increase in global temperature to 1.5 °C above pre-industrial levels, emissions will need to continue to decline at nearly the same rate – around 8% – every year from now until 2030. The global economy simply cannot pick up as it was before. 

In that light, the OECD and others have highlighted the potential for stimulus packages to accelerate the transition to net-zero emissions as part of a “green recovery”. Stimulus measures so far announced do include meaningful support for the green transition – in particular in the EU – but much more needs to be done. The OECD reports that while at least 30 countries among the OECD its key partners have included measures to support the transition to greener economies as part of their recovery programmes, many are also planning measures that will likely have direct or indirectly negative impacts on the environment.  According to Energy Policy Tracker estimates, G20 countries have so far committed USD 234.73 billion in support to fossil fuel energy versus USD 151.29 billion for clean energy.

In that light, the slew of pledges from the oil and gas sector helps to highlight an opportunity as governments continue to refine recovery packages. What better signal that a green recovery is good for growth and jobs than for some of the world’s most profitable companies to voluntarily pledge their own transformation?  Governments can take heed by continuing to reorient energy stimulus towards clean energy, while actively supporting the needed transition in skills and workforce.