Do oil and gas companies have a future?

Listening to the proponents of ‘divestment’ and ‘unburnable carbon’, it might seem the days of oil and gas companies are numbered. Last year being the hottest on record adds urgency to the discussion. It’s certainly true that if costly climate damage is to be avoided, these companies will have to change profoundly over the next couple of decades.

Tackling climate change is about how the world can get the energy it needs for the carbon emissions the planet can afford. The global energy system is huge and the challenge enormous. Over the first half of this century, because of demand in the developing world, energy supply will need to be about doubled. But, to avoid dangerous climate change, carbon emissions need to be cut by at least 60%.

Realistic assessment shows it is unlikely we can get all the energy we need in mid century without fossil fuels, even with much better energy efficiency, nuclear and immense growth in renewable energy. But we can’t go on using fossil fuels in the same way. There are three technology themes for low carbon energy: renewables in all their forms; nuclear; and carbon capture and storage (CCS) for both fossil fuels and bioenergy.

Despite what is often said, CCS is based on technologies that have been around for decades. It is ready to implement and can be scaled up rapidly under the right low carbon policies. Significantly, the Intergovernmental Panel on Climate Change estimates that the cost of avoiding climate change could more than double without CCS. CCS means the phrase “unburnable carbon” is misconceived. It’s “unemittable carbon”. The difference is important to the usability of fossil fuels. The energy can be extracted and the carbon returned underground. The use of fossil fuels in practice will, of course, be determined by the relative effectiveness of CCS as a low carbon technology.

But CCS won’t work in transport, meaning that oil in transport will need to be curtailed substantially.

So what should oil and gas companies do? They can't be expected to abandon shareholder value. But farsighted companies should judge that it is better for shareholder value if climate change is tackled sooner rather than later. Sooner means less damage to the environment and economies. Sooner means more time for governments to make sound, globally connected policies. Sooner gives more time for companies to develop competitive low carbon technologies.

It’s in the enlightened self interest of oil and gas companies to argue for tackling climate change. Shell, then BP did this over 15 years ago. The whole industry needs to strengthen its voice.

Oil and gas companies should advocate even handed, market based policies that will stimulate innovation and move the immense resources required for low carbon energy. The terms of trade for energy must be rewritten by governments. Companies can only cut emissions if the market offers the chance of recovering the costs of doing so. The market failure of carbon emissions must be corrected with a proper price placed on carbon. Where needed, regulation should demand energy efficiency and low carbon choices.

The new terms of trade for energy should be technology blind. Public funding for innovation makes sense for a wide range of low carbon technologies. But for operational solutions, the open market, including a carbon price, must be the arbiter.

Each oil and gas company will decide its own low carbon product strategy. But I doubt if they would succeed making batteries, solar panels or wind turbines. That's not where their skills lie. Others will do it better. The oil and gas companies must play to their strengths. I believe these strengths lie in high energy density liquids and gases. These are vital to heat, power and transport. Today these liquids and gases are high in carbon as well as high in energy. In the future they will have to be low in carbon.

In a low carbon world, there are three potentially important technologies for which oil and gas companies are the natural owners: CCS can be used with oil, gas and biomass to make low carbon electricity; advanced biofuels can be made from crop wastes and microbes using advanced catalysis; and fossil fuels can be used, with CCS, as a source for hydrogen as a major means of storing and carrying low carbon energy.

The transition over the coming decades for oil and gas companies is uncertain and risky. But defending the status quo would be more so. Success is not guaranteed. In road transport, for example, no one can predict which combination of batteries, biofuels, gas and hydrogen will prevail. But the oil and gas companies can have options in three of these four main low carbon transport fuel technologies.

The energy system will have to change profoundly. There will be many new technologies and competitors. Competitive markets must determine the outcomes. Nonetheless, for oil and gas companies with the vision and capacity, there will be business to do in a low carbon energy world.


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