I’m honoured to speak at the Carbon Trust’s Chairman’s Dinner, not just because of my respect for the work done by the Carbon Trust, but because James Smith is a friend and colleague of many years and I also have great respect for his thoughtful contributions, both when he was with Shell and since.
I find it distressing that 18 years after major oil companies such as Shell and BP acknowledged the threat of climate change and the need for precautionary action - and indeed began to put in to place many of the steps needed - the world has made very modest progress in addressing this challenge.
There remain a very wide range of views and a great deal of misunderstanding and even confrontation by those in different parts of society. While there is much convergence in the middle, there are extreme positions taken by some which range from an attitude of “it will be alright on the night, no hurry” to “we must immediately stop using all fossil fuels consider any ongoing use is simply morally bankrupt”. In fact cooperation rather than confrontation is needed across all parts of society.
The Carbon Trust’s new report, Titans or Titanics?, highlights the dichotomy of the two realities acknowledged by most businesses, these are: the needs which must be met today, while beginning on what is often still a relatively modest process of change; and the very much more radical changes needed if we are to meet what can sometimes seem still distant challenges.
One of the frustrations is that this gap in perceived realities has closed only modestly over the last twenty years.
For example, already more than ten years ago, in 2004 I used my Presidential Address to the Geological Society of London to express concern that progress was slow. There appeared a real danger that, unless there was a change in approach, we would miss the opportunity of stabilising carbon dioxide emissions at the levels required for the lower end of the then IPCC scenarios (which were higher then than now).
This in spite of the fact that already in 1997 major companies such as Shell and BP had publicly acknowledged that climate change posed a real threat and that precautionary measures were needed.
Geologists are of course familiar with past changes of climate and the consequences for those species less capable of adaptation if the change is too great or too rapid. The threat is not, as so often expressed, to the planet which will certainly survive, but to us and other living species.
At that time, it seemed to me that the problem was that three sectors of society, namely: government, the consumer-cum-voter, and business, tended to pass the buck to one another. That problem is still there.
Business tends to shift the buck to consumers, with a sideswipe at government regulation.
Major energy companies work successfully on the energy efficiency of their own operations. They also offer choice and advice to their customers to improve their energy efficiency and to make lower carbon choices. But the very essence of business is to meet the demands of customers – we cannot sell what customers do not want.
Business is also paranoid about regulation. At the very mention of the R-word, business people twitch. This is because of bitter past experience of the cost of unnecessary or overly prescriptive regulation which in the end drives business into the ground.
But if you ask business people whether they really think regulation is unnecessary, you will soon extract an admission that it is essential to the sound working of markets – regulation on transparency, on quality, on competition, etcetera. We all know the tragic consequences of inadequate or laxly enforced building regulations. In spite of this, business people in general remain deeply suspicious of the tool in the hands of politicians and governments.
Consumers, who in democracies are also voters, have considerable power. They can destroy a company or government. Polls suggest that in many countries - including the United States – consumers’ concern on climate change peaked in the “noughties” and then began to decline.
Now, perhaps because of unusual weather events such as storms, floods and droughts, concern is generally mounting again.
In countries all across the world, people want instant, economic and reliable energy as well as convenient personal transportation. Where they do not get it – whatever their level of affluence – they go to great lengths to acquire it.
The very poor are prepared to spend a disproportionately high share of their meagre income to acquire energy. For both power and transportation the consumer is well aware of the problems of local pollution and traffic congestion, but is loath to forego any personal convenience to address the problems. That is something that we all think “they” should do something about, where “they” is the government or business.
And what about governments? They are fearful of offending the consumers, their voters. They therefore fall back on exhorting businesses to develop solutions, to spend more on research and development and so on.
To be fair they often try to do their best through both taxation and regulation, the two main levers available to them. In regulation they tend to fiddle at the edges in things which are often costly to business, but whose price impacts are not directly visible to consumers. In taxation, they also try and attack in areas most remote from consumers.
Given its lack of votes, business defends itself with the best weapon at hand, the argument that international competitiveness will be lost.
Ten years later, this situation has not radically changed, although there are a few added wrinkles and several encouraging signs.
One encouraging sign is a much higher level of interest in investors in the potential impacts of climate change on companies. This has led to long term investors engaging quite systematically with companies and interrogating them supportively on their plans to address the challenges. Shareholder resolutions along these lines have been proposed at the AGMs of both BP and Shell. In an equally encouraging sign, both companies supported the resolutions.
Even the seemingly less constructive and somewhat quixotic campaign for endowments and pension funds to divest themselves of all fossil fuel holdings is not without some rationale. I often remind those making such calls that all the major oil and gas companies divested themselves of their coal operations in the nineties.
Divestment is an entirely rational market approach if you think that there are better uses for your funds. Given the inevitable continued demand for some forms of fossil fuels for some decades to come, divestment of all such holdings is probably not an economically sensible choice for most investors. Selective divestment or portfolio switching certainly is. As in all such choices, timing is critical.
As far as the position of Governments is concerned, while it is improbable that there will be a comprehensive agreement at the COP meeting in Paris later this year, it does look as though there will be a large number of individual country or regional commitments (Intended Nationally Determined Contribution or INDCs).
This is progress and will doubtless be hailed as an agreement, although one can certainly question whether an agglomeration of diverse commitments can really be hailed as a global agreement.
National commitments will vary in climate effect and it appears unlikely that they will add up to enough to make a two degree centigrade target achievable. At least the bulk of global emissions will be covered by targets of some sort.
The two degree centigrade mantra remains almost an article of faith, even though in their hearts most people seem to think it unlikely to be achieved. That is another dichotomy of realities.
Meanwhile on the business side companies from almost all sectors - from energy to consumer businesses - are working on their own business plans to address a carbon constrained future. Some are also now beginning to support government efforts to put in place frameworks which will guide the market in the desired direction.
So, given the ongoing need for collaboration between business, governments, consumers and civil society to address this challenge which no one element of society can meet on its own, are there things which business needs to do which go further than what is already being done?
First, we need well thought out frameworks which channel the creativity of the market to deliver timely solutions.
This needs business leaders to clearly acknowledge the role of the right sort of regulation. This is not easy for businesses leaders, particularly in some countries which are strongly antipathetic to regulation. It requires a statesmanlike approach. Businesses as a whole need to support ever tightening efficiency mandates, even where these may be economically damaging for one or other sector.
There also needs to be business support for frameworks to put a price on carbon, whether by cap and trade systems or taxation. Business leaders need to refrain from playing the international competitiveness card at the first sign of leadership from government. If countries are to meet their Intended Nationally Determined Contributions (INDCs), they need to put in place mechanisms to drive the market to achieve these, and that needs business support nationally and internationally.
Efforts to achieve carbon pricing through cap and trade systems or carbon taxes have to date often been hamstrung by special pleading by businesses. The recent call by six major oil companies is encouraging, but in a sense it is not new – some have been calling for it for years. It is very good to see the position getting a higher profile, but distressing to see that there remains a lack of unity. At the same time, NGOs need to stop ruling out some technologies on essentially emotional grounds.
Second, we need a truly independent and scientifically grounded mechanism for determining the carbon impact of different energy sources from production to consumption. This should be an independent vehicle supported financially by different stakeholders – from IFI’s, sovereign funds, private investors and companies. No one party should control it. Such a vehicle has been suggested among others by Shandi Modi of IDEACarbon. The present prioritisation is very much subject to individual fancy and technology preferences.
Third, a means of rating the carbon value of different national vehicles is needed to work towards a globally interconnected trading system. By such means we could gradually move from the fragmented commitments which are likely to emerge from Paris, to a more globally connected system where investment carbon emission reduction could be applied in the most globally effective way.
At the same time, there is also a quite pressing current need to assess the relative carbon impact of the tens of billions of dollars of “green bonds” which are now being issued annually in a very uncontrolled way.
Are there some specific things that the oil and gas industry should be doing, or indeed not doing?
Leading companies in the industry have been committed to carbon pricing for more than fifteen years. Although one might intuitively think that this is not in their interest, it is the only rational way to ensure that the lower carbon emitting fossil fuel sources and mechanisms are favoured. It is a guide to prioritising exploration and investment.
An effective carbon price also provides a rational solution to the “stranded asset” debate. More or less from the time that I joined the industry it has been almost axiomatic that we would not use all of the global fossil fuel resources. This was not because of climate change worries, but because of the assumption that other technologies would supersede some fuels on the basis of cost or convenience.
This happened in the twentieth century, first to coal and then to fuel oil. In the sixties the dream was probably mainly of nuclear power, but preferences have subsequently switched to various forms of renewables.
Ultimately hydrocarbons will be more valuable for petrochemicals and for lubrication than for combustion engines. An effective carbon price will also help to determine the location and quantity of ongoing exploration for hydrocarbons.
Few people in the industry think that it would be sensible to listen to the calls for the industry to invest in renewable energy generally (and of course to stop all exploration). The industry needs to stick to the things it has expertise in or which are related to its product cycle. These include hydrogen, already an important part of the industry’s processes and such things as biofuels, and possibly some offshore renewable technologies.
Where the industry does have a role to play is in Carbon Capture and Storage (CCS). The challenge in this technology is not the technology per se – it can be demonstrably practical and safe, although the public will take some convincing of this.
The problems are those of price and scale. To be commercial, CCS needs a carbon dioxide price of more than fifty dollars a ton. But there is also a question of scale. In a paper on energy futures for the 2008 World Geological Congress in Oslo, I compared the amounts needed to current natural gas production. The figures are not strictly comparable - gas production involves treatment and processing of the gas but limited compression, while in all cases compression will be required for CCS, but they are indicative.
To capture the emissions from 100 gigawatts of coal fired generating capacity would require the capacity to inject of some 350 billion cubic metres per annum. That is about half of the current North American gas production capacity. To achieve CCS on the scale envisaged in most low carbon energy scenarios would require essentially recreating the current global gas or oil production capacity.
As I did the calculations myself converting a plethora of different metric, imperial units and molecular weights, I was nervous of the accuracy, but no one has corrected me in the seven years since. Now is your chance! Depending on the level of industry ambition, investment on that scale is either a huge opportunity or an impossible mountain to climb.
So will the oil and gas industry exist in 2050? Many people in the industry say unequivocally yes. Some others outside the industry say that it will be dead by 2030.
Ali Naimi, the Saudi oil minister said to me some fifteen years ago that he was very relaxed about renewable energy as competition. He said that technological development would do what it always does – change things, sometimes unexpectedly.
He has recently been quoted as saying that one day Saudi will export not oil but solar energy and that he was relaxed about that too. Ali Naimi is older and wiser than me, but my attitude is somewhat the same as his. I think I will be dead well before the oil and gas industry!