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Energy companies should consider climate change in business plans

Energy producers should take climate change policy more seriously for their long term strategy

Following the United Nations-backed climate change summit in Lima, the countdown has begun for next December’s meeting in Paris, where a global agreement paving the way for swingeing carbon emissions cuts could emerge. For energy producers, the big question is: should their preparations for a future where demand for their products could be seriously curbed be shifting into a higher gear?  

The outcome of December’s Lima summit produced muted reaction from energy companies and industry bodies around the world. They are probably – and understandably – more preoccupied with the immediate effects of a collapsing oil price and rising costs than with a problem that many view as somewhat hypothetical and which has thus far produced relatively few headaches for heads of businesses used to thinking years rather than decades ahead. 

However, they may find it hard to ignore the negotiating texts that came out of Lima, which include options to specifically target “net zero” carbon emissions by 2050, or to halve them by 2050 and to eliminate them by 2100. While several other options are also up for consideration and little is guaranteed to make into Paris agreement, the possibility that measures that could make a noticeable impact on demand for hydrocarbons products in the relatively short-term may be adopted by the 195 countries involved in the UN process should at least provide food for thought. 

“The draft negotiating text sets out some clear options for the future, although, if the weakest of these is picked in every instance, the end result will have hardly been worth the effort,” David Hone, Climate Change Advisor for Shell said in a blog written at the end of the Lima meeting. However, some of the wording suggests a final agreement may not be as flimsy as some commentators are predicting. Carbon pricing is highlighted as key approach and some form of new emissions targets could well emerge.

Hone noted that some text, which did not have options attached, was quite likely to end up in the Paris agreement. “This is the case for some of the ‘net zero emissions’ wording and also the need for parties to ‘develop low emission strategies’ and ‘maintain commitments/contributions/actions at all times’,” he said.

The oil industry’s stance, in public at least, is typically that growing global energy demand will ensure the viability of the business for the foreseeable future, whatever is agreed in climate change talks. 

Analysts note that, regardless of what executives may think in private, expressing public concern over the impact of climate change measures on their businesses is not likely to be top of their to-do lists, when energy company share prices are already under pressure due to the low oil price and high operating costs.  

Some players concede the potential problems that more rigorous emissions reductions rules would cause the industry.  Khalid Abuleif, Saudi Arabia’s envoy to the climate change talks told journalists in Lima, such measures would be “very challenging” to energy exporters at a time when carbon capture and storage (CCS) techniques – that could allow oil and gas production to continue at a higher level by burying emissions – were not sufficiently well developed.

However, he cast doubt on the viability of plans to target zero carbon emissions at a time when workable alternatives are still not in place and billions of people on the planet still have inadequate energy supply. “The zero-emissions concept – or let’s knock out fossils fuels out of the picture without clear technology diffusion and solid international cooperation programmes – does not help the process,” he said.  

But some eminent members of the oil and gas community say that business as usual, on the assumption that the world could not cope without large-scale fossil fuel use, is no longer an option. 

Lord Browne, former chief executive of BP and current board member of UK shale explorer Cuadrilla Resources, has been sounding the alarm bell for some time. He urges all extractive industries to take play a more active role in the climate change debate or risk the future of their business.

He told a London seminar in November, hosted by industry advisory group Critical Resource that if business fails to engage constructively in the climate change process, “it will miss the opportunity to shape its own future, and will stop being master of its environment sooner than it thinks”.

Browne highlighted not just possible progress in climate change talks, but also signs of a closer relationship on tackling global warming between the US and China – the world’s two largest energy consumers and carbon emitters – as a reason for the industry to pay more attention than has been the case so far. 

He said targets within a significant bilateral climate change agreement unveiled by Chinese president Xi Jinping and US president Barack Obama in Beijing in November, would not be achievable using current climate change policies and could reduce the two countries’ oil demand by more than 15 billion barrels of oil over the next 15 years. Among measures in the agreement, the US pledged to reduce greenhouse gas emissions to 26-28% below 2005 levels by 2025, while China said it planned to ensure its carbon emissions would peak by “around 2030”, if not earlier.  

“That represents a huge potential destruction of value, and is a major long-term risk to any oil producer,” Browne said. He singled out small and medium-sized energy and mining companies in North America, few of which, he said, “publicly accept the science behind climate change, and even fewer think of climate change as a risk to their business.” 

Browne – who as a partner in private equity group Riverstone Holdings, co-heads one of the world’s largest renewable energy funds – advocates that energy companies should seek to diversify their businesses into low-carbon technologies, as falling prices for wind, solar and other renewables, make green energy an increasingly attractive business proposition. 

For all the tough talk on fossil-fuel reduction targets, the developing world’s leading oil exporters have also been hedging their bets. Saudi Arabia, for example, has long been operating a two-pronged strategy in UN climate change talks, championing the need to keep oil production high on one hand, while also pushing for the developing world’s hydrocarbons producers to be financially compensated for loss of revenues as a result of measures to combat global warming. That position effectively aims to put oil producers on a par with countries under threat from natural disaster resulting from global warming, as victims of the process that deserve compensation. 

Many other oil producers also operate divergent energy sector policies. Mexico, for example, enacted tough climate change legislation in 2012, which targeted a 30% cut in greenhouse emissions by 2020 and has said it aims to produce a third of its energy from clean energy by the mid-2020s. However, the country has also recently adjusted its investment regime to encourage more foreign investment in the oil and gas sector. Other Latin American countries, including Brazil, Peru, Ecuador and Colombia have also taken steps to boost oil and gas investment, while also pointing to the climate change measures they are taking, such as efforts to curb deforestation and boost renewables use. 

Meanwhile, in Europe – the testbed for many anti-global warming initiatives – government support in oil producing nations, such as the UK, has helped to boost investment backing fresh exploration in high-cost and marginal oilfields – at least until the recent oil price collapse.  

The outcome of December’s Paris climate change summit could reshape such conflicted thinking on energy policy. The summit could yet produce virtually any result from the total collapse of talks to a binding global agreement on much tougher carbon emissions regulations. But the odds are on a more comprehensive and effective agreement emerging than measures in place now. That possibility, coupled with travails due to the low oil price, means energy companies may no longer feel able to treat climate change policy as a long-term problem of no relevance to their business plans.      

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