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Majors urged to lead energy transition

IOCs would benefit from taking a prominent role in the transition and face capital flight if they do not, says former UNFCC leader

International oil companies (IOCs) face a major challenge from investors pulling out of fossil fuel-related businesses but are also in a unique position to reshape public perceptions and become trusted custodians of the world's energy resources, a leading force behind the COP 21 Paris Agreement told the SPE Offshore Europe 2019 conference.

In the past four years over 1,000 institutions have together pledged to divest more than $6tn from fossil fuels, an 11,200pc increase over the previous period, says Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change (UNFCCC) from 2010 to 2016.

"This capital drought is impacting IOCs more than NOCs," says the former Costa Rican diplomat, adding that the largest insurers and financial agents are also pulling insurance instruments from the fossil fuel business.

"[Oil] is in greater competition each day with EVs [electric vehicles] and renewables, although 10 years ago this would have seemed like science fiction. An estimated 35pc of oil demand comes from cars and 5pc from power generation, so effectively 40pc of global oil demand could be replaced."

Growing pressure

Pressure is being applied on IOCs from multiple sources. Last year, the divestment movement challenged investors to reach $10tn of divested assets by 2020 in order to deliver on the goals of the Paris Agreement. In July, oil and gas companies listed on the London Stock Exchange were reclassified as non-renewable energy.

"40pc of global oil demand could be replaced" — Figueres

IOCs could forge a new path by reinventing themselves as broader energy companies, says Figueres. Firms must also focus on radical methane reduction strategies and make dramatic investments in natural carbon storage initiatives, such as huge re-planting initiatives.

Political lobbying against climate change regulation would undermine rather than strengthen majors' position in the long term, she warns. "By doing this, you risk losing your 'licence to operate'. Anger on the streets at climate change is beginning to be matched by the fact that equity valuations in the sector have been stagnant lately, despite so much investment."

Earlier this year, Norway gave the go-ahead for its $1tn sovereign wealth fund, the largest in the world, to undertake the largest fossil fuel divestment to date, by selling off more than $13bn in coal and oil investments, although it stated at the time that the divestment programme was aimed at reducing the country's exposure to oil market volatility.

Privileged position

Figueres challenges the argument that moving away from oil and gas would have a negative macro-economic impact, although conceding that there will be an "unavoidable transition of the business model".

She reassures the oil and gas sector that it is in a "privileged position" to confront the challenge. "You could, of course, use that position to continue to explore [for oil] and continue to provide more supply." Instead, while there is a tough road ahead, Figueres says, the industry is "very ardently looking at… light at the end of the tunnel".

"The industry really is grappling with the challenges ahead," she says, adding that this enthusiasm is vital because "we do not have an option of [not] reducing emissions to zero by 2050—it is a necessity to ensure humanity's survival".

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