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To drill or not to drill

Producers’ view of the future may run the risk of complacency

The message sent to the fossil fuel industries by BP’s annual Energy Outlook—one of the world’s most respected sources of information on the future of energy—was, once again, a reassuring one.

Under its ‘Evolving Transition’ (ET) scenario, demand for fossil fuels would remain robust out to 2040. Oil demand goes up a bit, gas a lot more and coal falls a bit. This is comforting for oil firms, particularly for the many which are transitioning to predominantly gas firms. It is not news to coal producers, who are already finding new capital difficult to acquire. It would mean CO2 emissions are still rising by 2040.

The ET scenario assumes “government policies, technology and social preferences continue to evolve in a manner and speed seen over the recent past”. This is a very big assumption. It may not hold.

Under an alternative ‘Rapid Transition’ (RT) scenario, coal is nearly gone, oil is down a lot and gas is about the same as under ET. CO2 emissions have fallen sharply but are still more than half what they are today.

The Paris Agreement set the threshold for climate policy success: keep the global average temperature rise to below 2°C. For a reasonable chance of meeting this goal, the burning of fossil fuels must end by the middle of the century. The UK government has now set a target of net zero carbon emissions by 2050 to meet its Paris obligations—setting a global standard for climate policy which other nations may follow.

Neither the ET nor RT scenario, with their relatively comforting view of the future for oil and gas, come anywhere close to Paris compliance. They reflect a long held, if rarely mentioned, industry bet that the political cost to governments of a successful climate policy is too high.

It may be the wrong bet. Three important developments since Paris are changing the political equation on climate change. The political costs of climate policy success are falling just as those of climate policy failure are rising.

Opportunity is now a significant driver of decarbonisation. Renewable and battery technology costs are continuing to fall faster and further than anticipated. It is now likely that renewables will become consistently cheaper than fossil fuels early in the 2020s.

Public anxiety about climate change is rising rapidly. Greta Thunberg, Extinction Rebellion and Alexandria Ocasio-Cortes may be riding this wave, but its source is the increasing number of extreme weather events.

Authoritative new voices have entered the policy debate. Mobilised by a succession of speeches from Mark Carney, the governor of the Bank of England, central bankers have joined the climate conversation. Financial institutions and corporations are now under sustained pressure to disclose their climate risk exposure—when central bankers speak, investors and governments listen.

Compliance with Paris is now a commonly asked question at investor relations meetings, and to boards at oil and gas industry AGMs. A flow of oil firm announcements attempts to reassure their audience about the seriousness of their energy transition commitment. 

However, what the industry spends speaks louder than what it says. Systematic examinations of the risk of stranded assets to the industry by NGO Carbon Tracker have had considerable impact. Its latest report highlights that the majors had recently sanctioned $50bn of new investments that could not both earn a return and be Paris compatible.

Nor is climate change the industry’s only problem. Weak cash flows, meagre profits and slumping share prices are all the industry’s own doing. BP’s share price 22 years ago was a little under a 1997 ‘fiver’. Today it is a little under a 2019 fiver. More focus on peak value, rather than peak oil demand, might do both oil firm’s shareholders and the climate a favour. 

Tom Burke CBE is chairman of climate change think tank E3G. He was previously an advisor to Rio Tinto and BP, a senior advisor to the UK’s climate ambassador 2006-12 and served as a special advisor to three UK secretaries of state for the environment. He has been a director of Friends of the Earth and the Green Alliance. 

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