Can hydrocarbons survive the tobacco scare?

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The legal battle against climate change and perpetrators of carbon emissions seems to have finally caught up with the big players in the oil and gas industry. It is of course threatening the hydrocarbon industry, as big Oil receives blow after blow.

For a long-time, big oil majors have been in denial, refusing to accept that their business contribute to about 70 percent of the world’s carbon emissions. Numerous tactics such as funding climate-denial research, campaigns and influencing governments’ stance on climate have helped these companies do little about the problems they helped to create. Fortunately, growing awareness within the investor community and pressure from activist as well as pressure on governments especially in developed countries is preventing fossil-fuel players from getting away with their actions.

It was reported by OilPrice.com that a Dutch court on Wednesday 26 May 2021 ruled that Royal Dutch Shell PLC is partially responsible for climate change and ordered the company to reduce its carbon emissions. This is a pre-eminent ruling that adds new pressure on oil-and-gas companies currently facing increased scrutiny from investors and governments.

The ruling, which comes from a lawsuit brought by environmental groups Friends of the Earth, pronounced that Shell, must reduce its carbon emissions by 45 percent by 2030, compared with 2019 levels. This is in accordance to United Nations (UN) counsel for member states aimed at preventing global temperatures from rising more than 1.5 degrees Celsius above pre-industrial levels as agreed upon in the Paris agreement.

On the same day, two other oil giants, ExxonMobil and Chevron, both received some massive blows. A small hedge fund sprang a surprise on ExxonMobil Corp by unseating at least two board members. The move was a quest to force the company’s leadership to address its consistent refusal to adjust its business strategy to match global efforts to combat climate change. The success by the hedge fund, Engine No. 1 surprised the fossil-fuel industry, which is already struggling to address increasing investor concerns about global warming.

ExxonMobil and other American majors have been behind their European counterparts in their response to climate change concerns and it is not surprising that as their global rivals are cutting down on fossil fuel investments, it is doubling spending to boost its output and forecasting many more years of oil and gas demand growth.

A majority of shareholders in Chevron also supported the “Follow This” climate resolution with Sixty one (61) percent of shareholders in Chevron voting for the proposal to encourage the company to reduce all of its emissions. The result follows victories for the Dutch activist group earlier this month at ConocoPhillips and Phillips66 where 58 percent and 80 percent respectively of shareholders voted for a similar “Follow This” proposal.

The mission of the “Follow This” resolution is to oblige oil and gas companies to stop climate change by channeling their brains and billions to renewable energy. It is believed that the way to break the resistance by the Oil companies is to cause change from within― through shareholders, because they determine the path a company should take. If they demand change, the company will listen.

These events are serving as examples of the paradigm shift in the oil and gas industry, and lawyers as well as consultants are of the opinion that the ruling against Shell even though it stands to be appealed could set a precedent in other jurisdictions, especially in Europe, exposing oil companies to new legal peril over their carbon emissions. Companies in other heavy polluting industries could also face stronger environmental scrutiny. Going forward, it will no longer be economic motivation forcing the hands of the oil majors to do more in the fight but the social and moral duty being demanded.

The Tobacco similarities

The fossil-fuel industry over decades have towed the path of the Tobacco industry becoming the new tobacco. Just as the Tobacco industry spent millions discrediting studies and creating doubt in the minds of people about the true undeniable effects of tobacco on our health, the Oil industry adopted the same techniques, to make light the scientific findings and to dismiss them even when they knew the truth.

Recently, secret documents were leaked showing what the energy industry knew about the links between their products and global warming. In the 1980s, ExxonMobil and Shell carried out internal assessments of the carbon dioxide released by fossil fuels, and forecasted the repercussions of these emissions on the planet. There was no dispute about the linkage between their products, global warming, and ecological calamity. However, failure to notify governments of their research among other faults is what has landed a company like Shell where it is today.

One can draw more than one similarity between the Tobacco industry and the Fossil-fuel industry. Firstly, both industries thrive on products (tobacco and fossil-fuels) initially seen as harmless but increasingly understood as posing significant health and environmental risks, not just to direct consumers but the public. We can also look at it from the point of the public nature of the cost of their activities; public healthcare costs because of treating tobacco-related disease, and the public reactive costs that are expected to due to climate change.

It is an undeniable fact that the Big Oil companies can single-handedly make or destroy the Paris Accord. Only the biggest industry players have the financial strength, technical knowledge and market-making opportunities to rapidly scale up an energy transition to alternative energy sources.

The Scare

The International Energy Agency (IEA) put out a report about a month ago laying out a roadmap to get to Net Zero by 2050. To be able to meet the goal set in the Paris agreement, the report spells out that there must be no new investments in fossil fuel development.

At this point, only concrete actions towards hydrocarbon producers would compel oil majors to make the necessary shift in investments from fossil fuels to renewables and make their proclaimed fight against the climate crisis relevant to the subject matter.

The growing pressure from climate activists, the growing awareness within the investor community and the pressure on particularly governments of developed countries is preventing fossil-fuel players from getting away with their actions. It is becoming quite scary for major oil producers; as these and other actions may threaten the survival of the industry, just as it happened to the tobacco industry some decades ago.

To compel the hydrocarbon industry to divest from oil and gas, banks and institutional investors on their part are pumping money into renewable energy projects so “green” energy may dominate the future energy architecture on a global level, to supplement and eventually substitute the more polluting fossil fuels.

In addition, banks and other financial institutions are growing reluctant about continuing to provide funding to oil and gas companies, in a bid to curb their exposure to the sector. With the “green” recovery gaining traction, energy financiers are smelling the new opportunities, and are following the money.

Recent data released by Mercom Capital indicate that global corporate financing (including venture capital funding, public market, and debt financing) for just the battery storage, smart grid, and energy efficiency sectors in the third quarter of 2020 came to US$3.2 billion compared to US$1.2 billion in the first 6 months. The funding translate into 777 percent increase compared to the US$365 million raised by companies in these sectors in same quarter 3 for 2019. According to Goldman Sachs, the spending in renewable energy would surpass oil and gas for the first time ever in 2021, and projects total investment spiking US$16 trillion over the next decade. The bank sees green energy investment accounting for 25 percent of all energy spending in 2021.

The IEA sees the growing interest by capital markets in sustainability, marked by three broad trends; investor pressure focusing corporate attention on climate-related risks, growing need to identify and evaluate financial risks posed by the energy transition, and new efforts to better classify sustainable investment and avoid greenwashing.

Fighting from the energy angle

There are accepted and scientifically proven approaches to fight global warming especially from the energy point of view. Ultimately, we have to cut emissions of carbon dioxide and heat-trapping gases that are the main drivers of global warming. The solution remains, using alternative clean energy resources and promoting energy efficiency. By this, we prevent future emissions and decouple energy demand from economic growth. Moreover, by working together, renewable energy and energy efficiency alone can deliver around 90 percent of the energy-related CO2 emission reductions needed to reach our climate targets.

Aside reducing our emissions, we need to remove the carbon dioxide already in the atmosphere because according to a report by Oxford University, most carbon offsets available today which are emission reductions, may not be sufficient to achieve net zero in the end. The simplest and easiest ways would be planting new forest or restoring old ones. Other advanced practices and technologies can improve the rate of CO2 removal. They include direct air capture and carbon capture and storage. However, Carbon capture, utilization and storage (CCUS) technologies are the very expensive approach to carbon removal and may soon be the future cost of the world’s current and continuous use and indulgence in fossil-fueled activities.

Energy transition as an approach to fighting global warming, is creating a new era in the energy market led by clean resources specifically renewables. The Big Oil companies can push and grow this market. Having the needed technical know-how, market-making experience and financial muscle, the Big Oil majors and players can drive investment into renewable energy and carbon offset technologies and ultimately met the net zero emission target. I hope that the rising awareness at the shareholder level would rapidly scale the transition from fossil fuels to renewable energy.

>>>Elizabeth is an Undergraduate from Kwame Nkrumah University of Science and Technology with a Bachelor’s of Science degree in Petroleum Engineering. She is also an analyst at Institute for Energy Security

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