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The Unintended Consequences Of Punishing Big Oil

·5 min read

The ‘day of reckoning’ for Big Oil, when events at boardrooms and courtrooms issued last month the starkest warning to oil majors’ license to operate yet, was hailed as a huge victory for climate activists.

But the climate celebration may be a bit premature.

Rebel shareholder votes at Exxon and Chevron and a court ruling against Shell delivered a blow to Big Oil in a single day, and environmentalists are ecstatic.    

But for all the glee that oil majors ‘got what they deserved’, climate activists may be overlooking the unintended consequences of shareholders punishing oil companies about their continued investment in oil and gas production.

‘Pyrrhic Victory’

The court and boardroom wins for climate enthusiasts could be a pyrrhic victory, because unless oil demand also drops, emissions may not fall, Jason Bordoff, the co-founding dean of the Columbia Climate School and a columnist at Foreign Policy, says.  

Global oil demand will continue to rise, probably for another decade, until electric vehicles (EVs) and other technologies—which are not yet to scale—undermine demand for fossil fuels.

As demand grows, the gap left by international oil majors, if they accelerate a shift away from oil and gas faster than they have planned under investor and activist pressure, will simply be filled by national oil companies. Those companies, held by the Middle East oil powerhouses such as Saudi Arabia, the United Arab Emirates (UAE), Iraq, or Kuwait, as well as Russia’s Rosneft, haven’t pledged any ‘net-zero energy company’ goals. Nor do they operate in major markets that have net-zero emission targets.  

While activists are focused on punishing international oil majors, the national oil companies will not be sitting on the fence drafting net-zero strategies. They will step up to explore for and extract more oil and gas because, first, the world still needs fossil fuels. And second, because oil revenues are the pillars of government budgets and the social contracts in major Middle Eastern economies, including that of the world’s largest oil exporter, Saudi Arabia.

Moreover, how many shareholders would demand climate action at Saudi Aramco or Abu Dhabi National Oil Company (ADNOC), considering that the state holds (nearly) all the shares in each of those oil giants? Would Greenpeace activists dare breach a court order and board a rig offshore Saudi Arabia, as they have done several times in the North Sea in recent years?

Emissions Pledges

The primary goal of recent climate activism, leaving aside the radical ‘keep it in the ground,’ should be forcing a change in the emissions profile of oil and gas production and planning for a future where oil demand may not be rising year after year.

All international majors have pledged to cut emissions, but environmentalists don’t think those are enough.

The easiest and certainly the cheapest way to cut emissions from oil and gas production is to reduce oil and gas production. Yet, if Big Oil slashes production based on environmental wishes instead of on plans for gradual deceleration of investment in fossil fuels, Saudi Aramco and Rosneft will boost their output, and the net outcome for society and the climate would be no emission reduction at all.

To be fair, Shell, BP, and Eni have said over the past year that their respective oil production would gradually fall over time as they plan to become net-zero energy businesses by 2050. Shell affirmed earlier this year its oil production peaked in 2019. BP looks to slash oil and gas production by 40 percent by 2030. Eni sees its oil production peaking in 2025.

All these pledges from oil majors would do nothing to reduce overall emissions from oil and gas globally because as long as there is growing or plateauing demand for oil and gas, there will be producers willing to offer supply. Just ask Saudi Arabia.  

Global Oil Demand Is Not Falling

Since oil demand is not showing any signs of falling anytime soon, a supply reduction from one international oil major will not reduce global emissions, Shell’s CEO Ben van Beurden said earlier this month.

The change the world needs toward low-carbon energy “must address the demand for carbon-based energy, not just its supply,” he wrote on LinkedIn in response to the court ruling which Shell expects to appeal. 

Related: Oil Rally Continues On Bright U.S. Economic Data

“To mention one, perhaps extreme scenario, imagine Shell decided to stop selling petrol and diesel today. This would certainly cut Shell’s carbon emissions. But it would not help the world one bit. Demand for fuel would not change. People would fill up their cars and delivery trucks at other service stations,” van Beurden said.  

If Big Oil was forced to cut production faster than it intends to, people filling up their cars would likely mean that producers like Saudi Arabia and Russia would own an even greater share of the oil market. Moreover, persistently low investment in oil and gas from international majors will give OPEC and its allies led by Russia more license to pump more oil to meet global demand and “stabilize the oil market.” In other words, OPEC+ would have all the more reasons to step up and fill the gap and prevent the world from running “the risk of facing an acute deficit of oil and gas,” as Rosneft’s CEO Igor Sechin said earlier this month.

While Big Oil fights climate activists in the courtrooms, OPEC+ will gain an ever greater geopolitical influence and will step up production, hindering the global fight to reduce emissions from oil and gas operations and the use of fossil fuels.

By Tsvetana Paraskova for Oilprice.com

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