Industry urged to address climate change more aggressively

Oct. 9, 2019
The global oil and gas industry needs to take more aggressive steps as it cautiously tries to address global climate change, speakers said during an Oct. 8 discussion at the Center for Strategic and International Studies.

The global oil and gas industry needs to take more aggressive steps as it cautiously tries to address global climate change, speakers said during an Oct. 8 discussion at the Center for Strategic and International Studies. “I see climate change as the largest single issue facing the oil and gas industry,” observed Sarah Ladislaw, a CSIS senior vice-president who directs its Energy and National Security Program.

“There are clear policy signals as clean energy and renewable energy costs are dropping significantly. There’s also investor pressure as shareholders are launching a variety of resolutions, some of which sparked conversations between investors and companies,” said Ladislaw, who moderated the discussion, which coincided with the release of a recent CSIS report.

The report, “Oil and Gas Industry Engagement on Climate Change: Drivers, Actions, and Path Forward,” tries to explore how oil and gas companies are trying to address the issue, how their strategies fit with overall needs of an energy transition, and whether they can do more to help solve the problem.

“While a number of companies are discussing how to address climate change, not all of them are taking the same approach,” Ladislaw said. “Some are moving aggressively. Others are being more restrained. And, finally, there are some folks who aren’t engaged.”

She noted that strategies fall into three broad categories: emissions reduction, research and development, and consideration of non-oil and gas activities as investment alternatives. “Oil and gas companies also are polling resources to have an impact, such as their formation of the Oil and Gas Climate Initiative [OGCI],” Ladislaw said. “This potentially could lead to cases where the sums are greater than the individual parts.”

A US-European division

“We’ve been tracking investments by companies in the last 15 years and found there have been some zigs and zags, notably from European-based companies. More recently, approaches have become more consistent although there’s still a clear division between US and European companies,” said David Victor, an international relations professor at the University of California at San Diego and director of its International Law and Regulation laboratory.

Royal Dutch Shell PLC, BP PLC, and Total SA all have said they want to become more heavily involved in electricity generation, Victor said. US companies are focusing more on reducing emissions from operations, including oil and gas extraction, he said. “One question is how investors will feel as companies focus on power generation, which doesn’t offer the kind of returns oil and gas exaction does,” he indicated.

Victor said he attended OGCI’s annual meeting 2 weeks earlier in New York and came away impressed from the closing session because real questions were asked and answers were given. “I don’t think many people among the general public realized getting gas out of the ground creates carbon dioxide and other emissions,” he said. “They tend to think more about emissions from passing cars and trucks.”

Ethan Zindler, who heads Americas operations at Bloomberg NEF in New York, said, “I think that firms which have been to act are motivated by being able to continue to operate. If this is just a compliance problem, you could look at the marginal price of carbon. But if this is an existential question, specifically how your firm is going to survive, it becomes more urgent.”

The basic reason the industry has not been able to speak with a single voice is that it does not have one, Zindler said. “Oil and gas companies have traditionally allocated capital for very high returns on very high risks. That’s why so many are tinkering around the edges,” he said. “If the climate change issue was confined within fence lines, it would be easier for the industry to address. But if a firm is worried about a continued license to operate, it will need to address how its products are used.”

An adaptation challenge

“All companies need to look at what will be happening in another 10-30 years and find ways to adapt,” suggested Tracey Cameron, senior manager for corporate climate engagement at Ceres, a Boston-based environmental sustainability research firm. “For some, they may not have a future. They need to find how to increase returns to shareholders but may not be able to keep growing.”

Cameron said the investors with whom Ceres works are focused on engaging with companies. “Divestment is an option they’re not looking at, but as they encounter companies which are not inclined to engage, it’s becoming more attractive,” Cameron said. Energy firms’ prominence within the Standard & Poor’s Index of 500 leading publicly traded companies has dropped significantly, she added.

Zindler said, “Some companies are boosting their dividends. The ones in the oil and gas business used to be considered risky, but with good dividends. That could change as companies like Shell invest more in electricity generation and vehicle recharging, neither of which offer such high returns to shareholders.”

Victor noted, “One problem will be determining whether a company is part of the problem or part of the solution. That particularly could affect divestment questions. Firms that hold resources underground are repricing their valuations. The projections will affect values.”

Cameron stated, “Three years ago, oil companies weren’t talking about carbon capture and storage. They are now. It’s starting to seem like more of a reachable goal. We’re also beginning to see a lot of public commitments to begin combating climate change.”

Contact Nick Snow at [email protected].