Oil and gas companies “ought to be leading the charge” in the green energy transition, says US Climate Envoy John Kerry. Putting aside the peculiarity of the US government telling the private sector how to spend its money, expecting Big Oil to disrupt the energy industry is foolish — and counterproductive.
Eastman-Kodak didn’t invent digital photography; and the Underwood Typewriter Co. didn’t develop the keyboard I’m typing on. Disruptors did. Incumbents are bad at innovating. For the very same reason, the likes of Exxon Mobil Corp., Chevron Corp. and Shell Plc are unlikely to lead the energy transition.
At least, not in the way that most policymakers envisage.
In the run-up to the COP28 climate summit, the International Energy Agency argued for a bigger role of the fossil-fuel industry in the energy transition — a message similar to Kerry’s. In its The Oil and Gas Industry in Net Zero Transitions report released in late November, the agency said the industry faced “a choice” with trillions of dollars worth of investments at stake: “The uncomfortable truth that the industry needs to come to terms with is that successful clean energy transitions require much lower demand for oil and gas, which means scaling back oil and gas operations over time – not expanding them.”
The warning isn’t sinking in. So far, less than 1% of global clean energy investment comes from oil and gas companies. Of that, more than half came from four companies: Equinor ASA, TotalEnergies SE, Shell and BP Plc.
IEA executive director Fatih Birol told me he wanted Big Oil to help with the transition in two areas. First, he says the industry needs to reduce the emissions linked to pumping, transporting and refining oil and gas. I agree with him. Routine methane leaks and, above all, flaring, should stop. (The IEA estimates that flaring accounts for 140 billion cubic meters of gas — nearly double the amount that Germany consumes every year.) And it can stop — sooner than the 2030 that the industry has proposed. Governments shouldn’t tell companies how or where to spend their money, but they can punish – or reward – them via taxes and subsidies. Methane is an area where government should use the stick and carrot approach to encourage investments.
Second, Birol wants Big Oil to “embrace” the clean-energy economy, investing in areas like offshore wind and electric-charging points. He sees Big Oil companies devoting as much as 50% of their spending to green projects. Birol acknowledges that underinvesting in fossil fuels would be a problem, but the IEA believes the risk currently is skewed to overinvesting. I tend to disagree.
Where to invest depends on the profit – and, for now, oil and gas is vastly more profitable. A few years ago, BP and Shell announced big plans to invest in green energy, while scaling down fossil fuels. Since then, returns have disappointed, and both companies have turned back to a petroleum focus. If Big Oil can’t make stronger returns, it’s unlikely to devote the capital that would trigger innovation. I see few areas where it has a distinct advantage; perhaps in hydrogen and carbon capture – but I doubt the importance of both for the transition beyond niche hard-to-decarbonize sectors. Even in electric-vehicle charging, often touted as an evident adjacent area to the fuel marketing business of Big Oil, I’m skeptical. As battery range improves, electric cars will be charged at home and on the street, and only seldom on fuel-stations-turned-into-EV-stations.
Second, I worry that shifting so much spending into green energy now, while oil demand remains healthy, could risk much higher and volatile prices in the future, eroding public support for the transition. Voters support fighting the climate crisis, but few are prepared to pay for it.
Under current policies, the world still needs more – not less – oil over the next seven-to-10 years. After that, consumption will start a very gradual decline, more similar to a plateau than a cliff. As I’ve written in the past, I’m skeptical that global oil demand would drop at the pace envisaged on the net-zero scenarios. It is almost 2024, and oil demand is still rising.
The potential for years – if not decades – of healthy oil demand means that there’s little incentive for Big Oil to go head-to-head against any green disruptor. Julian Birkinshaw, a professor at the London Business School, argued in an article in the Harvard Business Review about business disruption, that fighting back is the appropriate response for a company if a new technology “represents an existential threat to the firm” — and that “isn’t true very often.”
Although Birkinshaw focused on digital disruption, his reasoning applies to fossil fuels, too. Rather than fight green energy head-on, the best strategy for Big Oil is to retrench to its core expertise. That’s the approach of Exxon, Chevron and, to some extent, Shell are taking now.
Energy and climate policymakers don’t need to worry about Big Oil. Let it retrench to do what it does best: providing plentiful supply while demand is still there. Put the focus, however, on cleaning up that supply. In the meantime, its dividends to shareholders can provide the cash to finance green investments. Leave innovating to the innovators. The huge growth of the solar industry, with minimal Big Oil backing, is testament of the ability of the green industry to go it alone.
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Mort Laitner
Rami G Khouri
Ali Fathollah-Nejad
Nikkei Editorial
visit website
