Core Insights: Sustainability

The global oil and gas industry has been gradually recovering from the COVID-19 induced devastation, but in late May 2021 it was rocked again by a series of landmark events.

The Hague District Court in the Netherlands ordered Royal Dutch Shell, one of the world’s largest oil majors, to reduce its carbon dioxide emissions by 45 per cent by 2030 (from 2019 levels). It is the first time a fossil fuel company has been ordered to achieve specific climate targets, treating it more like a country than a corporation.

Since then, Shell CEO, Ben van Beurden, has announced that the company will “rise to the challenge” and accelerate its transition strategy in light of the court ruling. Shell is now considering a (partial) sale of its assets in the Permian Basin, the largest US oil field, where its holdings accounted for around six per cent of the company’s total oil and gas output last year.

On the same day of the Shell ruling, across the Atlantic, two other industry giants, Chevron and ExxonMobil, faced shareholder revolts during their Annual General Meetings (AGM). ExxonMobil shareholders voted in three new members onto the Board of Directors who were proposed by activist hedge fund Engine No 1 and opposed by ExxonMobil’s management. Chevron shareholders backed a motion calling for a substantial reduction in the company’s emissions, including from the products it sells (so-called Scope 3 emissions).

Others are feeling the heat too. The French major Total had to fend off an investor rebellion at its AGM, while similar shareholder campaigns are underway at BP and Shell.

These events followed stark warnings from the International Energy Agency (IEA) earlier in May 2021 that there is no room for new fossil fuel developments if the world is serious about reaching net-zero emissions by 2050.

As part of our ongoing research, funded by the UK Energy Research Centre (UKERC) we are examining how ‘Big Oil’ is strategising in the face of the increasingly existential threats that climate change and the nascent global energy system transformation pose.

In that context, we have introduced the 'transition strategy continuum' to conceptualise and categorise differences in strategy. While some are reckoning with the challenges, particularly European majors, others, like ExxonMobil and Chevron, have remained fairly reluctant to change.

May’s developments add a new dimension to the risks Big Oil is facing as it reflects on intriguing ‘new’ ways of climate activism: climate litigation and investor activism. What does this mean and what will be the implications?

Although ‘Greta-inspired’ protests have proven their worth in recent years, long gone are the days when climate activism was associated with ‘tree-huggers’, street protests and civil disobedience campaigns alone. Instead barristers, executives, asset managers and bankers have stepped in.

Research shows that climate litigation has expanded in scope and geographical coverage, increased in volume, and accelerated significantly since the 2015 Paris Agreement. Both businesses and government are under pressure.

For example, the Shell ruling follows only a year-and-a-half after the widely covered Urgenda case in the Netherlands, when the Supreme Court ordered the Dutch Government to improve its emissions reduction measures.

Will the NOCs join the transition to net zero?

For Big Oil, this could well be their ‘Tobacco Moment’, as they are being held accountable for accelerating a public health crisis (climate change) and are ordered to change course. Now, a case similar to the one against Shell has been filed against Total in France, while in the US courts, multiple cases are seeking compensation from fossil fuel companies for climate damages.

Investor activism against Big Oil is on the rise as well. The case is simple: there is both a moral imperative and a compelling economic argument for climate action. In 2011, a little-known financial think tank, the Carbon Tracker Initiative, warned the world that financial markets might be inflating a ‘carbon bubble’, similar to the housing bubble that lead to the Global Financial Crisis a few years before. Fast forward a decade and the global fossil fuel divestment campaign has inspired hundreds of institutions to (partly) redirect trillions in investments away from fossil fuel and other carbon-intensive assets.

Meanwhile, without resorting to selling their assets, activist shareholders are holding Big Oil boardrooms accountable for their poor financial performance over the years, as well as their overall strategic unpreparedness for global energy system transformation. They want to change the industry “from the inside”.

Engine No 1 has secured support from some of the most powerful institutional investors in the world, including asset managers BlackRock and Vanguard, through its carefully crafted financial frames around (climate) risk management, returns-on-investment and capital allocation discipline. By using language familiar to the financial community, climate activists can succeed in forging unlikely coalitions with powerful pension funds, asset managers, insurers and even central banks.

The latter, like the Bank of England, are now increasingly concerned with ‘transition risks’ as some sectors of the economy are facing big shifts in asset values or higher costs of doing business, which could spill into wider systemic financial instability. All of this adds new dimensions to the challenges Big Oil is grappling with.

Yet, there is still reason for scepticism. Shell, for example, has already announced its intention to appeal the judgement. Many other similar climate lawsuits have failed in the past and critics are pointing out that judges cannot replace democratically elected politicians or policymakers in setting emissions reduction objectives.

The boardroom shake-up at ExxonMobil is important, but it is highly unlikely that it will immediately and drastically alter the company’s course. The same goes for Chevron. But effectively managing a company in the context of climate change and global energy transformation does require a seismic shift in its operations, strategy and long-term vision. So far, these companies have not shown a very proactive attitude.

Perhaps most importantly, these climate successes are mostly taking place in the West. As long as demand remains robust in the future, other producers, notably state-owned national oil companies (NOCs) will gladly step in. This is the so-called ‘perfect substitution’ argument. At the OPEC+ meeting of June 1, 2021, Saudi energy minister, Abdulaziz bin Salman, dismissively referred to the IEA’s net-zero roadmap as coming from “La La Land” and ask: “Why should I take it seriously?”

NOCs such as Saudi Aramco, Qatar Petroleum or Gazprom in Russia, control two-thirds of global reserves and produce half of the world’s oil and gas. In comparison, according to the IEA, the Oil Majors’ share of reserves was 12.3 per cent in 2018, 13.9 per cent of production, and 15.6 per cent of investment.

NOCs have kept the cheapest and least-carbon intensive oil to themselves, so their operations will go on the longest in a carbon-constrained world. On top of that, NOCs serve expressly political purposes, as the rents they generate are often used to maintain a social contract between governments and citizens. So, there is little incentive for them to change course.

In the IEA’s net-zero scenario, the Organization of the Petroleum Exporting Countries’ (OPEC) share of global oil supply will grow from around 37 per cent in recent years to 52 per cent in 2050. Such increased concentration of power over fuel supply chains comes with important geopolitical and economic consequences.

Climate campaigners have won a few important battles, but the war is far from over. Shareholder activism and climate lawsuits are powerful instruments in the toolkit to enforce a rapid and managed decline in the world’s dependence on fossil fuels.

As such, they are important sources of concern for fossil boardrooms. But in itself, these supply-side wins will have limited effect without significant interventions to curb fossil fuel demand. What happened in May 2021 should be a wake-up call for industry laggards in the West that without meaningful strategic changes, the chickens will soon come home to roost. 

See the original article at Geography Directions.

Further reading:

Kuzemko, C., Bradshaw, M. J., Bridge, G., Goldthau, A., Jewell, J., Overland, I., Scholten, D., Van de Graaf, T. and Westphal, K. (2020) "COVID-19 and the politics of sustainable energy transitions", Energy Research & Social Science, 68, 101685.

Connolly, R., Hanson, P. and Bradshaw, M. J. (2020) "It’s déjà vu all over again: COVID-19, the global energy market, and the Russian economy", Eurasian Geography and Economics.

Mathieu Blondeel is a Research Fellow in the Strategy and International Business Group. He teaches International Business on the suite of MSc Business courses and Business Immersion and Critical Thinking on MSc Management. He also lectures on the Global Environment of Business on the Undergraduate programme.

Michael Bradshaw is Professor of Global Energy and is a Fellow of the Royal Geographical Society. He teaches Managing in a New World and Managing Sustainable Energy Transitions on the Full-time MBA and Forecasting for Decision Makers on the suite of MSc Business courses.

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