The surge in climate activism demanding that Big Oil drastically cut emissions and shift strategies to investment in low-carbon energy instead of oil and gas could result in a surge in oil prices in the not-too-distant future. As much as environmentalists and activist shareholders want the major international oil firms to slash upstream investment further, the world’s energy system is not ready yet to deprive itself of the oil and gas resources that Big Oil is exploring and developing. As it stands, 80 percent of global energy is still being met by fossil fuels, and net-zero emission targets or not, the global transition to low-carbon sources of energy will take decades, not just years, and a shareholder meeting or two.
Last week’s rebuke of Big Oil’s current strategic direction sets the stage for some unintended consequences that climate activists may have overlooked.
These consequences include unintentionally giving OPEC even more control over the global oil market. National oil companies—in countries where environmental policies are much weaker than in the U.S. and Europe where the oil supermajors are based—will be all-too-eager to step up and fill in the supply gap.
Then, significantly reduced investments in developing new resources—which are already low after the 2020 oil price collapse—could lead to a supply crunch down the road. This will, in turn, result in an oil price spike when oil supply struggles to catch up with demand.
Some would argue that oil demand would fall anyway, and the world wouldn’t need as much supply as it did over the past decade. But there are currently no signs that oil demand is getting ready for a drastic fall, despite wishful thinking and net-zero scenarios, including the one from the International Energy Agency’s (IEA) bombshell report that suggested no new investment in oil and gas needs to be approved beyond this year’s commitments if the world is to reach net-zero emissions by 2050.
Investment in new oil will continue to be important, even if the world gets on the 2 degrees Celsius pathway. New low-cost, low-carbon barrels will be necessary in order to replace dwindling production from maturing fields, Wood Mackenzie analysts said last week. If these investments from international oil firms are insufficient, the national oil firms will step up to prove and commercialize new resources, WoodMac notes.
If Big Oil were to heed all the calls from environmentalists and the IEA’s suggestion of ‘no new oil and gas investment ever again’, oil supply would be severely constrained in a world that is only at the beginning of its energy transition and still needs oil and gas to function and support economies.
“If demand does not decline as rapidly as the IEA assumes in its scenario, and the supply side is simultaneously choked off, global energy provision could be threatened and lead to very high energy prices,” said the Norwegian Oil and Gas Association, the professional body and employers’ association of the industry. Norway, Western Europe’s biggest oil producer, has more stringent environmental standards than OPEC’s producing countries and pumps oil at one of the world’s lowest emissions levels.
In Europe, oil majors are preparing to reduce emissions and gradually slow oil production over the coming decades as per their net-zero by 2050 pledges. However, those firms are also aware of the fact that it will be oil and gas profits that will pay for their ‘energy transition’ portfolios.
“It’s nice to say that we need to stop producing oil, but if there are no longer enough projects or production, what will happen? Prices will rise,” Patrick Pouyanné, chief executive at TotalEnergies, formerly Total, told France’s Europe 1 radio on Monday.
Over the past decade, Big Oil’s reserves have dropped, but even Europe’s majors, all of which have pledged to become net-zero emission energy businesses, continue to rely on business models dominated by oil and gas sales, Rystad Energy said in a report last month.
“If reserves are not high enough to sustain production levels, companies will find it difficult to fund expensive energy transition projects, resulting in a slowdown of their clean energy plans,” said Parul Chopra, vice president of upstream research at Rystad Energy.
Big Oil had already awakened to the need to invest in low-carbon energy even before last week’s biggest wake-up call from shareholders and climate activists so far. Yet, aggressive reductions—or ‘keeping it in the ground’ as environmentalists demand—in future oil supply beyond the oil majors’ current plans would lead to oil price spikes. It would also leave most of the world’s supply in the hands of OPEC and Russia, where geopolitics is always in a state of flux and where emissions standards are not as high as in Big Oil’s home countries.By Tsvetana Paraskova for Oilprice.com