The governor of the Bank of England, Mark Carney, warned last month of the danger that climate change poses to the future of energy companies. He pointed out that a carbon budget limiting global temperature rises to less than 2° Celsius would render between two-thirds and four-fifths of the world's proven reserves of oil, gas and coal "literally unburnable".
The observation is not new, but it is notable that such a prominent figure, heading the epitome of prudence and economic conservatism – a central bank – felt it merited a major speech.
The concept of a “carbon bubble” that climate regulations imminently endanger the valuation of oil and gas companies, and perhaps the stability of the financial system as a whole, is very shaky.
But it is undeniable that the need to act against climate change means that oil and gas companies, whether private or state-owned, cannot continue to exist in their present form, certainly not beyond a time horizon of 20 or 30 years.
Oil companies have enormous strengths in leading the transition of the energy system – huge financial resources, reputation, a global presence and many skilled engineers. But they also carry a heavy legacy – business processes, costly fixed assets and trained people designed to optimise the discovery and delivery of fossil fuels.
In the intensely competitive global market, made even more challenging by the plunging oil price, shareholders are quick to punish any perceived frivolity or diversion of attention away from the core business.
Tweaking that core business is the easiest route. Gas is the cleanest of the fossil fuels, and Shell's acquisition of BG further reinforces its position among the supermajors. Carbon capture and storage allows burning oil, gas and coal without emitting carbon dioxide, but has struggled in the face of indecision from governments and companies alike.
Oil companies increasingly use solar panels to power remote installations, and Petroleum Development Oman will commission the world’s largest solar thermal system to generate steam to recover heavy oil at its Amal field. But making alternative energy part of the core business, rather than an adjunct to it, would require a radical rethink and commitment from oil companies’ leaders and owners.
Environmentalists and others often lazily call for oil companies to turn to renewable energy, without considering that their business is not electricity, which wind and solar produce, but fuels. Many environmental groups, often hostile to big, multinational corporations in general, really want the oil companies to disappear. "These are not companies we would trust to bring us into a renewable energies future," a Greenpeace spokesman, Travis Nichols, observed.
Between 2000 and 2010, US oil companies invested about $9 billion in renewable energy, only a small part of their overall capital budget, but not an insignificant sum in itself. However, the supermajors have not enjoyed success in renewables: Shell exited a large UK wind farm in 2008, and BP sold its solar unit in 2011. France's Total, though, still has interests in solar, including the Shams 1 power plant in Abu Dhabi.
The most promising area for the oil companies has been bio-fuels, which fit easily with the existing business of refining and delivering petrol and diesel to motorists. But although Shell has a venture to produce ethanol from sugar cane in Brazil, most of the oil companies have scaled down attempts at making “advanced” biofuels from waste and non-food crops. Without these, greater expansion of conventional biofuels is a dead end.
National oil companies do not face the same pressure from shareholders and environmental activists, but they confront an even greater long-term challenge – as stewards of their countries’ hydrocarbon wealth. Over the coming decades, private and state oil corporations need a way to use their petroleum resources responsibly, while at the same time building an entirely new business.
Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.
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