R.I.P. Big Oil? Why this week was monumental for climate action

Will Wednesday, May 25, 2021, be remembered as the death knell for big oil? Some say yes, calling it oil’s tobacco’s moment and the tipping point for forcing hydrocarbon companies towards climate action. It represents the most significant one-day shift in focus — and a win for shareholder activism and climate justice.

This week, what transpired for Exxon, Shell, and Chevron represent the rapidly shifting landscape for Western oil and gas companies and how quickly the operational and investor environment is changing and being disrupted. The hedge fund, Engine # 1 with backing from Blackrock, Exxon’s second-biggest shareholder secured two board seats with a direct aim toward aligning the company to reduce its carbon footprint and green its portfolio of assets away from hydrocarbons. Chevron must address Scope 3 emissions —  emissions resulting from not controlled or owned by the company.

Additionally, a Dutch court ordered Royal Dutch Shell to slash carbon emissions of its operations and products it sells 45 percent by 2030. The judge in the Shell case argued the company “violated a duty of care obligation,” and the company must be accountable for meeting climate goals and upholding human rights.

Shell will appeal, but the fact remains, this ruling represents a turning point with courts now open to the ruling not just on past wrongs but also on limiting future action, specifically restricting carbon emission increases. 

Disruption may be too simple a way to explain what’s currently happening to change the way oil and gas companies operate and how investors and society view their responsibility to act. Over the last few years, several Western oil and gas majors have done their code-switching and rebranding, transitioning away from integrated oil and gas companies to integrated energy companies, BP, Shell and others. Statoil is now Equinor, Danish Oil and Natural Gas is now Orsted, with most of its portfolio, focused on offshore wind and renewable energy. This week, Total shifted its branding to TotalEnergies, solidifying its new operational priorities around becoming a greener energy company.  

The demand side of the story is more complicated. Even after a year of COVID-19 forced lockdowns, the world still consumes a lot of oil, and the forecast is for demand to continue to rise, at least through 2025. In 2019, the world consumed more than 100 mbd of oil. COVID-19 shifted demand down to the mid-90s in 2020, but a rebound is already in play. Demand is expected to return to the low 100s by 2022.

With Western companies constrained to increase supply, the most likely scenario is that OPEC and other petro-states like Russia will fill the gap. Across OPEC + there is limited investor activism, and the courts are unlikely to limit or cap production to meet climate targets, at least in the near to medium term.   

The urgency of required change can’t be underestimated, this week the WMO forecast more temperatures rising above the 1.5 degrees Celsius threshold within the next five years. As countries and companies in the West take on more aggressive and ambitious climate statecraft positions and policies, the world’s petro-states will take advantage of the power play around climate and produce with abandon while the world still needs oil.

The most recent IEA report calls for a halt in oil and gas production in the next year for the world to meet 2050 net-zero targets but how likely is it that oil’s power players will act to limit production? 

Unlikely, so we can expect carbon emissions from fossil production to continue, although less from Western oil companies.

The other reality is that oil and gas producers, especially national oil companies, account for 75 percent of total oil production and 90 percent of reserves remain tethered to hydrocarbons. Many remain dangerously tied to resource revenues for their budgets. Although some are experimenting with how they transition away from dependency on funds from fossil fuels, most intend to produce while demand remains and not strand their resource assets.  

The good news is that the world is moving closer and closer toward decarbonization, but it’s a long road to 2050 and beyond. While the growing climate movement plays out across corporate boardrooms and production outlooks, big oil is not going away. It does have to change. The problem is that it won’t happen fast enough for all oil producers or the world.  

Carolyn Kissane, Ph.D., serves as the academic director of the graduate programs in Global Affairs and Global Security, Conflict and Cyber at the Center for Global Affairs and is a clinical professor. She is also the director of the SPS Energy, Climate Justice and Sustainability Lab.