Solutions Key for Industry to Get Climate Seat

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Investor Climate Demands Still Rising
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Last month’s COP26 climate talks made one thing clear to the oil and gas industry: It no longer has a direct seat at the global climate policy table. Oil companies were excluded from formal events and found limited reception on the sidelines. Oil and gas may still have a meaningful role in the future energy mix, even under aggressive net-zero scenarios, but politicians, bankers and activists now carry much more influence on key decisions. What, if anything, can the industry do to reclaim that seat? The industry is carrying some heavy baggage that will make this hard, but not impossible. Convinced of its staying power and distracted by high oil prices in the 2000s, the industry was late to recognize the seismic shift under way in society’s relationship with energy. Affordability and reliability remain key, but addressing climate change is now the priority. Put simply, after years of slow progress — or, in activists’ eyes, outright obstructionism — society has decided that it wants to control energy decisions, given the high stakes. “You can’t have a strategy that’s dependent on society failing at its goals,” Chris James of investor activist Engine No. 1 said of Exxon Mobil.

A first step is to recognize that society has the right to set energy priorities, and that the industry should support these rather than try to persuade otherwise. Here, significant headway has been made in the last two years. At last week’s World Petroleum Congress, some prominent voices still warned of the follies of the energy transition’s trajectory, but this camp is shrinking. A majority of leading producers stressed that the transition is essential and deserved active support, even if they emphasized a need for “balance.” Notably, most executives blamed oil and gas supply-demand dynamics for driving prices materially higher this year, rather than the transition.

Some progress has also been made on the next step — embracing true, two-way engagement. The industry sometimes trips up on its tone — perceived by critics as lecturing or worse — but companies like Royal Dutch Shell, BP and Occidental are making a sincere effort to talk, and more importantly listen, to a broad range of stakeholders. Bjorn Sverdrup of the Oil and Gas Climate Initiative and Equinor’s head of corporate sustainability likens the industry’s relationship with society to a troubled marriage. “If you’re having difficulties … [don’t] always point to others as being part of the problem,” he told last week’s conference. On the sidelines, he told Energy Intelligence that the industry must also adopt a more constructive tone and expand the range of stakeholders it engages with. Other delegates agreed that the industry needs to break free from its “echo chamber,” with some suggesting it establish partnerships outside the sector to build allies.

A third vital step is to build credibility with tangible action. Quick gains could come from rapid reductions in methane emissions and flaring, committing larger percentages of capital expenditure to low-carbon ventures, and making clear progress on major projects, including carbon captureResistance, foot-dragging or lobbying against clean energy can weigh heavily on this credibility, some executives privately complain. Even efforts to push against specific policies over differences on mechanics can provide bad optics.

All is not lost. The argument for an “all of the above” approach to decarbonization could be compelling, given the scale of the challenge involved in reinventing the world’s energy sector. The industry is right to point out the challenges of balancing supply and demand, and the risks of getting this wrong. But focusing on the flaws of the transition will not reset the relationship. To regain its seat, some argue, companies must listen to society’s objectives and challenges, and put forward solutions that extend beyond calling for more investments in oil and gas. If the pace of the transition is throwing up problems, is slowing things down the only answer? Are there other pathways the industry could bring forward to help keep global temperatures well below 2°C? Could the industry rethink its resource development to shorten life cycles and build more flexibility into the system — and broadcast this as a constructive solution? If oil and gas supply is being undermined more quickly than demand, is blaming policymakers the best course? Could companies more actively engage on actual steps to tackle demand, and articulate how they could shift out of oil and gas more rapidly if these are successful? This may feel awkward and counterintuitive — why should any company work to undermine its core product? But if the industry truly wants that elusive seat at the table, bold steps are needed.

Topics:
Low-Carbon Policy, Policy and Regulation, ESG
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