Getting squeezed: International oil companies have been at the receiving end of shareholder opposition and legal pressure to accelerate climate action and decarbonisation efforts | Photo: Raconteur

National oil companies to torpedo oil’s big turning point?

The climate action spotlight that had so far remained focused on coal seems to be dilating to include oil and gas, but a hasty move away from fossil fuels remains far from a foregone conclusion.

May turned out to be one of the worst months for Big Oil. Last week, oil and gas giants Shell, Chevron and Exxon each received monumental setbacks from courts and investors over their “non-concrete” climate policies. A Dutch court ordered Shell to halve emissions, Exxon lost two board seats to activist investors, and shareholders forced Chevron to lower emissions and account for burning their fossil fuel products.

A week earlier, the International Energy Agency (IEA) stated, in the clearest terms so far, that oil and gas investments will have to be stopped if global warming is to be limited to the lower Paris Agreement threshold of 1.5°C. IEA’s net-zero pathway for the energy sector is expected to add to the pressure on the world’s biggest economies to cut funding for oil and gas in the run up to the G7 meeting to be held in a week’s time. But while Big Oil is finally feeling the heat from climate change thanks to courts and investors, gaps left by private firms are likely to be filled by their national counterparts, experts warn. 

Goliaths falling all around

Last December, in a David versus Goliath contest, a small hedge fund named Engine No. 1, with a tiny $40 million stake in ExxonMobil, revolted against the company’s inadequate climate policy. Six months later, two directors backed by Engine No. 1 were elected to the company’s board by shareholders, against the wishes of company management, over concerns that the firm is failing to transition to clean energy and its miserable recent financial performance. 

A study by climate scientist Geoffrey Surpran revealed that ExxonMobil used rhetoric of climate “risk” and consumer energy “demand” to construct a “Fossil Fuel Savior” (FFS) frame that downplayed the reality and seriousness of climate change, normalised fossil fuel lock-in. The study pointed out that a risk is something that may or may not happen, so in talking about the risk of climate change, ExxonMobil implied that it was not a reality — even after scientists had clearly demonstrated that it was underway and doing damage. Experts say even today ExxonMobil, Chevron and ConocoPhillips refer to damage caused climate change as a “risk” rather than reality.

And it isn’t just Exxon that is facing the ire of activist shareholder groups. Last month, BP managed to fend off pressure from Dutch shareholder activist group Follow This, which argued that the oil giant was not doing enough to address its emissions. BP has been among the more ambitious oil and gas majors when it comes to climate change, with a plan to reach net-zero emissions by 2050. Still, this has not saved them from critical scrutiny from large investors and shareholders. Last week, asset management firm BlackRock, which owns 6.8% equity in BP, announced that it was backing the Follow This resolution against the BP board. 

While drama was unfolding in Exxon’s board room, Shell was receiving a body blow of its own in a Dutch courtroom in the Hague. Shell, already facing the ire of shareholders, was ordered by a Dutch court to cut emissions by 45% on 2019 levels by 2030. Campaigners say the court order to Shell to cut emissions in line with the Paris Agreement has significant long-term implications on the oil and gas industry. The verdict questions their entire approach to business and it may force them to spend less money looking for new oil and gas.

Campaigners note that the whole fossil fuel business model is based on an assumption that climate commitments are non-binding, and that’s what the companies communicate to the shareholders, but this ruling will change that. If shareholders and courts make it impossible for oil and gas companies to operate, the so-called non-binding Paris deal will become a binding reality.

Roger Cox, lawyer for the Dutch environmental organisation Milieudefensie, expects the Shell verdict to have a global impact. “People around the world are getting ready to follow our example and take oil companies to court. And that’s not all. Oil companies will become much more reluctant to invest in polluting fossil fuels,” he said. 

The ruling, while significant, has not come out of the blue. The Dutch government has twice lost legal battles in the Dutch courts and was forced to raise emission reduction targets from 17% to 25% to match the UN target (25%-45%) for developed countries. The court had rejected the government’s argument that there was a huge gap between international obligations and what would actually be needed to meet the 2℃ target saying that the country agreed that measures should be taken to limit temperatures and it does not take away the state’s “independent duty of care” to protect and improve living environment.

Experts see the new Shell verdict as a massive win for future generations in the battle against fossil fuels. “The decision marks several legal firsts with global implications. It is the first time that a court has found that a company has a legal duty to reduce its greenhouse gas emissions in line with the goals of the Paris Climate Agreement. It is also the first time that international human rights standards have been used to inform a binding emissions-reduction obligation for a company. Just as importantly, the court set a new precedent by scrutinising and rejecting some of the most common arguments used by the fossil fuel industry to justify its business model,” writes Tessa Khan, human rights and climate crisis lawyer. Khan had argued against the Dutch government in a landmark 2019 case that saw the Supreme Court of Netherlands order the government to cut its greenhouse gas emissions.

The IEA clarion call to end fossil fuels

Last month, IEA released the world’s first comprehensive study on how to transition to a net-zero energy system by 2050. According to the report, no new investments in oil and gas projects should be approved if the world is to reach net-zero emission targets by 2050 and limit warming to 1.5°C. It also predicts that by 2035, there will be no sales of new internal combustion (IC) engine passenger cars, and by 2040, the global electricity sector will have already reached net-zero emissions.

The special report is designed to inform the high-level negotiations that will take place at the 26th Conference of the Parties (COP26) of the United Nations Climate Change Framework Convention in Glasgow in November.

The IEA report goes on to say that commitments made by countries till date are not enough to achieve the global pathway to net-zero by 2050. More countries have joined the race to net-zero emissions, however, most pledges are not underpinned by new-term policies and measures. Even if the countries successfully achieve their pledges, it would leave around 22 billion tonnes of CO2 emissions worldwide by 2050, the IEA report states.

According to the IEA’s pathway, the share of fossil fuels in the global energy supply would need to fall from around four-fifths currently to one-fifth by 2050. Solar and wind energy capacity, on the other hand, would have to be expanded rapidly. The report emphasises that advanced economies need to reach net zero before emerging markets and developing economies and assist others to fulfil their targets.

“The clean energy transition is for and about people,” said Dr Fatih Birol, IEA executive director. “Our roadmap shows that the enormous challenge of rapidly transitioning to a net zero energy system is also a huge opportunity for our economies. The transition must be fair and inclusive, leaving nobody behind. We have to ensure that developing economies receive the financing and technological know-how they need to build out their energy systems to meet the needs of their expanding populations and economies in a sustainable way.”

Still a question of national commitment

Even as the impact of IEA’s report made waves, the World Meteorological Organisation (WMO) dropped another bombshell. According to its latest climate update, there is a 40% chance that the 1.5°C threshold is likely to be temporarily breached in at least one of the next five years — a clear sign that a longer term breach is imminent. While recent reports are expected to gain traction as the COP26 climate talks draw closer, an immediate impact was apparent on governments of G7 nations that are due to meet on June 11-12.

Although the G7 has been found to still spend heavily on fossil fuels, an official communique jointly issued by environment ministers of the G7 group, immediately following the IEA report, commits to a phase out of most support for fossil fuel energy. “We will phase out new direct government support for carbon intensive international fossil fuel energy, except in limited circumstances at the discretion of each country, in a manner that is consistent with an ambitious, clearly defined pathway towards climate neutrality in order to keep 1.5°C within reach, in line with the long-term objectives of the Paris Agreement and best available science,” says the communique. 

While the upcoming G7 meeting is now firmly in focus as developed nations feel the heat to end support of the fossil fuel industries, other oil producing nations reportedly sense an opportunity. According to experts, as long as oil demand continues to hold or grow, cut-backs by G7 nations and private industry will likely be compensated by national oil companies (NOCs), operated particularly by OPEC nations, which are not facing the same pressures to deliver on net-zero plans or shareholder dissent. With NOCs currently accounting for about half of the world’s total oil supply, experts warn that big government-run firms such as Rosneft (Russia), Saudi Aramco (Saudi Arabia), Gazprom (Russia), CNPC (China) PDVSA (Venezuela) and Petrobras (Brazil) will likely increase production to fill gaps left by private international oil companies. “Resource-holding governments will want to maximise the value of their oil and gas revenues through the energy transition. If IOCs [International Oil Companies] progressively narrow their geographical focus and keep budgets tight, NOCs will take more of a lead in proving up and commercialising resources,” writes Simon Flowers, chief analyst at Wood Mackenzie.

Another worry is the continued exploration and discovery of new oil fields, particularly around Africa, the North Sea and new areas opening up in the Arctic region. According to a report by the Natural Resource Governance Institute published in February this year, around $400 billion being poured into new exploration, primarily by NOCs, will not break even if the Paris Agreement target of limiting global warming to 2°C is to be met. This could grow to almost $1 trillion if decarbonisation efforts and carbon sequestration fail to pick momentum. Despite the pressure on Big Oil to back global decarbonisation efforts, industrial demand for oil remains an unresolved issue. Aligned sectors such as petrochemicals, plastics and other heavy industries are yet to find viable fuel alternatives even though demand in these industries are projected to continue rising at least over the next decade.

So what does this mean for the global clean energy transition movement? At best, it would mean oil has already peaked. Through sustained pressure and evolving green finance norms, there is a likelihood of greater decarbonisation momentum for oil and gas majors. At worst, the recent setbacks for the global oil and gas sector were merely a flash in the pan, with several national oil producers waiting eagerly to continue oil and gas expansions. How the cookie crumbles will ultimately depend on how successfully non-committal oil producing nations can be persuaded to join the decarbonisation movement. Leaders attending November’s ‘make or break’ COP 26 will be expected to a new chapter in the clean energy transition saga. The hope is oil and gas will be at its centre.

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