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Blaming Big Oil: Righteous and Wrong

Blaming Big Oil: Righteous and Wrong

The plot is more complicated than most activists allow for.

Scott L. Montgomery

For climate progressives, this has been a mixed year. On the one hand, atmospheric CO2 levels have rebounded from their decline in 2020 and reached levels exceeding those of 2019. Then, too, the bipartisan infrastructure bill pushed by the Biden White House, which will go to the House for debate in September, was a disappointment, omitting major support for clean energy and, as one observer noted, not going far toward “dislodging the fossil fuel industry from the U.S. economy.”

On the other hand, the year saw an unprecedented series of defeats for Big Oil. Relevant events have been called “historic blows,” a “beating,” and even, in the words of environmentalist Bill McKibben, “cataclysmic” for international oil companies (IOCs) like ExxonMobil and Shell.

During the first half of 2021, shareholders of five major oil companies voted at their annual meetings for more serious action on reducing emissions. At ExxonMobil, a small hedge fund named Engine No. 1 (now known as the “little engine that did”) corralled enough votes to replace three directors with people experienced in renewable energy. Chevron shareholders passed a resolution proposed by Follow This, a climate advocacy group that is now a yearly presence at meetings of more than a half-dozen IOCs, to have the company cut emissions from purchases, production, and investments. Follow This had similar success with ConocoPhillips and Phillips 66.

The board of TotalEnergies, France’s largest IOC, adopted a measure announcing its “ambition” for net-zero carbon emissions by 2050, along with more concrete changes—like changing its bylaws to include socio-environmental responsibility, increasing its investments in renewable technology, and even changing its name—from Total.

In what may be the most consequential setback for the IOCs, a judge in the Netherlands District Court ruled against Shell on the required speed and level of its emissions reductions. Shell was ordered to reduce emissions by 2030 to no less than 45 percent of 2019 levels.

The case was brought by a consortium of NGOs, green groups, foundations, and individuals, 17,000 entities in all, led by the Friends of the Earth Netherlands. The decision relied on a Dutch Civil Code provision known as the “due care standard,” which requires companies to avoid “serious risks to human rights, such as the right to life and undisturbed family life.” Shell was found guilty of contributing significantly to the violation of these rights. Though Shell says it intends to appeal, a precedent has been set. Whether it sends a shudder through the oil industry remains to be seen.

Other companies, like BP, suffered smaller “losses,” including increased (though not majority) shareholder support for climate resolutions. In Massachusetts, a judge has denied a motion to dismiss a suit against ExxonMobil for misleading investors and the public about climate change. (In 2019 the company prevailed in a similar suit filed by the New York State Attorney General.) The suits in U.S. jurisdictions are growing in number.

Party Crashing Realism

In a time of global warming, it was perhaps inevitable that major oil companies would become targets. The website of Follow This features a motto: “Green shareholders change the world.” The site encourages people to buy stock in Shell, TotalEnergies, BP, and Chevron, along with helpful links. The premise is that by acquiring more corporate control, people can substantially alter global emissions.

But there are problems here. First, while “Big Oil”—the Orwellian label attached to the seven largest publicly traded IOCs (Shell, BP, Eni, TotalEnergies, ExxonMobil, Chevron, ConocoPhillips)—suggests a scale of wealth and power similar to that of J.D. Rockefeller’s Standard Oil, this image is little more than myth. No public IOC is close to being a trillion-dollar firm like Apple or Microsoft, each now valued at well over $2 trillion. The only oil company in this club is Saudi Aramco, which is a state-owned monopoly answering to a monarchy, not to shareholders. The likes of Shell, ExxonMobil, and BP are all small fry compared to the orcas of the national oil companies (NOCs), which also include Rosneft (Russia), Iraq National Oil Company, Kuwait Petroleum Corporation, and dozens of others in OPEC and elsewhere. These monopolies own over 80 percent of proven reserves and control 85 percent of global production. They respond to political autocrats, not activists. Despite some domestic moves to utilize more non-carbon sources of energy, nearly all the NOCs believe that oil and gas will remain dominant in the mid-21st century. Indeed, even if Big Oil greatly reduced operations in the near term, this would merely open space for greater control by the NOCs over the global market.

More than that, any IOC, to produce significant emissions reductions quickly, would have to cut their production of hydrocarbons. (This is the real demand aimed at them: to get out of the oil and gas business.) But would this mean closing down the fields, plugging all the wells, removing the equipment, and walking away? Not likely.

Though overall consumption has declined in Europe and North America since about 2005, this decline just means that the global center of demand for these sources has moved to emerging economies, especially in Asia. The situation will not change overnight. Oil and gas fields will remain valuable assets. They will be sold.

The buyers would be other oil firms or investor groups that contract with them. These firms would continue production. Indeed, in a higher price environment like that of 2021, they will seek to increase output through advanced recovery technologies. More, some of these buyers will be closely held, not susceptible to shareholder pressure. In 2020, for instance, BP sold its producing properties in Prudhoe Bay, Alaska, for $5.7 billion to the privately owned, Texas-based Hilcorp Energy. As in most deals of this type, Hilcorp acquired abundant data from BP, including a plan it intends to pursue for revitalizing older wells. If it does, the total amount of oil produced by the field over its lifetime will be larger than it would be without the sale.

Thus, forcing Big Oil IOCs to reduce their oil and gas operations rapidly would likely increase or, at the least, maintain rather than lower emissions.

This likelihood has a global dimension as well. These companies have superior technology and human capital in finding and developing new fields. As a result, NOCs routinely contract with them to establish and manage production. Though activists might want an end to all such development, a sizeable number of new oil and gas discoveries have been made in lower-income nations, like offshore discoveries in sub-Saharan Africa from Senegal to Kenya. These countries, unsurprisingly, are not likely to forswear these resources as potential generators of income, investment, and electricity. If IOCs were blocked from such projects, some African states would turn to companies with lower standards of safety, efficiency, and environmental protection. Others might embrace coal and large-scale dam construction sponsored by China’s well-known Belt and Road Initiative. The climate, ecological, and geopolitical implications of this type of development should give one pause.

Big Oil and Renewables

Most public IOCs—BP, Shell, TotalEnergies, Equinor (Norway), Eni (Italy), and Repsol (Spain), though not the American ExxonMobil and Chevron—already have plans to reach the Paris Climate goal of net-zero emissions by 2050. While the U.S. firms have thus far emphasized carbon capture and storage, the European plans include investment in renewables, hydrogen, and electric vehicle (EV) batteries and charging.

The focus of the European public IOC model is electricity, forecast to grow in demand worldwide more than any other energy production sector. The model has two parts: building a new core business in the production and sale of non-carbon electricity and keeping a smaller oil and gas capability for continuing—declining, they hope—demand.

BP, under its new CEO, Bernard Looney, is shifting operations toward renewable-based power. It has acquired solar and wind projects in the United States, Great Britain, Portugal, and Greece. It announced last year that it will sell 40 percent of its oil and gas production in order to build 50 gigawatts or more of renewable capacity by 2030. It has also invested in rapid-charge infrastructure for EVS and in biofuel production in Brazil.

Shell has a somewhat different, “customer-facing” strategy: It will supply power, other energy services, and related products directly to consumers and businesses. For generation it will emphasize natural gas and renewables; it intends to combine its gas supply capabilities with investment in offshore wind projects like Atlantic Shores, off the coast of New Jersey. In the United Kingdom, Shell has set up a new entity, Shell Energy, offering renewable power, broadband, and smart technologies. For EV, the company has bought 60,000 charging points in Europe; it aims to install 2.5 million of them by 2030.

European IOCs are in part responding to the EU’s increasingly aggressive climate moves under its European Green Deal. Though the plan is not yet fully finalized, its goal is to make the EU carbon neutral by 2050 and to make the decade of the 2020s a pivotal period, slashing net emissions 55 percent or more below 1990 levels.

No IOC is a “leader” or “early adapter” of measures to lower emissions. Only in the past five years has any of them shown signs of appreciating the meaning of climate change for energy. Still, there is further indication that this type of appreciation has in fact developed.

Beginning in the 2010s, each of these companies has published an annual report outlining its views of the future of global energy based on various emissions scenarios. This forecasting has been done internally for a long time, no surprise for firms with depleting assets. In 1965 BP became the first firm to make the data publicly available in its Annual Statistical Review of World Energy, now a key resource for energy analysts. Since 2011, BP has also published an annual Energy Outlook, with an overview and forecasts. Other IOCs have followed suit.

There is striking agreement among the European IOCs about the decades ahead. Each of BP, Shell, and Equinor puts climate change at the center of its analysis, in emissions scenarios like “business as usual,” “rapid decarbonization,” and “net zero by 2050.” BP forecasts a 70 percent drop in global oil consumption for the net-zero 2050 scenario; Shell posits just a 40 to 45 percent decline. But both companies forecast an overwhelming dominance, more than 80 percent, for electricity generation from non-carbon sources, especially renewables. Equinor forecasts a drop of 50 percent for oil, with renewables reaching 75 percent of the power sector and nearly 100 percent for buildings.

Such analyses are consistent for European IOCs, which intend to continue their direction despite the rise in oil and gas prices and related profits this year. In contrast, U.S. companies—above all, ExxonMobil and Chevron—and the NOCs continue to cite a “lower carbon future” rather than “net zero by 2050.” The divide reflects differences in not only climate-related policies but ideology about the energy future. The posture outside the EU reflects the belief that fossil fuels are both too abundant, and thus affordable, and too deeply embedded in the workings of modern society to be replaced in just a few decades and that such replacement faces massive hurdles. Still, only ExxonMobil publishes scenarios in which the global demand for oil and gas increases in the coming decades.

The Nub of the Matter

Shareholder activism and legal challenges to oil and gas operations have not been wholly ineffective. This year’s court decision in the Netherlands may have helped inspire a new push by Shell to divest major assets in the Permian Basin and onshore Nigeria. IOCs, partly in response to events at 2021 shareholder meetings, have increased investment in clean-tech start-ups. Oil industry firms have promoted projects to transform older offshore platforms into wind and solar facilities, sometimes combined with hydrogen production for energy storage.

Yet there remain two large problems in the movement to attack and “defeat” international oil firms.

Activists continue to treat Big Oil as a single, toxic species whose efforts toward net zero 2050 cannot be taken seriously; in this view, such efforts are “fake green news” that must be met with outraged dismissal or at least barbed skepticism. “We’re currently witnessing a great deception,” says an attorney with ClientEarth. “[T]he companies most responsible for catastrophically heating the planet are spending millions on advertising campaigns” claiming a focus “on sustainability.” The implication is that Big Oil IOCs should commit mass suicide by going bankrupt or transforming into renewables firms.

Such a claim fundamentally misreads today’s reality. Big Oil, as already noted, is in fact a small player in global petroleum and natural gas supply—and thus in emissions. Consider that, in 2019 when oil and gas accounted for 56 percent, or thirty-three billion tons, of total CO2 emissions, the seven publicly traded IOCs in the Big Oil group were responsible for just 15 percent of world supply, thus only 9 percent of these emissions, or about three billion tons. In the same year, coal use in China generated eight billion tons of CO2, nearly three times as much. Big Oil’s emissions are not a trivial amount, to be sure. But treating Big Oil as if it were the core of the climate problem today and assuming that, in the words of Dutch activist Mark van Baal, “the oil industry can make or break the Paris Agreement” distort the truth no minor amount.

More seriously, the real motive force in the continuing use of oil and gas is demand. The greater part of the world—above all, rapidly developing nations from China and India to Indonesia and Turkey—has been growing its consumption. With oil, this means the billion-plus vehicles—cars, trucks, trains, planes, and ships—as well as the entire universe of plastics, from contact lenses to computers, that drive the use of liquid petroleum. It also involves every modern military, thus rendering sufficient oil supply a national security matter.

This demand is the reason economists have for years advocated putting a price on carbon. It is also the reason for giving serious policy support to EVs, reduced emissions for commercial aircraft and merchant shipping, and consistent high-level funding for energy research and development. Such measures will do significantly more than punishing Big Oil, especially if pursued not just in the United States and Europe but also in China, India, and other emerging and developing economies that generate much of the growing demand for fossil fuels. (Granted, the impulse to demonize oil companies also has symbolic and emotional satisfactions—especially in the United States, where consumers happen to drive the most fuel-inefficient vehicles on the planet.)

IOCs are not exemplary firms. In the 1990s they, especially Exxon, produced campaigns that downplayed and misled the public about climate science, aided by denialism among many Republicans. Today, a large part of the congressional GOP remains unwilling to accept the fact of global warming—in direct contrast to the oil industry itself.

IOCs will be far more useful as allies in dealing with climate change than they will as enemies. Each of these companies is a huge reservoir of scientific and technological capital related to energy and, thus, can thus play a vital role in the energy transition. We further need to make peace with the truth that oil and gas themselves will be needed in the mid-to-near term to transform global energy. They will still be part of the building, transporting, and installation of solar panels, nuclear facilities, batteries, EVs, charging stations, and other innovations that will eventually reduce their use. Like the IOCs themselves, oil and gas are, and will continue to be, necessary tools of their own replacement.

Scott L. Montgomery is affiliate faculty in the Henry M. Jackson School of International Studies at the University of Washington and a fellow at the Stevanovich Institute on the Formation of Knowledge, University of Chicago. He is author, with Dan Chirot, of The Shape of the New: Four Big Ideas and How They Built the Modern World, From Enlightenment to Reaction (2015).