10 Jun The challenge for the oil industry working on net-zero and net profits
International oil businesses are being forced to adapt their long-term strategies and review their plans to meet investor demands.
Environmental pressures are poised to continue having a significant impact on the oil industry. As pressure mounts from climate and investor plans, legal challenges and investment patterns are transforming, oil businesses must focus on profits and emissions. The shift from rebranding their image to adapting their business strategies involves many challenges for the oil and gas industry.
In the last month, shareholders at Chevron voted to approve new reduction targets, while investors at ExxonMobil approved directors working to take more bold and ambitious steps towards tackling climate change. A regional court in the Netherlands also recently instructed Shell to accelerate reductions in its carbon footprint by 45% worldwide by 2030, in a case pushed forward by climate activists. These recent events highlight the mounting risk of climate litigation on energy businesses, particularly this year before the start of the COP26 climate summit.
Studies suggest that recent events have shifted the power structure within the investment class towards stronger activism, forcing businesses to seriously reevaluate their long term future.
Recent pressure from the boardroom and in courts on global oil businesses and other fossil fuel companies will inevitably continue to intensify, making it more challenging to meet the demands of shareholders for profits and emissions reductions. Oil businesses will be increasingly pressured in balancing financial returns with the necessity to decarbonise.
Recent events like the ones mentioned are raising the bar for oil and gas businesses and showing that they could be held legally responsible for their role in climate change and executives that show little action could potentially lose their positions. International oil businesses will continue to face heightened scrutiny from stakeholders and force many large oil businesses to reconsider where to focus and deploy their current and future resources.
Several larger European majors have already started making strategic plans to adapt their business models and expand beyond just oil and gas. Several major oil businesses are focusing on enhancing their green credentials and committing to reducing their carbon footprint.
According to reports by the International Energy Agency, the total investment share by the oil and gas industry into clean energy could increase more than 4% this year, a rise from 1% in 2020. So while it is moving in the right direction, there is still a long way to go. The IEA recently published an ambitious roadmap for global energy to become net-zero by 2050 and explained that the $750 billion due to be invested in clean energy technology this year was not sufficient to meet the Paris Climate targets on global warming.
Future trends in the oil industry will depend on how global oil demand reacts to the rising energy transition movement. Analytics anticipates that global oil demand will recover from the lows experienced during the pandemic into 2023, but will grow slowly at best until 2040. Aside from exiting oil and gas altogether, global oil businesses will focus on reducing their carbon footprint by implementing new strategies, moving towards less carbon-intensive production and investing in carbon capturing and other technologies.
For the time being, there are still many oil majors balancing a position between targeting climate goals and remaining focused on shareholder returns, to meet the demands of both sides. Until there is more clarity on the demand side, this tricky balance between climate strategy and investor return will continue for a little more time.