September 21st, 2018
by Alexander Boden
Businesses – especially energy businesses – have a huge role to play in limiting global warming. The combustion of oil-based fuels accounts for more than 50% of GHG emissions in industrialised countries. It’s hard to see a path to keeping global warming to below 2°C without fossil fuel companies committing to major changes in their business models. So, let’s look at what is being done by the world’s sixth largest oil and gas company, BP, which enjoys something of a green reputation.
Formerly British Petroleum, the UK-headquartered company traces its origins back to 1908. From 1914 to 1979 it was largely owned by the UK Government, with which it retains close links. Since 1970 it has extracted over five billion barrels of oil and gas from the North Sea alone. The company estimates that 0.5% of the UK’s GDP relies directly or indirectly on its activities.
With oil companies under scrutiny following the Brent Spar incident in the North Sea in 1995, and with discussions about climate change prominent in the run up to the Kyoto conference in 1997, BP was the first major oil producer to recognise that the risk of climate change required action on their part.
Wind of change?
Part of their response was a change in branding. In 2000 they adopted their current “Helios” logo, which they say suggests “heat, light and nature”. Then in 2001 they signalled an apparent change of business focus when they adopted the slogan “Beyond Petroleum” – and spent hundreds of millions of pounds over the next decade promoting it.
These moves helped to boost perceptions of their environmental credentials while coinciding with significant sales growth. But have the company’s actions lived up to the image it has sought to present, or are they more in keeping with the many parodies their logo has spawned?
Back in 1998, BP pledged to cut its emissions by 10% from 1990 levels by 2010. In 1999, their “plug the sun” campaign promoted solar investment and in the mid-2000s, the company pledged to invest around $8bn in renewables, including solar wind power. However, in more recent times, BP’s investment in renewable energy has dropped significantly. In 2009, BP scrapped the ‘BP Alternative Energy’ business it had established, while in 2011 it axed its solar power business.
Investment in oil and gas has remained high, including a recent $10.5bn acquisition of BHP’s shale and gas fields in western Texas and Louisiana, which is set to boost BP’s gas production by 20%. BP badged these long term commitments to fossil fuel production as part of the journey towards decarbonisation calling gas a ‘transitional fuel’ to cheaply and reliably bridge the gap between oil and renewables at half the CO2 emissions of crude oil.
A 2015 report from the climate charity ShareAction found that that BP’s investment in renewables had fallen consistently since 2005, with low carbon projects accounting for just 1.3% of its capital expenditure. The 1998 emission reduction targets appear to have fallen by the wayside, as ShareAction found the company had no binding targets to reduce emissions. Although BP’s most recent direct emissions estimate does show a slight drop in overall emissions compared to their recent past, they remain significantly above the targets outlined in 1998. A further ShareAction report in 2016 concluded that there was ‘limited evidence’ to suggest that BP was committed to moving onto a path enabling it to be ‘resilient in a low carbon world’.
It therefore seems that BP’s rhetoric about the importance of emissions reduction is not firmly backed by action. The recent evidence suggests that the company remains firmly committed to expanding its fossil fuel business, and there is little to distinguish it environmentally from its rivals. Shell, for example, invested heavily in renewables projects in the early 2000s, but later pulled back from some of its high profile projects; and has recently made major corporate acquisitions in the fossil fuel sector.
If BP’s record so far on investing in renewables is poor, are there any indications that this might change? There are a few: BP has made some significant investments in electric vehicle charging stations and technology, but is thought to lag a little behind Shell on adoption of this technology. It’s also expanding bioethanol production in Brazil and recently invested $200m in UK solar power developer Lightsource.
Like several oil companies, BP now produces an annual sustainability report. What evidence does it provide of commitment to a deeper green transition? The 2017 report reveals their expectations about the use of fossil fuels into the future.
They outline three scenarios for the potential speed of the transition to low carbon energy through to 2040. In the fastest transition BP envisages, the technologies they class as ‘renewables’ meet only 33% of energy demand, with a further 8% from hydro power. Oil (22%), gas (19%) and coal (10%) continue to provide over half of the world’s energy. In their slowest transition scenario, fossil fuels provide 74% of world energy needs, and are consumed in significantly greater quantities than today, due to growing energy demand. None of the scenarios appear consistent with limiting temperature increases to less than 2°C.
If BP is operating on these expectations, it is unsurprising that it is continuing to invest in oil and gas exploration. To allay concerns about the climate impact, they talk positively about negative emissions technologies such as CCS. They emphasise their role in developing the technology, which they consider ready to roll out if supported by the right policy measures. However, the scale of CCS deployment that would be necessary to offset continued high levels of fossil fuel emissions is vast for a technology still in its infancy.
It’s easy to cast oil companies as the villains of the piece – and as it becomes clear how long they have been aware of climate change and the role of their products in causing it, it seems a deserved label. However, even if oil and gas producers want to transition to a low carbon future, there are genuine difficulties for directors of public companies in making radical changes. They are accountable to their shareholders and responsible for maximising their returns. In effect, they’re obliged to put profit ahead of the planet, so far as law and policy allow.
BP’s shareholders have already indicated their concerns. In April 2015, they voted overwhelmingly for the company to test its resilience to governmental action on climate change. Perhaps they have recognised the potential threat of decarbonisation to oil companies’ future income streams – but it seems that for the time being at least, oil and gas companies have no shortage of willing investors.
Where the market is failing to produce sensible outcomes, the usual response is to look to government to intervene to allow it to function better. This might be through market instruments, such as higher carbon prices – perhaps through carbon taxing – or subsidies for renewables, or through regulatory mechanisms such as bans on fossil fuel powered vehicles. Measures of these kinds are already emerging, but not yet at the scale or pace that appears to be necessary to keep global temperature increases below 2 degrees.
It is tempting to conclude by calling for governments to go further and faster to propel companies like BP to change the focus of their business. That would entail overcoming the influence oil companies have on governments, cemented through political donations, regular meetings and even through senior executives taking roles in and around government. But, perhaps more importantly, if it government action makes it clear that large amounts of oil and gas reserves can never be profitably extracted, it would mean oil companies writing down – or even writing off – some of their key assets.
When ExxonMobil shareholders demanded in 2014 that the company should report on the risks climate change posed to the value of its assets, it was unsurprising that the resulting document concluded “none of our hydrocarbon reserves are now or will become “stranded.”” Far more remarkable is the fact that BP executives have started to publicly recognise stranded assets as a potential issue.
Governments therefore face something of a bind. If their policies finally undermine the convenient fiction that it is safe to allow these oil and gas reserves to be fully extracted, at best, this could cause a major dip in oil company share prices; at worst, it could lead to insolvencies. The sheer scale of oil companies, and the massive amount of pension funds invested within them, are perhaps the biggest brake on meaningful action.
The challenge, then, is to drive change quickly enough to avoid catastrophic climate change, but slowly enough to avoid severe economic harm. Finding the right policies to achieve this is perhaps the biggest single problem for governments to grapple with over the decade ahead.