Editorial: Wishful thinking [Gas in Transition]
There have been several momentous though unwelcome developments for the global natural gas industry over the past month.
First, the International Energy Agency (IEA) reached a controversial conclusion in its Net Zero by 2050 report published May 18. If the world is to succeed in reaching its “narrow but still achievable” goal of net-zero emissions by 2050, the Paris-based agency says, no further investment in oil and gas is needed.
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It was not that long ago that the IEA was urging investment in natural gas to continue, to help those nations burning dirtier coal and oil-based fuels to reduce emissions from their power mix. Its latest conclusion has drawn stiff criticism from the industry as unrealistic, impractical and a threat to energy security.
If the advice was followed, “we would see significant disruption in power supplies, transportation systems...and a significant rise in energy taxes,” Andy Calitz, security-general of the International Gas Union, warned in the Financial Times.
The Gas Exporting Countries Forum added that “the only approach to achieve energy market stability, responsible and inclusive economic growth, as well as sustainable development goals, is to consider natural gas as a destination fuel that will always be an essential element in achieving a lower-carbon energy system.”
The forum, comprised of the world’s biggest gas-producing countries, said it believes “in the right of countries, particularly the developing economies, to have access to an abundant, affordable and clean source of energy.”
“We don’t condone restrictions of policies on upstream development and directing investment resources instead towards expensive decarbonisation options and technologies, some of which are yet to be proven,” it said.
Some developing nations have criticised the IEA for adopting a one-size-fits-all, Eurocentric approach to tackling climate change. Why should Africa not capitalise on its vast reserves of gas, to eliminate poverty and phase out dirtier fuels, the chairman of the Egyptian Gas Association, Khaled AbuBakr, asks in an interview with NGW in this issue.
Even some developed, oil and gas-producing nations are pushing back. Norway’s government published its new long-term energy strategy on June 11, which envisages oil and gas licensing and production continuing beyond 2050.
Nevertheless, some politicians will listen to the IEA’s conclusion and base their policy decisions upon it.
Second, a court at the Hague ruled on May 26 that Shell’s already lofty targets for reducing its emissions are not lofty enough. The Anglo-Dutch major has been ordered to draw up a plan to reduce its absolute Scope 1, 2 and 3 emissions by 45% by 2030, using 2019 as the baseline. The ruling applies immediately and cannot be suspended pending the appeal that Shell expects to launch.
The industry’s fear is that this sets a precedent and could result in NGOs filing similar lawsuits in multiple other jurisdictions. Still, some commentators see Shell’s appeal as having a high chance of success, and that making oil companies responsible for end use emissions, as problematic as that is, will never come to pass. In a sign that investors are unconvinced by the threat the ruling poses, Shell’s stock price fell only moderately on the news and has since rallied to above the previous rate.
Even so, the ruling and the publicity that it has generated will have emboldened NGOs to ratchet up pressure on the industry. Oil and gas companies also face increasing scrutiny from their own shareholders. On the same day as the Dutch ruling, a small activist investor known as Engine No.1 succeeded in getting two nominees elected to ExxonMobil’s board and later installed a third in early June. Engine No. 1 controls only a 0.02% interest in ExxonMobil but managed to convince larger pension fund investors to back its cause.
Amid this pressure, international oil companies (IOCs) will respond with increasingly ambitious targets and transformation plans that bar any growth in oil and gas and force them further into renewables and uncharted territories like hydrogen. Shell has already promised to fast-track its transition plans in light of the ruling.
The movement of IOCs away from oil and gas will have only a limited impact on global oil and gas supply. Many will divest their away towards emissions targets, meaning production will remain on the market but in different hands. Barring a significant decline in oil and gas demand over the coming decades – while forecasters predict this, market price trends so far suggest otherwise – other suppliers will simply fill the void.
National oil companies (NOCs), less beholden to climate-conscious investors, will have an opportunity to ramp up production. The CEO of Russia’s state-owned Rosneft, Igor Sechin, warned on June 5 of acute shortages of oil and gas emerging as IOCs shift their focus away from hydrocarbons. The implicit suggestion was that NOCs like Rosneft would be there to avert such a crisis.
Saudi Arabia and its OPEC supplies will control over half of oil supply in 2050, the IEA itself predicted. There is some irony in this prediction, considering that the Paris-based agency was established in the wake of the 1973-1974 oil crisis, caused when the then more-powerful OPEC proclaimed an oil embargo. The IEA believes this heavy reliance on a handful of oil suppliers will not pose a risk in the future, as oil will occupy a much smaller part of the global energy mix. It assumes that oil demand will subside dramatically, as other, in some cases yet-to-be-proven, technologies take its place. But this may be wishful thinking.