Europe’s biggest energy companies just came together to voice support for UN-backed carbon pricing. The heads of Royal Dutch Shell, BP, Total, Eni, and Statoil all signed a letter to the Financial Times declaring “We have important areas of interest in and contributions to make to creating and implementing a workable approach to carbon pricing.” Conspicuously absent from this who’s who of oil major executives were any representatives from the American firms ExxonMobil and Chevron, whose shareholders recently voted overwhelmingly against appointing directors coming from a climate background. But as the FT reports, the outlook for the world’s oil companies looks remarkably similar on both sides of the Atlantic:
Energy outlooks from European and US companies suggest fossil fuels are likely to provide the bulk of energy demand for decades into the future, and they intend to be a part of meeting that demand.Even Shell, a European company that is enthusiastic about putting a price on carbon, plans this summer to drill in the Arctic waters north of Alaska, where production is unlikely to start up until the 2030s.
For companies whose biggest focus necessarily entails greenhouse gas emissions, the question that naturally follows is: what can be done to get greener? The first and most obvious choice is to invest more heavily in natural gas, which emits just half the carbon as its closest energy analogue, coal, and can be readily and profitably extracted. Greens, however, have long scoffed at natural gas’s eco-merits, and would rather see Big Oil investing in renewables. Your average environmentalist’s idea of preparing for the apocalyptic future greens swear is right around the corner is to tell oil firms to leave that black gold in the ground and start constructing solar and wind farms.This is yet another indication of just how disconnected from reality a lot of the conventional green thinking is. From a corporate planning point of view, even if stockholders think that carbon prices are rising, they do not want oil companies to make the investments to become renewables companies. The FT reports:
Mark Lewis, an analyst at Kepler Cheuvreux, suggests that, although investors may be worried about the impact on oil companies of a global shift away from fossil fuels, they would prefer to see them stick with what they know.“Plenty of investors think there is a very serious problem with the long-term business models of the large oil companies,” he says.“But they would prefer the companies to pay out cash in dividends and buy-backs, rather than investing in renewables themselves.”
The world’s energy supply is a huge, capital intensive, deeply complex ,and incredibly well-developed mix of extractive, transport, refining, and distribution capacities. It has taken well over a century of investment and innovation to produce this system. Besides the visible aspects of this architecture are the invisible elements: the corporate cultures and governance structures that allow oil majors to operate in dozens of countries, for example, and the financial knowledge and business experience necessary to organize, plan for, and carry out complex capital investment programs stretching over many years in environments with a host of business, regulatory, political, and technological challenges. It is very hard to build this capacity and maintain it, all the while managing the political and cultural demands that come from operating as highly visible and not particularly popular entities in a score of difficult and sometimes quite hostile countries.Likewise, the scientific knowledge needed to prospect for and evaluate new resources is immense. Companies constantly have to look deeper, farther away, and more unconventionally to find their product. Finally, they have to develop both the technological capacity to extract the resource and the managerial capacity to attract, manage, and reward the various types of people and skills needed to maintain and renew this capacity.Add all this together, and the world’s energy infrastructure and the corporate entities that maintain it appear really to be one of humanity’s most elaborate and fragile constructions. To say to this complex that “we don’t like the way you are currently organized, go turn yourself from a fossil fuel-based entity to a (less efficient) renewable-based entity” is not a policy. Nor will a replacement architecture based entirely on (again, less efficient) renewables simply spring out of the ground because greens want one to appear.The U.S. oil majors seem to think that, in spite of what greens say, their own long term future is in the production and distribution of fossil fuels and the energy they produce. They see natural gas as a way of reducing their carbon intensity and therefore their vulnerability to the ‘carbon discount’. At the same time, they don’t see a way to make effective investments on a large scale in renewables.That’s something the world should pay close attention to. The oil majors aren’t ideologically opposed to new lines of profitable business. If they saw a profitable way to transform themselves into ‘energy companies of the future’ based on renewables, they would do it in a heartbeat. And they certainly have the resources to study the feasibility of such investments more thoroughly than anybody else. If they don’t have a lot of technical knowledge of renewables, they have a pretty deep understanding of the way energy markets work. They are also reasonably astute analysts of government policy—they have some idea of how subsidies work, and what sizes will be needed.They seem to be saying “no, thank you” to the option of transformation into renewables, and it’s hard to spin this any other way except to say that the shift to renewables looks much harder and much less feasible to the professionals than it does to faculty lounge greens.Furthermore, people seriously interested in building a renewable energy complex to replace the fossil fuel system that exists today would be wasting their time majoring in environmental studies programs or looking for work in green NGOs. They should be studying engineering, finance, chemistry, management and the various other tough subjects that people in serious, for-profit companies need to understand. A renewable energy complex might extract energy from different sources than the fossil fuel industry, but it will be a large, heavily capitalized, and tech-intensive industry all the same. Its business decisions will be driven by the same kinds of profitability logic that drive Big Oil and Big Coal. It won’t have a lot of use for people who shun hard math and science classes as undergrads and grad students, and it will likely be the object of harsh and bitter criticism by faculty lounge liberals, idealistic students, and ‘civil society activists’. In fact, Big Renewable, when and if it comes, will likely be even harsher in its operating logic than the energy industry we have today. If renewables remain a less efficient source of energy than fossil fuel, a renewable energy industry will have to operate more ruthlessly and efficiently than Big Oil does to produce the energy the world needs at a price it can pay.For serious greens, there are two takeaways here. The first is that Big Oil is unlikely to make the shift to Big Green. The transformation of a fossil fuel company into a renewables company is more like gender reassignment surgery than it is like changing from PC to Mac, and neither management nor the investment community appears to be in the mood for a switch.The second should be even more sobering: making the shift to renewables means a more capitalist, more corporate, more tech-heavy world than the one we have now. The construction of a renewable energy complex is going to be a matter of corporate power, technological know-how, and sophisticated financial strategies, not of activism and politics.