Analysis: High revenues from oil sales are no longer a guarantee

BP’s decision to cut almost 10,000 jobs is the latest in a series of disruptions in a global industry struggling with record low oil prices and high expectations from stakeholders and the public for action on climate change.

The oil giant was one of a growing number of companies that, pre Covid-19, targeted a transition to a low-carbon future. While it is tempting to think that the potential demise of such firms will accelerate a transition to a clean energy future, the opposite may be true as they possess the skills and expertise required for key low-carbon technologies.

Bernard Looney, the Irish chief executive of BP, has previously outlined his vision for a leaner, faster-moving version of the company, with targets including zero net growth in operational emissions from 2015 levels to 2025 in addition to near-term reductions. It is fair to say that other such companies will need to do likewise and it may just be a case of the survival of the quickest.

Not all oil and gas companies are equal, and their size and ownership structure will determine their ability and appetite for change.

Large companies such as BP, Shell and Total are the outward-looking face of the global oil and gas industry, and correctly receive attention when it comes to emissions and climate action. These companies are part of a group known as the “majors”, but this title is deceptive as they represent a minor stake.

Independent producers and national or international oil companies are more significant in terms of production, reserves and emissions. The majors account for about 15 per cent of oil and gas production today, and tend to be relatively proactive on plans for emissions reduction.

National oil companies (NOCs), such as Saudi Aramco in Saudi Arabia, and international oil companies (INOCs), such as Equinor, the Norwegian giant, are fully or partially owned by governments. Today, this category accounts for over half of global oil and gas production.

The environmental performance of this group is mixed, often reflecting more diverse governance structures and interests. Emissions reduction policy in NOCs can be driven and enforced by government policy but tends to be less developed than the majors, who are exposed to stakeholder pressure and public scrutiny.

The final group of companies classed as independent producers are typically smaller in size, but as a block are responsible for about a quarter of global production. This group includes North American shale independents, a newer group of small and agile firms that focus on developing shale gas and tight oil resources.

Significant emissions reduction from all these companies is required if they wish to remain relevant in a low-carbon world, and the amount of emissions attributed to each company depends on how they are counted or “scoped”.

Typically, emissions from the extraction of oil and gas and those linked to the energy used to power on-site equipment, known as scope 1 and scope 2 emissions, are easily quantified and attributable. Emissions from the end-use combustion of the fuel in our cars, homes and factories, so-called scope 3 emissions, are contentious because they make up the bulk of overall emissions and could also be attributed to different end users.

Oil and gas companies are now coming under pressure to reduce and take responsibility for all emissions, including the scope 3 sectors. Last January, Microsoft became the first software company to set a target to reduce all of its emissions, including scope 3, to zero by 2030.

Some oil companies such as BP have already set targets and deadlines for net zero ambition. But if the wider industry is to follow, national and international oil companies will have to play a much more active role in decarbonisation projects worldwide.

There are a number of ways these companies can contribute to climate action. At the simplest level, the environmental impact of gas leakage, venting and flaring must be stopped.

Reducing all emissions will require carbon to be captured and put back in the ground along with the deployment of massive amounts of renewables, both onshore and offshore, and new fuels such as hydrogen will also have to be scaled.

These clean fuels are needed for the difficult challenge of de-carbonising sectors such as cement and steel, heavy transport and aviation. The industry has extensive knowledge and experience in these areas, as well as understanding in managing multi-billion dollar projects and managing risk.

Whether companies can make this transition is yet to be seen, but the lesson from BP is that hard decisions will have to be made. High revenues from oil sales are no longer a guarantee, and companies that diversify early will likely stand the greatest chance of success.

Dr Paul Deane is a research fellow at the MaREI Centre for Marine and Renewable Energy and the Environmental Research Institute at UCC