How to Save the Fossil Fuel Companies

June 15, 2017 – The fossil fuel companies of the world know what they have to do to save themselves from holding stranded assets that will be anchors around their financial statements in the next few years. They have known for a long time that their business practices would have to change. ExxonMobil’s scientists told management about industry influencing global warming back in the 1970s. Royal Dutch Shell had similar insights. BP was among the first to launch solar and wind projects which they then sold off because oil and gas continued to be better for their short-term bottom line. For all intent and purpose the investments made in solar and wind by fossil fuel companies smacked of public relations gambits, something to put in the annual report, or get placed in a newspaper column, but not to be taken seriously by the industry.

Today, the world is awash in oil and gas while it is coming to terms with reducing carbon emissions. Oil and gas companies know, despite the federal U.S. decision to back out of the Paris Climate Agreement, that carbon reduction and the emergence of low-carbon emitting economies is the future.

So now seems the right time for a mid-course maneuver. The slowing demand for oil in the face of a global glut should make it obvious where the fossil fuel companies need to go. It is to renewables, particularly wind, solar and storage.

Wood Mackenzie, a research group that looks at the industry points out in its latest report that the move to renewables is “unstoppable.” States Dr. Valentina Kretzchmar, Director of Research, about renewable energy, “it is a megatrend; it’s not a fad, it’s not going away. There is definitely a risk to their core business.”

Wood Mackenzie argues that the fossil fuel companies need to spend $350 billion by 2035 on wind and solar energy projects to match the energy market share they currently get from oil and gas. Where Wood Mackenzie is advising the industry, Bloomberg LP, on the other hand is forecasting a significantly larger investment in renewable energy projects in the future, not just from current fossil fuel and energy companies, but from a raft of new players who may displace the oil and gas giants we know today. In a report last year Bloomberg forecasted $7.8 trillion in renewable energy projects compared to $3.2 trillion in coal, oil and natural gas by 2040. In its crystal ball gazing Bloomberg predicts that 60% of electricity generation by then will come from zero-emission sources.

So who is taking Wood Mackenzie and Bloomberg seriously?

Norway’s Statoil recognizes where its bread and butter future lies. The company is deploying the world’s first floating wind farm off the coast of Scotland this year and has launched an entire division focused on capturing and sequestering carbon.

France’s Total, spent $4.7 billion on solar, biofuels, battery storage and gas, and employing 13,000 of its employees in these areas in 2016.

And Royal Dutch Shell is building offshore wind farms in The Netherlands and has budgeted to spend in its new energy unit, $1 billion annually focusing on biofuels, hydrogen, and renewable energy.

Shareholders who have large equity stakes in fossil fuel companies are also taking note of what Wood Mackenzie and Bloomberg are saying.

For example, at the last ExxonMobil shareholders’ meeting, 62% voted to see transparent reporting of climate change risk in the company’s annual reports. Other oil companies are experiencing similar pressure from shareholders who want to know their risk exposure in continuing to hold fossil fuel shares.

Other oil companies are experiencing similar pressure from shareholders who want to know their risk exposure in continuing to hold fossil fuel shares.

And divestment pressures are mounting as university endowment funds are being pressured by academics and students to rid themselves of fossil fuel investments. These funds are not alone in divesting from fossil fuels. They are joined by major institutional investors, large asset holding funds, and other stockholders concerned about climate change.

Having said all that, the pressure on the fossil fuel industry to make the leap to renewables remains a challenge. Today fossil fuel companies earnings from oil and gas are 33 times greater than from renewable energy states Wood Mackenzie. That will narrow to 13 times by 2035. But even at 13 times that still makes oil and gas attractive to these companies.

So what other events on the horizon may tip the industry to renewables?

When governments institute policies that make it burdensome to continue to rely on fossil fuels for profits, that may prove to be the breaking point for the industry. Policies like escalating carbon taxes, or a cap and trade system that puts ever greater pressure on meeting annual emission reduction targets may hasten the low-carbon economic transition. It also may leave the industry holding what today we euphemistically describe as stranded assets. But stranded assets aren’t assets at all. They are enormous liabilities that could bankrupt the fossil fuel producers.

The only light of hope for the status quo lies in the latest moves by the Trump administration with its anti-climate change agenda. For the American fossil fuel industry it represents a temporary reprieve from facing the future for four years. But the reckoning is coming. Investment in fossil fuels is incompatible with a low-carbon future, while investment in renewable energy technology is not.

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