SUSTAINABILITY
An Emerging Split in the Energy Industry
Milind Phadke, Vice President, Lubricants & Base oils Market Research, Kline
The global market scenario in 2020 has highlighted the divide in the oil industry on how to negotiate the transition to low carbon while maintaining profitability. As if the combination of the post COVID-19 demand contraction and the (possibly) permanent shift in consumer behavior relating to personal mobility and work from home were not enough, Europe’s green hydrogen plan and China’s commitment to become carbon neutral by 2060 has put pressure on the global oil companies to lay out plans of their own.
How oil companies have behaved on this front reflects their unique business environment and consumer pressure. Many European oil companies have made commitments on reducing their carbon footprint to net zero or close to zero by 2050. North American oil companies have not made any commitments on sustainability, instead, focusing on incremental reductions in their carbon footprint. This might change with the induction of the new administration. National oil companies (NOCs) of energy exporting countries as well as those of large economies stress that they will continue to focus on oil and gas while ramping up their carbon reduction initiatives. The most visible example of this divide is the recent declaration by leading energy companies on Energy Transition Principles. The declaration was supported by eight energy companies – BP, Eni, Equinor, Galp, Occidental, Repsol, Royal Dutch Shell, and Total, most of whom are of European origin1
.
The focus on sustainability has been accompanied with statements on when “peak oil” will occur – an event when oil demand will hit its highest point, and beyond which will be in permanent decline. Many European oil companies project that we are already at peak oil or will arrive at that point in the next ten
1 Leading energy companies announce Transition Principles | Shell Global 2
years or so. In contrast, some NOCs claim that we are quite far from peak oil and the demand growth in Asia and other developing economies will offset any decline in Europe and North America. As if to play the mediator, International Energy Agency (IEA) published its energy outlook which projects that oil demand will grow till 2030 and then flatten till the foreseeable future without a peak. To be fair, one scenario – “Sustainable Development Scenario” puts 2021 as the peak oil year2
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Global oil demand by scenario, 2010-2040 This situation reveals some underlying features about the move to sustainability.
First, the pace at which any economy will get to net zero will be influenced, in order of reducing importance, by government regulations; energy, automotive, and other industrial company commitments to create a new ecosystem; and corporate and retail consumer choices. In one sense, consumers have the least impact as they simply select from a menu of options offered to them. Energy, automotive, and other industrial companies will set the menu options influenced or nudged by government regulations and competitive pressures arising out of what their peer companies are doing. In another sense, consumer sentiment is the prime driver since vocal consumers push government to enact regulations and influence the terms of competition between companies.
Consumer influence takes a long time to play out, but it is decisive. How the European oil companies have responded to EU’s green hydrogen strategy reflects this mechanism. Of course, consumers in other regions of the world are not as focused on the green agenda, but that may change with time.
IEA, Global oil demand by scenario, 2010-2040, IEA, Paris
https://www.iea.org/data-and-statistics/charts/global-oil-demand-by-scenario- 2010-2040
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LUBE MAGAZINE NO.161 FEBRUARY 2021
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