The Net Zero Oil Company
In the post A Clunky Yet Memorable Sentence we discussed the catchy phrase ‘Net Zero by 2050’, what it means and where it came from. Many companies and government agencies have now adopted some type ofnet zero emissions as a long-term goal. By making this commitment these organizations have said that they will participate in what promises to be an extraordinarily rapid and radical transformation of society's industrial base.
Companies in the process industries — the oil companies in particular — have been subject to much criticism in recent years for their perceived role in climate change. The profound cultural and economic shift implicit in the Net Zero programs now provides these companies with a unique opportunity to provide leadership to society at large.
Oil and gas companies are sometimes compared to the tobacco companies at the time when it became increasingly obvious that smoking was a serious health hazard. The tobacco companies deliberately tried to confuse the public with regard to the health impact of their products. It is evident that the oil companies have, at least to some extent, been guilty of the same practice.
But this comparison is misleading. Oil is utterly integral to our society’s infrastructure. Cigarettes are not. People can quit smoking and nothing else changes. But society cannot just quit the use of oil and gas — these energy sources are fundamental to every aspect of modern life. Alternative energy sources are making slow inroads (with emphasis on the word ‘slow’). But they are nowhere near the point that would allow us to stop using oil and gas. If the oil companies go out of business then society, at least in the way that it is structured now, ceases to function.
As an example of the oil industry’s commitment to ‘Net Zero’ is to be seen in the actions of the International Energy Agency (IEA). (The IEA is more than an advisory organization — it has the authority needed to make changes in the international oil markets.) In May the IEA published the report Net Zero by 2050. Part of their report reads,
Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required . . . the focus for oil and gas producers switches entirely to output – and emissions reductions – from the operation of existing assets.
This is a remarkable statement from a conservative organization that generally represents the interest of the companies and nations that are in the oil business; the IEA is basically telling oil and gas companies that they need to discontinue investments in oil and gas business.
The IEA then says that the cut back in oil and gas work must be matched by investments in alternative energy sources. The Washington Post summarizes this aspect of the report as follows,
To limit climate change, by 2030 the world must install the equivalent of the current largest solar park — every day . . . by 2035, the sale of the internal combustion engine needs to be a thing of the past.
This is another remarkable statement. They are saying that all of the millions of cars, trucks, trains and ships that are utterly crucial to our modern way of life need to be gone within not much more than a decade.
The Oil Companies
Two other events that took place in May 2021 illustrate the public relations problems that the oil companies face. The first event was the challenge that three majors — Chevron, BP and ExxonMobil — faced from activist investors. At ExxonMobil two board members were replaced by nominees backed by the tiny hedge fund organization Engine No. 1. At Chevron 61% of the shareholders voted for the company to reduce its Scope 3 emissions (defined as 'indirect emissions that occur in the value chain of the company). The second event occurred in the Netherlands where a court ordered Royal Dutch Shell to reduce its carbon footprint 45% by the year 2030.
The natural reaction for these companies would be to act defensively and to challenge these perceived threats. Yet, by and large, that is not what has happened — many oil companies have now publicly stated that they aim to move into other types of energy business; they are no longer perceive the extraction, refining and marketing of fossil fuels to be their core business.
Two examples of this type of response are provided in statements made by the CEOs of Occidental Petroleum and BP.
Vicki Hollub, (1960- )
As we got to the point where we realized that there was no way to cap global warming at two degrees without a significant amount of carbon capture we then realized that there was an opportunity for us to go further with our anthropogenic plan and make it into a business. Ultimately, I don’t know how many years from now, Occidental becomes a carbon management company and our oil and gas would be a support business unit for the management of that carbon.
Bernard Looney (1970- )
The Oil Companies Kodak Moment
The term “Kodak Moment” originally referred to a rare or special occasion that was captured on (Kodak) film. The term has since developed a second meaning; it has come to describe a situation in which a company fails to adapt to structural changes in its industry such that the company eventually falls into bankruptcy.
The Kodak company was a world leader in film photography. Management of the company recognized that digital cameras were replacing traditional cameras, hence there would be very little need for the film that the company manufactured, nor for its development and printing services. Indeed, the Kodak company introduced one of the first digital cameras to the market. (I know, I bought one, and it worked well.) However, management was unable to maintain revenues and profits from their existing film business, while simultaneously moving out of that business. The company fell into bankruptcy inside a surprisingly short period of time.
In its early days Kodak had been innovative and willing to sacrifice a currently profitable product line in order to adopt a new technology. The company’s founder, George Eastman bet the company on such a change twice — once when he moved out of plate photography to rolls of film, and later when he moved to color.
When one of its own employees introduced the first digital camera in the year 1975 the company was faced with the need to reinvent itself a third time. However, rather than bet the company once again, management played an unsuccessful defensive strategy; they tried to make a gradual transition from film to digital. They went out of business in the year 2012. The digital camera business came to be dominated by companies such as Samsung and Sony that did not need to manage an existing photography business.
Other companies have faced the same challenge. By and large they have not made the transition. For example, the leader in general merchandise sales is no longer Sears Robuck, it is amazon.
Today’s oil companies face a similar dilemma. They have an existing business that is well established, and that is profitable. Yet these companies face structural challenges. Kodak was challenged to adapt to new technology, and failed. The oil companies are challenged to adapt to profound changes in their business environment.
The Slow Train
The goal ‘Net Zero by 2050’ calls for a total transformation of society’s industrial infrastructure in just three decades. This is an extraordinarily challenging goal, as we can see by looking at the time it took for the American railroad industry to make a much, much smaller change: the switch from steam to diesel power.
The following chart, which is taken from the November 2018 issue of the Oil & Gas Journal, shows how long it took for the railroad industry in the United States to switch from steam to diesel-electric motive power.
Diesel and diesel-electric locomotives are attractive economically when compared to steam locomotives, largely because they require less downtime for routine maintenance and cleaning. The chart shows that the diesel locomotives were put into use in the United States around the year 1925. Yet it was not until 1937 that diesel locomotives were commercialized. After that they steadily replaced their steam counterparts. But, even by the year 1955, that replacement was not complete. (The chart shows that the total number of locomotives of both types fell from nearly 70,000 to 35,000. This is presumably because the power of the individual motive power units, both steam and diesel, steadily increased.)
Most other aspects of railroad technology and operations such as the track, the freight cars, the signaling systems, and the Union contracts did not have to change much. Yet this relatively modest adoption of a new technology took decades to implement. If it takes 30 years to transform a single industry, the challenge to do with transforming our entire industrial infrastructure in the same amount of time can only be described as formidable.
Just 30 Years
The post The Three Hundred Year Party describes the extraordinary and unique sequence of events in the three centuries since Thomas Newcomen invented his atmospheric engine. It is this party that is coming to an end, partly due to the impact of climate change.
It took 300 years for the Industrial Revolution to reach maturity, but we are now talking about achieving an equally profound industrial and societal reorientation in less than 30 years — just one tenth of the time. If we are to have any chance of meeting such an astonishing target then leadership and commitment will be needed from every type of organization.
Which is where the oil companies come in.
Most discussions to do with the role of the oil companies are to do with the fact that they are energy companies. Therefore, it should be relatively straightforward, it is thought, for these companies to switch from the oil business to say the solar panel business.
There are two other business activities, however, where the oil companies have special strengths where they can offer unique leadership.
The first of these business areas is to do with the fact that oil companies are vertically integrated organizations that deliver a wide range of energy, products and services to customers. The start by looking for new deposits of oil and gas, and end with consumer-related activities such as delivering gasoline to members of the public, as shown in the sketch. This business profile can provide invaluable benefits to the organizations that are working in just one area.
The second business attribute of oil companies is that they understand how to manage high-risk megaprojects. They can spend billions of dollars on a very sophisticated offshore drilling platform, only to find that they have hit a dry hole. Once more, this ability to manage projects of this type will be invaluable in a world where there will be an immense amount of project work taking place.
The chart below shows the scale of the challenge. It shows how emissions of CO2 have increased inexorably from about 5 gigatons per annum in 1950 to 36 gigatons now. The slope is showing no signs of bending. I have added the dotted line. It shows just how drastically CO2 emissions will have to come down, starting now. None of this is going to be easy.