Growth in renewable energy poses risk to global oil companies: study

Natural gas and zero-carbon fuels will satisfy at least 60% of the increase in global energy demand to 2035 and, under some scenarios, renewable energy could grow nearly 500% in the next 20 years, a new study postulates.

Coal and oil demand could peak well before 2035, and as demand for oil slows and energy growth shifts to lower carbon fuels, renewables will grow rapidly across all regions, according to research/analytics firm Wood Mackenzie’s just-released study, Fossil Fuels to Low-Carbon: The Majors’ Energy Transition.

The three main risks for global oil Majors identified by Wood Mackenzie include: the growth in renewable energy; intensifying carbon policy; and increasing low-carbon competition. The study investigates how the major oil companies are responding to growing pressure to move to a low carbon-energy environment.

“As carbon policy intensifies, the oil and gas Majors will face more regulatory burden and are likely to face increasing costs,” said Paul McConnell, research director for Global Trends at Wood Mackenzie. “Green financing could also mean higher cost of capital for more carbon-intensive oil assets such as oil sands, as investors shift to alternative fuels and lower-carbon technologies.”

Wood Mackenzie’s study shows only 13% of global emissions are currently covered by a price on carbon. The vast majority of the Majors’ upstream operations are not yet directly impacted, with most policies primarily focused on the power and industrial sectors.

Up to 50% of Majors’ production could be hit with carbon costs over the next decade — but only if the countries and regions that currently price carbon extend their policies to the extractives sectors. These are commonly outside the scope of emissions-limiting plans.

“While all the major oil companies put a price on carbon in their long-term planning, the big question is how much risk each has taken into account,” said McConnell. Assumptions vary greatly by geography, timeline and on price from between $6 to $80 a metric tonne, Kallanish Energy understands.

According to the study, the global major oil companies are under pressure to de-risk their existing business models and diversify into low-carbon energies.

“The timing of a transition to low-carbon energy will be critical,” McConnell said. “Diversifying to renewable energy will be a balancing act. Moving too quickly could leave money on the table from the Majors’ fossil fuels business. But too slowly, and they could miss their window of opportunity. The biggest risk for oil and gas companies is to do nothing, and be left exposed to investors making their own minds up.”

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