BP, Big Oil, and climate change: It’s complicated

Every year for the past 68 years, BP has been issuing its statistical review of global energy trends. For those who think that nothing good can come from Big Oil, let it be said that this annual report is highly regarded, in and out of the industry, which is why it is always widely reported (see, for example coverage from newspapers, the trade press, and think tanks). About half the report is made up of tables and graphs; these can be fascinating for energy nerds like me, although perhaps less so for the general reader.

But this year, what was even more interesting was the analysis from BP CEO Bob Dudley and chief economist Spencer Dale. In a webcast introducing this year’s report, the two men said some startling things.  Here is one of Dale’s comments, for example: “There is a growing mismatch between societal demands for action on climate change and the actual pace of progress, with energy demand and carbon emissions growing at their fastest rate for years. The world is on an unsustainable path.”

Here are a few things in the report that stood out to me.

Energy production in the United States keeps growing, and growing: In fact, the record is nothing short of astonishing. “The juggernaut continues to grow,” is how Dudley put it. In 2018, American producers set world records in new production, increasing oil production by 2.2 million barrels per day (b/d). Since 2011, oil production in the United States has risen by 7 million b/d—or as much as Kuwait and the United Arab Emirates combined. As for natural gas, almost half of the increase in production came from the United States—86 billion cubic meters; again, this was the largest increase of any year by any country, ever. Almost all of this is due to shale, which shows no sign of going away.

Renewables continue to grow fast—and basically, it didn’t matter. Yes, renewables are important. As Dale said, they “have come of age”; they are now a critical part of the global energy supply, no longer a boutique sideshow. The cheaper they get, the bigger a fan I become. And they’ve gotten a lot cheaper in the last decade—costs of solar PV modules (and battery storage) have fallen 80 percent and wind turbines by as much as 40 percent. These positive trends have fueled their remarkable growth over this period—an average of 16.4 percent a year for the last decade, according to the BP report (see chart). 

Here’s the thing, though: If you look at the shape of energy use—that is, what kinds of fuels are used for power, and how much—the picture has barely changed. Just look at the chart below.

Okay, then, clearly renewables need to grow even faster. That would help, but the scale needed makes this tough. In 2018, for example, they would have needed to double from their already high level just to keep emissions even because the demand for energy was so high—2.9 percent above 2017, the biggest increase since 2010 and almost twice as fast as the average of the previous 10 years (1.5 percent). And with little appetite for other non-carbon sources of power, such as hydro and nuclear, the implication is that decarbonizing the power sector to the degree necessary to meet the goals of the Paris agreement is going to be very, very difficult. In 2018, greenhouse-gas emissions grew 2 percent—the highest in seven years.

Coal is not dead. In some markets, it is certainly in poor health; its use in OECD countries fell to the lowest level since 1975. But that leaves a lot of the world. Global production rose 4.3 percent, and consumption 1.4 percent, double the rate of the previous 10 years, and after 3 straight years of decline. The biggest users: India and China. This points to two things. First, there are limits to what international agreements and public pressure can do. Schoolkids all over the West can go on strike, and it is not going to matter in India, where the politics of employment and the economy support continued coal investment. And that matters. Despite its recent run of strong growth, India has hundreds of millions of very poor people who lack everything from toilets to light. The key question is whether the best approach to bringing people out of poverty will be renewables, which are getting cheaper all the time and do not contribute to the poor air quality of many Indian cities, or more coal. Then there is the role of China. It was second only to India in the greater use of coal. At the same time, it is by far the biggest gainer in the deployment of renewables, accounting for 45 percent of global growth. For nuclear, it accounted for 75 percent. In short, China is doing everything and on a big scale.

For some people, the most startling thing of all might be the emphasis the BP executives put on climate change. The report itself, for example, is subtitled “Energy in 2018: an unsustainable path.” If this was coming from an environmental organization, such language would be no surprise. But BP? An overwhelming percentage of its revenues and investment are related to oil and gas. Why would a company whose destiny is tied to fossil fuels even pretend to care about climate change? It’s fair to say, after all, that the industry has had its share—and maybe more—of people who deny climate change, or resist doing anything about it. In my experience, however, it’s not hard to find oil-and-gas executives who understand the science of climate change. Many of them are optimists, seeing enormous potential for technology to improve both human development and the environment. But they also believe that fossil fuels are not about to go away, even in a low- or no-carbon future. That view may not be popular with those who believe no cost is too high to address climate change, but it is not unique. The International Energy Agency, the US Energy Information Administration, and McKinsey’s own Global Energy Perspective all see fossil fuels playing a big part in the global energy system for decades to come.

Put it all together and I come to three conclusions. First, fossil fuels are not about to disappear. That said, Big Oil could help its reputation, and its operations, by doing more to decarbonize its own operations, for example by reducing methane emissions, improving efficiency, and putting forward practical regulatory and technological solutions. Second, there is a big disconnect between what needs to happen on emissions, and what is actually happening. And finally, doing anything about it is going to be fiendishly difficult and complicated.  

All views are mine and not those of McKinsey & Company.

Graphics: BP