The fossil fuel industry is about to have a bad energy transition

PERSPECTIVE

Timed out

The fossil fuel industry is about to have a bad energy transition, says Mark Campanale

The fossil fuel industry may be about to have a bad energy transition.

In 2024, world power emissions are predicted to peak – a major energy milestone and signalling the beginning of the long-term decline in fossil fuel use. The industry, however, is misaligned with Paris climate goals and is unready for the speed of demand substitution for its products.

This poses a major risk for the fate of our planet.

The Carbon Tracker Initiative’s recent report, Paris Maligned II , highlights three key areas where oil companies are pursuing short-term gains at the expense of the planet’s health, paradoxically jeopardising their own stakeholder returns.

• The first area is misaligned executive remuneration– fossil fuel firms still reward ?leaders for production growth, rather than good production management.
• The second is misaligned corporate goals– despite the focus on growth, firms are actually using cashflows to increase dividends and share buy-backs; while watering down emissions targets and reducing investments in longer-term projects or renewable growth opportunities.
• Third is misaligned technologies— firms also divert resources into technologies that are aimed at extending the life of oil and gas output such as Carbon Capture Utilisation and Storage (CCUS). A costly business distraction, with very few benefits to global emissions reduction.

Put together, this adds up to a fossil fuel industry that is pursuing purely tactical transition thinking by continuing to focus on current production and recycling cash without any longer-term energy aims. For all its apparent strengths, the fossil fuel industry’s future seems more and more built on shifting sands. The industry’s actions are built on two assumptions: that OPEC (the cartel that controls significant amounts of world oil output) will continue to cut production to preserve prices, and that fossil fuel consumption will persist over the long term. If either of these supply and demand bets prove wrong, fossil fuel prices may rapidly fall – yet oil and gas firms have hardly prepared for this outcome.

Take supply.

Relying on rigid OPEC discipline has been viable in recent years, but OPEC’s chronic determination toward production cuts suggests a lack of health in underlying demand. And, the oncoming peak in power emissions demand and transport fuel demand will be a shot across the bows of future fossil fuel growth. How so?

New, cheaper manufactured technologies such as wind and solar are forcing fossil gas off the electricity grid, and electric vehicle (EV) batteries are pushing oil fuels off the road at an accelerating rate. What started as a drive to lower emissions, is now being propelled by better economics and greater energy security, as Carbon Tracker has pointed out:

“Even if CO2 were a benign molecule, the transition we are now seeing would still go ahead.”

So, what is the outlook now for the oil and gas companies?

They remain energy providers but are increasingly misaligned with energy’s future:

with weakening investment in their core assets and token financing in renewable alternatives. Their culture and performance incentives have not adapted to the new energy environment – they live off the tenuous behaviour of OPEC, and precarious belief in unending fossil fuel demand growth – both of which are now clearly high-risk bets.

However, they remain powerful and will likely try to use their lobbies to push for continued dependence on transport and industrial fuels and petrochemical products, propping up emissions from various sectors, and flooding the world with plastics it doesn’t need.

What about the solution? ?

We are in urgent need of a consensus.

That there should be no new fossil fuel developments, a planned production decline rather than planned production growth, and diversification into renewables. Investors must push energy firms into lower production to reduce environmental harm and their own financial exposures.

Even with limited investor pressure to date, this seems to be an emerging strategy of many firms – except they are only following the first part: lower fossil fuel investment, and not the second: diversification. The free cashflow they have is going into pay-outs rather than new oil and gas projects. But the percentage spend on diversification into renewables is a tiny fraction of overall expenditures, despite much publicity suggesting otherwise. In other words – they are quietly reducing their role in energy supply and aiming for cash supply.

The bottom line is energy transition is well underway and will carry on even if the fossil fuel industry resists or ignores it. Without a fast change in strategy, the industry is likely to have a bad transition, because the choices it has made means its chances to lead it and avoid the consequences of a much-diminished energy role, have probably timed out.

Mark Campanale is co-founder of Investor Watch and Planet Tracker, co-founder and Executive Director of Carbon Tracker and advises financial institutions including Tribe Impact Capital and Consilium Capital.

To read Carbon Tracker’s Paris Maligned II report, click here .