How do climate policies and politics affect oil and gas companies?

The politics of oil and gas production are at the top of the agenda once again. The energy price shock and increasing climate change impacts have led some countries to strengthen policies to shift away from fossil fuels. Despite the overwhelming evidence that fossil fuel use is driving climate change, other national leaders (notably a re-elected President Trump) have drawn precisely the opposite conclusion. They advocate more fossil fuel production, and a shift away from supporting renewables.

Where they have been implemented, climate policies affect oil and gas companies in many ways – often with political consequences. Overall targets for emissions reduction have been adopted by a large number of countries. Whilst these targets reduce the space for emissions from fossil fuels, more specific policies that accompany them have a greater impact. Policies to shift car sales to electric vehicles or to encourage a switch away from gas boilers will eventually lead to demand destruction – a permanent reduction in demand for oil for transport, and gas for heating. In late 2024, the International Energy Agency pointed to falling oil demand in China which could contribute to a plateau on global demand, partly due to the rise in electric vehicles.

Other policies could provide opportunities for oil and gas companies to shift investment away from fossil fuels, and to secure their long-term future. Incentives for investment in renewable electricity, carbon capture and storage and hydrogen have increased significantly – though only renewables have taken off in a big way. Some countries such as the UK and Denmark have also announced restrictions on new licenses for oil and gas production. If they spread, such restrictions could threaten the business model of oil and gas companies. But they have not had a significant impact on major companies or the global market so far.

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Opportunities for a shift away from fossil fuels??

Incentives for renewables are working very well in many countries. They have led to a rapid increase in deployment rates – and a steep decline in costs. The UK’s Contract for Difference scheme has been running for a decade. Since 2014, when the first auctions were held, contract prices for onshore wind have fallen by over 35% in real terms to ￡50/MWh. Offshore wind prices have declined even more, by around 50%. Oil and gas companies have invested in some projects supported by this policy, but they account for a small share of overall investment.

Lessons from this policy are now being applied to contracts for other technologies such as carbon capture and storage. After almost two decades of discussion and false dawns, the first large-scale CCS plant in the UKachieved financial close in late 2024. Perhaps not surprisingly, this plant (the Net Zero Teeside power project) is a joint venture between two large oil and gas companies: Equinor and Shell.

There are political challenges associated with such policies. Many contracts have been agreed at above market prices – so the difference needs to be paid for by energy consumers or taxpayers (which is arguably fairer). Whilst the extent of these costs are sometimes exaggerated by opponents of the shift to cleaner energy, policy costs are a tangible and significant share of energy bills.

Those challenges are arguably more acute when it comes to early-stage technologies like CCS. Contracts for CCS projects have been directly negotiated with developers so far, and there is a lack of competitive pressure to keep contract prices as low as possible. There are significant risks that the government locks consumers in to paying too much for CCS projects for years. The House of Commons Public Accounts Committee recently concluded that there is ‘a high degree of uncertainty as to whether these risky investments in unproven technologies present best value for money for taxpayers and consumers, relative to other ways of decarbonising industrial sectors and energy production’.

The Secretary of State for Energy and Net Zero, Ed Miliband has argued that a reduction in energy bills will be a significant benefit of the UK government’s commitment to a clean power system by 2030. Whilst renewable electricity from solar and wind is cheaper than power from new fossil fuel plants, consumers are not yet benefitting significantly from these lower costs. This is due to the way the electricity market works, which means that gas-fired power still sets the wholesale price most of the time. The political challenge for the government is that it only has a few years to demonstrate that support for non-fossil electricity can deliver what Ed Miliband has promised.

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Threats to traditional oil and gas businesses?

The UK has also made a commitment to ending new licenses for oil and gas production. It is important to understand the context for this significant reversal of the previous government’s position. UK production of oil and gas has been declining since it peaked over 20 years ago. The North Sea Transition Authority (the offshore regulator) projects that production will continue to decline steeply in future. The Authority expects new production to slow the rate of decline, but not to a significant extent.

In practice, the new UK policy is not clear cut. The current debate raging inside and outside the governmentabout the Rosebank oil field demonstrates the short-term challenges of implementing a ban on new licences. Rosebank had been granted a license by the previous government. However, this was recently found to be unlawful by the courts because it did not take into account emissions from burning the oil that would be produced. Ministers are now faced with a dilemma: refuse to support Rosebank, which would reinforce the seriousness of their new policy; or allow it to go ahead on a technicality, and risk a major political row.

This case illustrates the practical difficulties of managing a transition away from oil and gas, even in a country like the UK where the industry is already in decline. Whilst the transition is inevitable, Ministers have argued correctly that the impacts need to be thought through – especially the impact on regions and workers who will be affected.

For international oil and gas companies, one country’s policies are unlikely to be decisive. The investment portfolios of these companies continue to be dominated by fossil fuel exploration and production. Among these companies, Equinor had one of the highest shares of investment in renewables in 2023 – at just under 20% of overall investment. However, their future investment plans have recently been cut back by 50%. This follows reductions in ambition by some other international oil and gas companies.

Whilst this retrenchment is partly driven by shareholders that are used to high returns from oil and gas, it may turn out to be short-sighted. Climate policies are increasingly contested, but many countries still have policies in place that are helping to accelerate investment in renewable electricity and electric vehicles. If that continues, oil and gas producers will end up competing over a declining market. Sooner or later, a much more decisive shift in strategy would be required. A failure to plan for this plausible future could threaten their long-term survival.

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