Oil and gas companies have been the biggest winners of the energy price hikes of 2022. But as yet, there is scant evidence that companies have invested their windfalls in the energy transition. Is there hope that they will? Joelle Thomas reports.

Oil and gas companies have hugely profited  from 20322’s energy price hikes. The world’s top public oil and gas producers cumulatively benefited from over $200 billion in profits alone in 2022 from price windfalls, and shelled out $110 billion in dividends to investors. Similarly, national oil gas companies (NOCs) in the Middle East and Central Asia (facing less scrutiny and transparency than public companies) boosted their expected annual earnings by $320 billion, according to the International Monetary Fund (IMF). For oil and gas companies playing the long game – looking to expand into new green energy sectors in anticipation of a post-oil world, these unexpected earnings presented an unprecedented opportunity to pad growth into greener investments. These additional earnings and profits could have set them on track to investing the $600 bn that is required for the oil and gas sector to reduce emissions by 60% by 2030. Some companies working places with more progressive tax regimes have energy windfall taxes. Public companies like Shell and BP have publicly declared net-zero targets by 2050, meaning they are held accountable by investors, activist groups, and regulators to stay on track. But have these companies truly been investing a slice of their profits in the energy transition? Is there hope that they will?

In short, oil and gas companies’ investments have not been commensurate with their renewable energy targets. The International Energy Agency (IEA) reports that only 2.5% of the oil and gas industry’s capital spending currently goes to clearn energy.  As stated by Fatih Birol, head of the IEA: “More ambitious targets, concrete plans and robust accountability are needed to achieve deep reductions across oil and gas activities and beyond.” For example, despite its record year increase in earnings, BP lowered its carbon emissions reduction targets, and ramped up oil production. A target to reduce emissions by 35-40% by 2030 – made just three years ago—has already been revised down to 20-30%; in parallel, commitments to reduce fossil fuel production has already been reduced to 25%. To take another example – Shell, was expected to spend 12% of its new capital investments in renewable energy (labelled as Renewable and Energy Solutions), the company only spent 1.5%, according to the British watchdog Global Witness. The group called on the US Security Exchange Commission to investigate Shell for its greenwashing claims.

Despite a lackluster track record across the sector, there is some reason to be optimistic. Momentum is building. This year’s COP28, hosted in the UAE under the leadership of COP and Abu Dhabi National Oil Company (ADNOC) Chairman Sultan al-Jaber (the first time that a COP Chairman is also the Chairman of a major NOC) puts the oil and gas sector front-and-center. In anticipation of the event, the COP28 organizing team is marshaling an alliance of global oil and gas companies – provisionally named the Global Decarbonization Alliance, with a goal of achieving net-zero emissions by 2050. While many oil and gas companies have already set a net-zero target, the Alliance formalizes such a goal across the sector, while also proposing that oil and gas companies should aim to “to measure, verify and report their progress on cutting emissions and investment plans on how to do so, initially focused on 2030.” Finally, the proposal aims to put in place tracking for methane emissions. While it does not stay in the atmosphere for as long as carbon dioxide (approximately 100 years), methane is a much more potent greenhouse gas, and is all-to-often released into the atmosphere through leaks at production site or through transport or is burned off.

However, lacking from the Alliance’s agenda are Scope 3 emissions — constituting emissions up and down the value chain. While Scope 1 (direct) and Scope 2 (indirect) emissions are more easily controlled, scope 3 emissions—are generally the biggest contributors to any company’s carbon footprint. Producing oil and gas (in other words, oil and gas scope 1 and 2 emissions) accounts for 15% of the world’s carbon emissions, yet using oil and gas for combustion (scope 3), whether through transportation, industry, or to generate electricity – are responsible for the lion’s share of the global carbon footprint. Al Jaber underscored this reality, announcing at a conference at CERAWeek in March 2023 that, “the oil and gas industry has the capacity and resources to help everybody address Scope 3 emissions.” The proposal for the alliance also calls upon the sector to express an ambition to work with customers, partners and other energy intensive industries to reduce greenhouse gas emissions. Updates on the new Alliance is expected in the lead up to COP 28.

Another reason to be hopeful: actions to reduce (at last Scope 1 and 2) emissions in the oil and gas sector are not a mystery and are achievable with today’s technologies. The Alliance’s commitment to address methane emissions, for example, is a crucial piece of the puzzle. Other decarbonization levers include:

• Electrifying upstream operations. Especially in remote locations, oil and gas companies used diesel or natural gas fired generators to produce electricity. Switching to renewable electricity is a greener alternative.
• Scaling up low emissions hydrogen. Amidst the development of hydrogen-power trains and planes, it’s easy to forget that hydrogen is not new everywhere – in fact, one of the biggest uses of (green) hydrogen today is in refining. Used to clean oil product (desulfurization) and to break hydrocarbon chains (hydrocracking), it is a critical feedstock. Switching from gray to green hydrogen is costly but offers an opportunity;
• Carbon capture and storage. CCUS is having a comeback moment through the US Investment Reduction Act. The oil and gas industry is already leading the way in CCUS, investing heavily in this technology, as it does not require significant changes to industrial processes. However, most decarbonization industry experts advise considering CCUS as a last resort given potential risks.

It is high time that oil and gas companies act on their pledges to accelerate decarbonization. The upcoming COP28 provides a better opportunity than most climate events for oil and gas companies to publicly adjust their business strategies. However, at the time of writing this blog, the signs are not terribly optimistic. In the first days of COP 28, Jaber has announced that there is no science backing the claim that a phase out of  fossil fuels is required to reach our 1.5 degree target.  As he and other oil and gas leaders stride into the limelight at this year’s COP, there has also never been a better time to hold them accountable.