Oil and gas companies are risking their long-term profitability by failing to act on climate change, which is already fueling a growing backlash against the industry, the International Energy Agency has warned.
The Paris-based organization, or IEA, said in a new report that oil majors will need to reduce their greenhouse gas footprint much more quickly if they do not want to fall victim to climate impacts, requiring more efficient operations and higher investment in low-carbon activities.
"No energy company will be unaffected by clean energy transitions," Fatih Birol, the IEA's executive director, said in a Jan. 20 statement. "Every part of the industry needs to consider how to respond. Doing nothing is simply not an option."
While fossil fuels still drive returns at Royal Dutch Shell PLC and its peers, European oil and gas companies in particular have already made moves to diversify their energy mix. Shell and Norway's Equinor ASA are among those leveraging their offshore expertise to become large players in the rapidly growing offshore wind sector.
Others, including Total SA and BP PLC, are also building onshore renewables, and most of the big players have designs on other parts of the power value chain, such as retail supply and electric vehicle charging. Oil and gas companies outside of Europe, including in the U.S., have so far been much more hesitant to expand into low-carbon alternatives.
Aside from intensifying public climate protests, the oil industry's expansion into alternative energy has also come on the heels of growing pressure from investors. BlackRock Inc., the world's largest asset manager, this month joined the Climate Action 100+ initiative, which has successfully lobbied companies for years to align their strategies to the Paris agreement on climate change.
As a result, companies like Shell and Repsol SA have started implementing short- and long-term targets to reduce their emissions intensity, including carbon released by customers who burn their products.
The IEA's research is used by governments to draft energy policy and the organization itself has been criticized in the past for projecting future energy scenarios that are not aligned with emissions reduction targets under the Paris Agreement on climate change.
Although it acknowledged that there was no ideal strategic blueprint for the oil and gas sector, the IEA said the industry still has the potential to play a much more significant role in the energy transition through its "engineering capabilities, financial resources and project-management expertise."
Birol said this includes the environmental footprint of companies' own operations, where emissions can be brought down "relatively quickly and easily" by reducing methane leaks, eliminating routine flaring and integrating renewables into new upstream developments.
Oil companies should also drive ahead technologies that are less established, such as carbon capture, utilization and storage or hydrogen produced from green electricity. In particular, alternative fuels like hydrogen, biomethane and advanced biofuels could pay off, the report said, because they can deliver the same benefits as oil and gas, but without the emissions.
Despite the need for emissions reductions, the IEA pointed out that investment in existing oil and gas fields — and even some new ones — will still be needed. If this were to stop at once, supply would fall faster than demand in any scenario, it said. As a result, some companies, particularly state-owned national oil companies, could stick with oil and gas for as long as possible. National oil companies control more than half of global oil production and an even larger share of reserves.
But even at the integrated majors, investment in areas outside of traditional businesses only amounts to a fraction of capital spending. Data compiled by CDP, an investor advocacy group, shows that capital expenditure in low-carbon activities has remained below 5% for even the most active in the industry.
According to the IEA, investment outside of core business areas has averaged less than 1% of total capital expenditure. Overall, it concluded, "there are few signs of the large-scale change in capital allocation needed to put the world on a more sustainable path."