'Managed decline' and 'first one out' are commercially viable options for oil majors in a two degrees world, new research suggests
New research released today suggests the only commercially viable future for oil majors in a carbon constrained world is a gradual winding down of their operations or a quick sell off of assets.
The report, from environmental think tank E3G and the Oxford Sustainable Finance Programme, simulated a scenario under which the world's largest oil companies would be forced to shift their business models in line with a 2C trajectory for global emissions, as agreed by governments under the Paris Agreement.
It is based on the results of a 'wargaming' experiment where decision-making by competing oil executives is simulated over several decades. Participants in the game that informed the study included current and former professionals in the extractives and investment industry.
It found that oil firms' best chance of commercial survival is to rapidly diversify from fossil fuels into alternative technologies such as renewable energy, and gradually retire upstream fossil fuel assets.
While a number of highprofile oil and gas firms have started to step up investment in cleaner energy in recent years, very few, if any, have acknowledged the need to start retiring fossil fuel assets.
"Out of five possible strategies, only 'managed decline' and 'first one out' are commercially viable options for International Oil Corporations ," said Ingrid Holmes, director at E3G. "These are the most difficult to implement as they require long-term planning and shifting investor attitudes."
But firms will have to be prepared to experience significant challenges in the short-term, warned Ben Caldecott, director of the Oxford Sustainable Finance Programme at the University of Oxford.
"Diversification at the speed required to ensure survival will entail lower dividend payments to shareholders, especially in the short to medium term," he said. "These are the kind of grown up conversations that companies and their investors need to have as soon as possible. A deal can be struck now between companies and their shareholders to ensure their long-term future and one that is also compatible with the rapid decarbonisation of the global economy."
The researchers also warned the costs associated with transitioning to a clean energy economy are likely to increase with time, so policymakers must act quickly to set out a clear pathway for investors and societies to minimise the financial impact.
The results follow reports from oil majors including Chevron and Exxon which for the first time spelled out the carbon majors' vulnerability to a 2C scenario. But while most oil companies acknowledged the rapid transition underway in their industries, they broadly concluded that the low-carbon shift poses little risk to their business strategy.
This is despite evidence suggesting investment decisions taken over the next few years could put $2.3tr of capital at risk unless oil and gas firms explicitly align their business strategies with a 2C scenario.
Talk of 'managed decline' and 'first one out' will be understandably to many within the oil industry, not to mention the treasuries around the world that rely on them for revenues. But the hope is that the latest report in a growing series of investigations on the implications of the 'carbon bubble' will serve as a wake up call. After all, it is increasingly hard to argue with the underlying logic the meeting the goals of the Paris Agreement means leaving fossil fuel assets in the ground. If demand for oil does start to decline as planned, then 'managed decline' may be the only option for the industry that dominated the last century.
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