WPC 2020: Climate pressure will force new energy strategies

21:06 PM | April 2, 2020 | Rebecca Coons

Global energy markets are on the cusp of change as companies under pressure from diminishing returns, shareholder climate resolutions, and demand destruction are forced to adapt. 

 “There is a target on the energy sector’s back when it comes to climate-related risk and greenhouse gas emissions,” says Susan Farrell, vice president, Energy Futures at IHS Markit, speaking at the IHS Markit World Petrochemical Conference 2020 Online. “Eighty-nine percent of CO2 emissions are from energy related activities… So, the energy industry is viewed as the obvious target.”

Pressure from shareholders is increasing, with divestment campaigns and limits on new funding for the hydrocarbon sector. In the US, energy companies are the most targeted for shareholder climate resolutions, narrowing financing options. “The financial sector is continuing to pressure businesses to assess what their risk is going into an environment in which the demand for hydrocarbons may be in decline,” she adds. 

Farrell says that the energy sector was already under strain before the coronavirus disease 2019 pandemic and steep decline in oil prices. Return on capital for global integrated oil companies has been falling for several years.  “[And now we] are looking at a substantial decline in oil prices in 2020 heading into 2021 because of that confluence of over oversupply and unprecedented plummeting of demand.” 

CUSP OF CHANGE

Farrell notes that IHS Markit has several energy scenarios mapped out as the world works to meet climate change goals of capping the temperature increase to less than 2 degrees Celsius by 2050. The most plausible scenario does not move quickly enough to low-emission pathways to meet this target, however. “Radical change” would be necessary, and the scenarios in which mitigation goals are achieved result in “real demand destruction.” At 2050, a more plausible scenario has more than 100 million barrels per day of consumption, compared to 70 million barrels per day for a low-emission outlook. 

Energy companies are employing different strategies to adapt, Farrell says. These include diversifying into growth areas, integrating vertically in the energy value chain, creating technology breakthroughs, cut costs and emissions drastically, shifting business mix and narrowing focus, divesting/downsizing hydrocarbon investments, returning more to shareholders and putting less back into the business.  The energy sector is increasingly investing in low-carbon technologies, but Farrell admits it has been overall a very small portion of overall capex. 

Industry will nonetheless be forced to adapt as the pressure will only increase. “Climate change will not go away… [I]t is a megatrend that is going to continue whether we have a virus and whether we have an economic downturn or not. The need to lower the [global] temperature and the focus on energy-related companies is going to be sustained.”