Can Big Oil be part of a post-carbon world?

Source: Can Big Oil be part of a post-carbon world?

Global CO2 emissions rose by less than 1% last year, with increased coal and oil production offset by a surge in renewables, EVs, heat pumps, and energy efficiency measures. Add in the prospect of windfall taxes, stranded assets, and a younger generation sneering at its products, and the future of the oil, gas, and coal industry doesn’t look quite so rosy. So what’s next for Big Oil? Should oil wells simply be plugged and refineries shuttered, or can the biggest corporations the world has ever known even help humanity’s biggest industrial and social transition?…

1.  Don’t just divest, destroy. Over 1550 institutions have announced their divestment of fossil fuel stocks, to the tune of over $40 trillion—the biggest such organized sell-off in history. But not so fast, warns Tom Johansmeyer in the Harvard Business Review. Selling off an asset requires someone else to buy it, and that can breathe new capital into the very assets activists are trying to choke. “There’s another approach: running those assets into the ground,” he writes. “By holding onto fossil fuel assets, investors can resist efforts to improve their output and extend their lives… and ultimately have more of an impact than if they simply washed their hands and dumped these investments.” This process, called running off, is already being trialed: Harvard University divested most of its fossil fuel investment, but has kept 2% to be run-off.

2.  You can’t trust an addict. Despite oft-repeated claims of corporate responsibility and vows to transition from fossil fuels, Big Oil remains hooked on carbon. BP recently scrapped a plan to cut production 40% by 2030, reports the New York Times, setting a new target of just 25%. And Shell said it would leave its renewable energy spending at 2022 levels rather than continue the company’s expansion in wind, solar and biofuels.  

3.  Managed decline. California has just passed a law that places a profit cap on its oil refineries. If oil companies enjoy too big a windfall, they will face a “price gouging penalty.” More importantly, the state is now in the process of preparing an equitable refinery transition plan, which could potentially include using the facilities for sustainable fuel or hydrogen production. According to Energy Intelligence, eight U.S. refineries have already announced conversions to produce renewable fuels. By 2025, these facilities could displace 238,000 barrels per day of fuel—mostly diesel.

TOM JOHANSMEYR—Fossil fuel divestment certainly has some amount of value as a tool for promotion and advocacy, and in general, the decision by asset managers to divert capital from fossil fuels is laudable. However, it requires near total adoption to truly be effective, and without that penetration, divestment could have the unintended negative consequences shown above. For more effect than symbolism or public discourse, alternatives to the sale of fossil fuel assets must be considered.

What’s better than divestment?

Run-off strategies are poised to succeed where divestment campaigns fall short. As illustrated above, divestment is built on an inherently contradictory and counterproductive dynamic, in which the divested asset could become more negatively effective. On the other hand, running off an asset instead of selling it, simply means holding it until can be terminated. For example, this could entail holding a fossil fuel company’s debt to maturity and then not renewing or extending another loan, or it could mean operating a physical asset (like a refinery) until it is no longer useful, to include resisting investments in improvements that would make the asset more productive and longer-lived. Instead of extending the useful life of a fossil fuel asset or otherwise improving it, run-off involves setting a time horizon for ending its productivity.

Run-off, of course, lacks the immediacy of divestment. Selling an asset today — or committing to do so — is easy to communicate: I’m getting this off my books now. It makes for a great a great line in a letter to investors. Explaining a fossil fuel run-off strategy requires complexity, nuance, and patience. In the long run, it’s worth the effort. And, run-off can even be paired with divestment. Divesting an asset to a party that commits to running off the asset sets the asset on a course for run-off. While run-off hasn’t received as much attention as divestment, the strategy is already being used. The 2% position in fossil fuel investments that has survived the Harvard University endowment’s divestiture commitments is in fossil fuel investments to be run off.