Climate change is a concern for many business and governments around the world; however, oil and gas firms in particular have begun to assess what the implications of climate change are for their businesses. A few progressive oil and gas firms have publicly stated their belief in climate change and how they will address this issue in their business models.
Over the last few years scientists, non-profits, and governments have raised a call to action against climate change – calls which mostly fell on deaf ears. The Paris Agreement in 2015 has solidified these calls and governments and businesses have sprung to action to combat climate change. Oil and gas companies have taken note and realized that public and economic pressures will continue to exert downward pressure on demand for hydrocarbons.
Royal Dutch Shell, an oil supermajor based in The Hague, believes in climate change and has taken steps to shift the focus away from oil and towards gas and renewables . This shift will require modifications to the existing supply chain of their business. The concern is no longer a supply concern, as it was less than 10 years ago, but a peak-demand concern due to the advent of renewables, electric vehicles (EV), and increasingly energy efficient technologies. Both private and public investment in energy has been focused on renewables. Venture capital firms are getting back into the cleantech industry after years of reticence due to the cleantech bubble 10 years ago. Technologist billionaire Bill Gates has taken up the call to battle climate change and launched a cleantech fund, Breakthrough Energy Ventures, . Sovereign wealth and endowment funds are facing increasing pressure from investors to diversify assets away from carbon-emitting energy sources – Harvard included . The increased competition in the energy space and the demand from the public to transition to renewable sources will persist into the foreseeable future and O&G firms will need to find a way to adapt.
Changes in the Industry
Market and public pressures on the supply chain of oil and gas firms have resulted in leaner companies, grappling with how to change their operating models and optimize for the future. Figure 1, illustrates the supply chain for most oil and gas companies . Many of the changes on the supply chain for Shell are currently happening on the Upstream (red box) portion of the supply chain. A few examples of the changes on the supply chain include, no longer drilling in the artic, decreased focus on offshore production, increased focus on onshore production and shale oil. The focus on costs and efficiency have predominately been due to market pressures, which have in turn positioned them to take these learnings to other sectors of the energy industry. The focus on keeping a competitive cost advantage and global supply chain will position Shell to be successful on its energy journey.
Currently, Shell is investing in optimized oil production technologies, which would enhance the productivity of a well. They are also investing in carbon capture and sequestration technologies in order offset their upstream and downstream carbon emissions.
The focus on costs and efficiency are great short-term solutions, however; they do not address the longer-term impacts of climate change.
In the short term, Shell should focus on exploring for low-cost oils and incorporating carbon capture and sequestration technologies to their current operations. They should explore more efficient and autonomous focused transportation methods for their products and their demand is global. Shell should also begin exploring carbon pricing scenarios and its effects on their current operations as some governments are currently moving towards carbon taxation as a potential means to reduce carbon emissions.
In the medium term, Shell should focus on identifying and developing new renewable energy sources which they can add to their business model. There are many capabilities that an oil and gas firm can directly translate into the renewable sector such as engineering, project evaluation, and operations. Shell should begin to develop these internal capabilities for themselves and offer renewable sources such as wind, solar, hydrogen, and biofuels.
Given the changes Shell has undertaken to pivot towards gas and renewables, it begs the question of whether Shell can and more importantly should become an energy firm.
- Steven Mufson, “Shell CEO Says Climate Change is Real but Energy Demand is Unstoppable” , Washington Post, May 22, 2017, https://www.washingtonpost.com/news/energy-environment/wp/2017/05/22/shell-ceo-says-climate-change-is-real-but-energy-demand-growth-is-unstoppable/?utm_term=.95e22ccba411 , Accessed November 2017
- Kerry Dolan, “Bill Gates Launches $1 Billion Breakthrough Energy Investment Fund”, Forbes, December 16, 2017, https://www.forbes.com/sites/kerryadolan/2016/12/12/bill-gates-launches-1-billion-breakthrough-energy-investment-fund/ , Accessed November 2017
- Oliver Milman, “Harvard Pausing Investments in Some Fossil Fuels”, The Guardian, April 27, 2017, https://www.theguardian.com/environment/2017/apr/27/harvard-university-pausing-investments-in-some-fossil-fuels , Accessed November 2017
- Susan Lumieux, “Energy Understanding Our Oil Supply Chain”, American Petroleum Institute, http://www.api.org/~/media/Files/Policy/Safety/API-Oil-Supply-Chain.pdf, Accessed November 2017