In order to react to

criticism from society, companies have recently

taken several initiatives, some of which are quite interesting and
should be mentioned. For example, there is the Oil
and Gas Climate Initiative, which has grouped together several international and
national oil companies. This initiative is pursuing
three major strategies. One is reducing the
carbon footprint of the energy value chain. The second is accelerating
low-carbon solutions. The third is enabling
what they call enabling circular carbon model. What does this mean? In the next
graph, you will see these three
different targets represented on the left of the slide in
a short description of each, at the center you
see what is meant by reducing the carbon footprint
of their operations. This is done by limiting
the energy input, which is needed to explore
and produce oil itself, limiting emissions of methane in the atmosphere and also
the flaring of methane. So flaring and venting of methane in association with oil
production must be limited, and this is recognized. The companies have established
specific targets that
they intend to meet collectively in order to reduce the carbon footprint of
oil and gas production, and this would be
a major step forward. On the right hand side
of the slide, you see the meaning of working
for a circular economy. This basically means instead of emitting carbon into
the atmosphere, so emitting CO2 into
the atmosphere, moving in the direction
of capturing CO2, both in the operations of
the companies themselves. So both at the stage of producing oil and
gas which is already taking place and also at the stage of utilization
of oil and gas, so in power plants, in cars, and so on and so forth, and capturing
CO2 and
either storing it, sequestering it in
deep geological formations or re-utilizing it for the
production of useful products, which is a possibility. So the idea is that
we might be able to continue using oil and gas
and coal for that matter, but we would need to capture
CO2 so that it is not emitted into the atmosphere and becomes a factor
in climate change. When we go to the numbers
and we look at how much of their investment budget companies effectively devote to
alternative energy sources, we see that this percentage
is really very limited. We are talking about a maximum of five percent of
the total investment budget which companies devote to
alternative energy sources. This is not surprising because their main job is to
explore
and produce oil and gas. So oil and gas activities that are highly capital
intensive and inevitably much of their
investment budget ends up being devoted to
their traditional activity, this is viewed as
very disappointing by many outside observers. But one should also take
into account the fact that international
companies do not have any special advantage in investing in some of these areas.
They are not especially good
in developing solar or wind. They may be good and have a special knowledge in
developing carbon capture
and sequestration, in developing bioenergy
because in the end, bioenergy means
producing biofuels which are similar to oil and gas. But in other areas, they have
no special strength. If we look at research
and development that is devoted to
low-carbon technologies, we see that the percentage is even smaller of the total
research and
development expenditure. It is in all cases less than one percent of total research
and
development expenditure. Some international
oil companies have been doing, they've been shifting their
investment from oil to gas. This is because while there
is a possibility that oil demand may peak and the use of oil might
need to decline, there is basically
no scenario in which we have a significant decline
in the use of gas. Natural gas is preferable
to all other fossil fuels because of its more
limited carbon emissions. So companies have been
shifting from oil to gas and consultancies have been working on measures of
resiliency
for individual companies, and how much they are
oil intensive or gas intensive is one of
the key considerations. As you can see in this slide, which comes from a report
recently published by
a consultancy called CDP that engages in an analysis of oil companies action with
respect to climate change, some companies, those that are represented in the bottom
left quadrant, are considered to be
more resilient to climate change while
others are more exposed and would be
losing more heavily if definite action is
taken in order to achieve the targets of
the Paris Agreement. The next graph also shows you how the mix between oil and gas
works out
for different companies. You will see that
some of the companies are essentially gas producers. This is the case of Gazprom
to the extreme left. Other companies are
both oil and gas producers but the ratio to which they engage in
gas versus oil differs, and some of them notably
Shell or Total or Eni are more engaged in gas or produce more gas
than they produce oil. Companies are not
subjected to pressure from environmental groups only, they also are under pressure
from financial analysts. Financial analysts
have been preaching the gospel of returning
value to shareholders, which is very similar to
maximizing the value for the profits and the returns
for shareholders. They are calling
companies to increase dividend payments and engage in schemes to purchase
their own equity. So devote money not to
investment in oil and gas or in alternative energy sources
but devote money to purchase their own shares
from the market. So that the price of
their shares will go up and the number of outstanding shares
will be reduced. Another mantra has been
investment discipline, whereby companies are
told that they should not invest in expensive projects
or projects whose maturity, whose benefit is very
much delayed in time, but focus on
those projects that are low cost and promise
quick returns. So it's a very
short-term approach that is being pushed
towards the companies. In contrast, at the opposite end, the International Energy
Agency has expressed a preoccupation that insufficient investment is going into
upstream oil and gas. This may cause a spike in oil prices and
gas prices in the 2020s, and this would be negative for global growth and
in the end probably negative also for
the energy transition although it would encourage
reduction in demand. So it should be kept in
mind that oil fields which are currently in production are
naturally declining. Every year, some
production is lost because the resources
progressively exhausted. At the same time, demand, at least for the time
being, is growing. As we have seen already
in a previous unit, it is expected to keep growing in most scenarios at least
for the next 20 years. So the danger of
insufficient investment is real. Companies, therefore,
face huge uncertainty. On the one hand they're told they need to invest more
to meet demand and demand is growing and
they need to invest more also in alternative
energy sources. If they believe that the Paris Agreement targets
will be implemented, they would need to shift their investment to
other projects completely. But this is not what is
happening in reality, and so they don't know in
which direction they should go. How fast will the
world decarbonize? That's a question that companies
need to ask themselves, and it is crucially
important for them, but no clear answer is available.