Many roads lead to Paris

by: Hans van Cleef

Recently I was in London for the International Petroleum (IP) Week. At the conference it was noticeable that this year, in addition to the future of oil, there was much more discussion about the major role that gas (pipeline or LNG) plays in the energy transition. In addition, again the conclusion was that the oil sector has an image problem for a part of the population and needs to communicate more effectively. This was apparent from comments from two important speakers, as I discuss below.

The first speaker was Amin Nasser, CEO of Saudi Aramco. He was recently in Davos, as were many other CEOs and political leaders. His observation was that many of his (mainly European) stakeholders think that it will be done with the oil sector within 5-10 years. That with the arrival of electric cars the demand for oil will evaporate (cars account for about 20% of the global demand for oil), and that sustainable energy will be the only right solution. However, his view was that for 80% of the oil demand, there are no suitable and affordable alternatives, and that the need for flexible supply of sustainable energy sources – such as sun and wind – at a given moment will lead to infrastructure problems if a solution is not found. In Northwest Europe, we sometimes tend to forget that some countries cannot afford the sustainable solution. Or that countries might opt for oil and / or coal for geopolitical reasons. According to Nasser, in addition to the climate problem, there is also a ‘crisis of perception’. In this perception crisis, it is assumed that everyone, at any cost, is fully dedicated to the energy transition in order to bring climate change to a halt, as was agreed in Paris. This is not the case.

According to Nasser, the oil and gas sector must adhere to five principles to avoid the perception crisis:

  • Openly sharing concerns about climate change and the required reduction of CO2 emissions. At the same time, build the supply of affordable, reliable and clean energy (in that order);
  • Show that the sector takes its responsibility seriously. It does this with values ‚Äč‚Äčthat the shareholders also strive for: employment, diversity, compliance and accountability. The extraction of oil and gas can help countries alleviate poverty;
  • Making the sector more sustainable through innovation and technological development;
  • Maximizing the added value of natural resources. The oil and gas sector also partly contributes to economic growth;
  • And finally, improving communication in terms of the message and how the audience is targeted.

Bob Dudley, CEO of BP, added a few other things. According to Dudley, 80% of the world’s population has never travelled by plane. A large part would like to and will do so in due course. 80% of the population also lives under the ‘well-being’ level. An increase in prosperity is generally accompanied by more energy consumption. According to BP, in its Energy Outlook there will still be substantial demand for oil and gas in 2040 (50% of total energy demand). Dudley indicated that he should keep his shareholders on board and at the same time remain attractive during and after the energy transition. “Prepare for a lower carbon world” he said.

It is true that Saudi Aramco and BP both have their own agendas, and that they benefit from oil and gas sales and therefore are trying to prolong the energy transition. That being the case, I think they still have a point. We have recently seen that price movements can be triggered by a relatively small deficit or oversupply of oil. Imagine what happens if the investments continue to dry up while the global demand for oil continues to grow steadily. A huge price increase can have very negative consequences for the global economy, and therefore also for the energy transition.

The final goal, meeting the Paris objectives, is known. How to get there is the unknown. Not only in The Hague during the formation of the climate agreement, but also in London during the IP Week, everyone was fully aware of the need for a further decoupling of economic growth, the demand for energy and the global CO2 emissions. Yet there is still a need today and tomorrow to meet the demand for energy. Not only the final goal, but also the manner in which those goals are achieved, is part of the Paris Agreement. And it will take time for sustainable solutions to fully play their part. The supply of energy must remain adequate and affordable. To achieve this, governments will have to work together more closely. Cooperation as countries, but also working together with the business community to promote efficiency, sustainability and open communication with society. We cannot just discuss the things we don’t want, but also find the things that we do want. See what is sufficient and technically feasible. And then look at how this can be part of the energy mix. By issuing clear guidelines, governments can create clear and long-term frameworks. Markets can then determine by themselves the final winners and losers of the energy transition. Economically, therefore, we would all benefit more from a controlled transition rather than an uncontrolled transformation.