Why Big Oil Isn’t Losing Sleep Over the New Climate Deal
The COP28 climate summit in Dubai recently concluded with a landmark deal calling for a transition away from fossil fuels. While some countries, including the United States, applauded this as the firmest-ever commitment to moving away from energy sources responsible for significant planet-heating emissions, critics argue that the agreement falls short of demanding a complete “phase-out” of oil, coal, and gas.
It’s important to note that more than 100 nations supported the position of phasing out these fossil fuels. The outcome raises questions about whether this climate deal represents the beginning of the end of the fossil fuel era or if there is still significant resistance within the oil and gas industry to such a transition.
“The resolution is marred by loopholes that offer the fossil fuel industry numerous escape routes,” said Harjeet Singh, the head of global political strategy at the nonprofit Climate Action Network International.
Despite any ambiguity or dilution of language in the deal, some argue that it appears disconnected from the current reality. Notably, U.S. oil production is at a record high, India has plans to double coal output by 2030, the UK is issuing new drilling licenses in the North Sea, and major American oil companies are making substantial investments, signaling their anticipation of robust demand for oil and gas over the coming decades.
This underscores the challenge of aligning global commitments with on-the-ground practices and industry trends, highlighting the complex and often conflicting dynamics between climate goals and the immediate economic interests of some nations and industries. The effectiveness of international climate agreements often hinges on the ability to bridge such gaps and reconcile ambitious targets with practical, achievable actions.
“Anything less than a systematic transformation of the fossil fuel industry would be at odds with COP28’s deal,” said Daniel Klier, the CEO of ESG Book, a provider of sustainability data on companies. “The reality is no single climate summit can single-handedly drive the transition away from fossil fuels, let alone a phase-out.”
Recent developments provide further evidence of the oil and gas industry’s continued emphasis on fossil fuels. Occidental Petroleum, on Monday, announced a $12 billion cash and stock deal to acquire U.S. shale oil producer CrownRock. This move follows ExxonMobil’s $60 billion deal in October to acquire shale driller Pioneer Natural Resources and Chevron’s agreement, less than two weeks later, to purchase shale producer Hess for $53 billion.
Additionally, there is speculation about a potential $50 billion oil and gas deal in Australia, where Woodside Energy and Santos are considering a merger that would establish one of the world’s largest exporters of liquefied natural gas (LNG). This trend suggests a significant ongoing commitment to fossil fuel investments, indicating a belief in continued strong demand, particularly in the Asian market.
“Markets aren’t functioning properly and are rewarding the wrong companies … If anything, our future depends on markets rewarding those oil companies that are decarbonizing at pace,” said ESG Book’s Klier.
Despite the recent windfall profits in the oil and gas industry, major companies with ample cash reserves are prioritizing the acquisition of lower-cost assets and boosting shareholder returns. However, there is a significant disparity in investment, with much less capital directed towards renewable energy projects.
According to the International Energy Agency (IEA), the industry allocated just $20 billion to clean energy projects last year, representing approximately 2.5% of its total capital spending.
The IEA emphasizes that for effective climate action and to limit global warming to 1.5 degrees Celsius above preindustrial levels – a critical threshold to mitigate the severe impacts of climate change – the industry’s investment in clean energy should increase substantially to reach 50% by 2030. This shift is considered vital in averting the worsening effects of climate change, including extreme weather events, wildfires, and food shortages.
The recent surge in deals within the oil and gas industry provides little hope that companies in the sector are planning radical changes to their spending strategies, which is deemed urgently necessary. Despite the imperative for a substantial shift in investment towards cleaner and sustainable energy alternatives, the ongoing focus on acquiring fossil fuel assets and returning cash to shareholders suggests a persistence in traditional practices rather than embracing transformative approaches that align with global climate goals.
“With the world suffering the impacts of a worsening climate crisis, continuing with business as usual is neither socially nor environmentally responsible,” IEA executive director Fatih Birol said in a statement last month ahead of the climate summit. “The oil and gas industry is facing a moment of truth at COP28 in Dubai.”
On Wednesday, Fatih Birol, the head of the International Energy Agency (IEA), expressed congratulations to the COP28 Presidency and countries for the major outcome of the climate deal, emphasizing the goal of transitioning away from fossil fuels in line with the 1.5-degree Celsius target.
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However, the IEA did not provide further comment on how the deal aligns with the agency’s earlier calls for a halt to all new investments in oil and gas projects. The agency noted on Sunday that the world is still off-track to limit global warming to the critical 1.5-degree threshold, despite numerous pollution-cutting commitments made by countries during COP28. The IEA anticipates that global demand for oil, gas, and coal is likely to peak by 2030.
Even European oil giants like Shell and BP, known for a comparatively better track record in renewable energy investments, continue to allocate significant funds to fossil fuels. Earlier this year, BP revised its climate targets, scaling back ambitious reductions in carbon emissions and oil and gas production set three years ago.
