Black gold, as affectionately known, is crude (Fossil fuel), explored since its discovery by civilizations to power lamps and make small bombs for battle. But since the 1800s, it has been used widely across the globe in every part of society, fueling a massive industrial revolution in the West and significantly enriching states in the East in the 2000s.
Big oil countries and global collaborations such as the OPEC, OPEC plus, and the United States have been big players in global crude oil economics, establishing key management benchmarks, such as the Petro-dollar system and a global crude price benchmarking system to control crude pricing and grow and develop economies. Integrated oil companies (IOCs), also known as “supermajors,” are large companies that play across the entire petroleum value chain from oil exploration and production (upstream) to transportation, refining, and marketing (downstream), as well as other energy-related activities have also been critical to the production and supply of the black gold products across the globe to fuel the entire industrial and transportation sectors to grow the global economy.
Fossil fuel (hydrocarbons) has, however, come with global-level drawbacks. Global warming and climate change have been the effect of over decades of fossil fuel extraction and emissions on every part of the planet. The effect has generated massive changes in climatic patterns and warming of the planet by just +/-2 degrees which doesn’t seem like much but had a catastrophic environmental effect on the ecosystem. There has been increasing climate-induced disaster in every part of the globe, such as severe flooding in Europe, Australia, and several parts of Asia, widespread fires burning large portions of forest reserves and human settlements in Europe, Australia, and the USA, massive drought and shrinking rivers and water bodies in Africa and Europe. The effects of global warming created by the burning of fossil fuels are felt globally, and there are active global-level plans to reduce or slow down the phenomena.
There is an aggressive shift towards renewable energy sources that are much more sustainable and will have minimal effects on the planet. Global institutions such as the COP (Conference of the Parties to the United Nations Framework Convention on Climate Change) and stakeholders in the global fossil fuel industry, and the IOCs have made calls for urgent action to combat climate change and its impact.
The IOCs have announced as part of their policies and operations to go green and to transition towards renewable energy in the future to the extent of becoming the Net Zero emission of carbon despite the high upfront cost of investing in renewable energy. It is important to mention that the usage of fossil fuels may be part of our energy mix for about 100 years from now. But the question is what factors are making the IOCs gravitate towards renewal energy? In trying to answer this question, I will consider mainly government policies and climate change policies and other factors, including consumer and investor pressure, economic factors, competition, and diversification.
The UN pact on sustainable development and several EU, G7 states, and other Transatlantic multilateral agreements have steered government policies in Europe and North America, such as renewable energy portfolio standards, feed-in tariffs, tax incentives, emissions directives, and investment opportunities to direct IOCs to develop renewable energy projects and reduce the planet’s increasing carbon footprint.
Renewable Portfolio Standards (RPS) require a certain percentage of electricity to be generated from renewable sources. This helps countries move away from climate-damaging fossil fuels while promoting the growth of a new clean energy economy, hence compelling IOCs to go into renewable energy. The percentage and concentration vary by country and state.
Feed-in tariffs (FIT) guarantee a fixed price for the electricity generated from renewable energy sources, such as solar or wind power. This helps to provide a predictable revenue stream for renewable energy projects and encourages IOCs to invest in that space.
Governments are offering a range of tax incentives to promote the development of renewable energy projects, such as investment tax credits and production tax credits. These tax incentives attract IOCs to invest in renewable energy.
Carbon pricing policies, such as a carbon tax or emissions trading systems (ETS), put a price on carbon emissions and encourage the shift towards low-carbon energy sources. The carbon pricing policy gives IOCs the option of either reducing their emissions to avoid paying a high price or continuing emitting but having to pay for their emissions.
Governments in Europe and North America have started procuring green energy through tenders to encourage the growth of the renewable energy sector.
Recently, governments around the world, especially in Europe and North America, have announced new climate action policies. These policies would increase the use of renewable energy and decrease the reliance on fossil fuels; this is pushing the IOCs to adapt and diversify their energy portfolio to align with the new policies.
Nationally Determined Contributions (NDCs) under the Paris Agreement, countries have submitted their NDCs, which outline their targets and plans for reducing greenhouse gas emissions. These targets often include increasing their implementation of renewable energy.
Under the Clean Energy Standard (CES) many countries and cities have also developed climate action plans, which set out specific actions and targets to address climate change, including increasing their utilization of renewable energy. While other countries and cities have set targets to achieve zero-carbon emissions, which require a significant increase in the deployment of renewable energy. The Clean Energy Standard (CES) is a policy that was established with a long-term goal of the proportion of electricity that must come from clean energy sources, mainly nuclear power and other renewable energy. Governments in Europe and North America have started procuring green energy through tenders to encourage the growth of the renewable energy sector by the IOCs.
There has been increasing pressure from civil society, consumers, and investors on IOCs to reduce their carbon footprint and address climate change. IOCs, in turn, are responding to this by investing in renewable energy, as it helps them to improve their sustainability and reputation. With the growing presence of renewable energy companies and technologies such as Lithium-ion Storage batteries and industrial-scale solar farms in North Africa and the great plains of North America and investors in green tech, the competition is becoming more intense, pushing the IOCs to move towards renewable energy to remain competitive. However, the advent of Covid-19 and the Russia-Ukraine war has altered the conversation and shown that the world economies are not ready to let go of our reliance on Fossil fuel as oil prices rose sharply with high demand after the pandemic and OPEC Plus’s reluctance to increase the supply of oil amidst the declining pandemic and a new war agonizing the woes of advanced and developing countries alike. This resulted in prolonged disruptions in supply chains and rapid inflation, and empty shelves at supermarkets even in North America and Europe.
Integrated Oil Companies are looking to diversify their energy portfolio and reduce the risk of being reliant on a single energy source. Investing in renewable energy allows them to diversify their portfolio and reduce their exposure to the volatility of fossil fuel prices.
I must conclude that IOCs are business organizations whose interests are profitability in an orderly world. Hence despite the efforts of the governments and pressure groups to go green in the long run, the IOCs logically will prefer prolonging global reliance on fossil fuels and continue to remain the number one source of energy for industry and transportation to further their interests. Global effort through policy and financing opportunities will be needed to increase green alternatives to fossil fuels and maintain reasonable pressure to reduce reliance on fossil fuels and reduce the planet’s carbon footprint.