Navigating disruption within changing systems
Nigel Topping, CEO of the We Mean Business coalition
Managing the transition to a low-carbon economy is the defining challenge for many companies over the next decade. How they react to the disruption it brings will have ramifications far beyond their own boardrooms.
Faced with rapid change it can be tempting to withdraw to business as usual, plot a steady course and hope for the best. However, engaging headlong in the global effort to decarbonize will provide companies with an effective compass to navigate the uncertainties ahead.
The oil and gas sector is facing huge disruption in the race to decarbonize, as a result of the accelerating rollout of both renewable power and electric vehicles (EVs) globally. The challenges of finding a viable pathway, or multiple pathways, for such carbon intensive companies are not to be underestimated. But adopting a spirit of collaboration, where we recognize the inherent strengths of these companies as well as the roadblocks they face, is proving to be far more constructive than casting blame from the outside.
Statoil is one of the few oil majors that is trying to plot an effective course to decarbonization. The company, which is majority owned by the Norwegian government, recently announced plans to invest 15-20% of its capital into renewables and low-carbon technologies by 2030. This includes developing floating wind farms, which plays to the company’s strengths of delivering precision engineering in difficult geographies. These decisions come amid a shifting political backdrop, where the country’s recent election could result in roadblocks to new oil exploration in the region.
The company itself is quick to point out that demand for oil and gas will remain a key part of the energy mix for a long time to come. But in an industry where there has been a distinct lack of leadership, the company’s willingness to lay out a pathway that reflects the demands of the Paris Agreement counts as progress.
Taking decisive action is vital for companies like Statoil if they are to maximise the business opportunities, minimise the risks such as stranded assets and effectively plan to transition workers away from polluting sectors in a just and fair way.
Statoil (soon to be renamed Equinor) is not alone in facing the complex challenge of managing a hydrocarbon portfolio while aiming to decarbonise.
French counterpart Total is targeting 20% of its energy output to be renewable by 2035 and has invested in renewable firm Eren, while Shell is taking a more cautious approach and investing only a fraction of its annual expenditure in low-carbon technologies.
Treating the low-carbon transition with caution is understandable, but underestimating the rate of change carries its own pitfalls. Not only are there risks to the company in the form of bad investments and lost ground to competitors, but a lack of effective planning can have detrimental impacts on a huge range of outside stakeholders.
Forward-looking companies are acknowledging that disruption is not limited to their own businesses; they recognise ramifications through entire value chains, communities and even countries. This can clearly be seen in the race to electrification by the world’s biggest automakers, where the accelerating transition risks unintended consequences if not managed carefully.
The rapid rate of change was recently underlined by Volvo’s plans to shift its entire fleet to hybrid or fully electric engines by 2019. This came as many of the major automakers are announcing plans to gear up their EV offerings in response to a tightening regulatory outlook in countries such as France, Norway, The UK, India and elsewhere.
General Motors announced plans to have 20 new electric models by 2023, highlighting its growing commitment to the all-electric auto industry and the eventual death of the internal combustion engine. And Ford is diverting more investment away from its traditional models.
This rapid electrification represents a seismic shift not only for those companies, but for a whole host of related industries including component manufacturers, commodity producers, electric utilities as well as the production workforce.
Some of these impacts may well have positive effects, such as copper miners seeing increased demand, while some may be potentially negative, such as unemployment at vehicle manufacturing plants due to the reduced number of components used in EVs.
The impact on oil demand from a rapid rollout of EVs is only starting to be fully understood, thanks partly to long-standing conservative forecasts from the likes of the International Energy Agency (IEA) downplaying the likelihood of exponential growth in EV stocks.
Bloomberg New Energy Finance now forecasts more than half of new cars sold globally will be plug-in by 2040, as battery prices rapidly decline, improving range and reliability. This could displace around eight million barrels of oil a day.
With China now looking to follow India by proposing an all-out ban on the production of non-electric vehicles in the coming decades, the era of endlessly rising oil demand appears to be nearing an end sooner than many thought.
This has been backed up by the IEA’s ramped up forecasts for the rollout of renewable capacity. The agency now forecasts global renewables to expand by over 920 GW by 2022, an increase of 43%, thanks largely to increased solar projections in China and India. Underestimating this force for change could lead to oil majors being unprepared, potentially risking the economic growth of countries reliant on oil revenues and the livelihoods of workers relying on the industry for jobs.
This is why it’s vital for companies to actively engage in the coming disruption to ensure the transition happens in a just and sustainable way. It requires a systems-wide approach, which fully integrates internal and external factors, and encourages collaboration between companies, sectors, trade unions and governments.