How to Compost an Oil Company

Break them down to help something more useful grow.

Someone has been playing with AI-generated images.

It's no secret that we need to decrease our use of fossil fuels to better our chances of having a livable future. The more time we waste not winding down these industries the worse our future will get.

This isn't happening though. A recent report by Carbon Tracker, titled, Paris Maligned II, shows that the 25 largest publicly traded oil and gas companies aren’t bothering to align with a wind-down of their businesses that would be required to hit even the more modest 2.0C degrees target of the Paris Agreement.

These companies are investing in new production. Each seems to be betting that they can be the “last man standing” as oil and gas demand cools down in the coming years as climate change gets worse and cleaner energy production increases.

This isn't an unreasonable position from the point of view of oil and gas companies. The world will need oil and gas in the midterm and long term, just a lot less of it. The executives and shareowners at each of these companies are incentivized to bet that their company is the one that will survive or one of the few that will survive.

You try telling the CEO of an oil and gas company to stop doing the job that's making them millions of dollars a year. Don't forget to say please. They're not going to do that until they are forced to. The market will eventually force many of them to do so, but that isn’t going to happen tomorrow, so they will continue cashing those big checks, thank you very much.

We need to compost oil companies.

We need to wind down these companies at a much faster rate. We need to “compost” many of these companies. This means breaking these companies down into their parts, so they can do more good than they are doing now. This isn’t an “oil companies” are evil tirade. This is a “most oil companies won’t survive what is coming” tirade. In that case, we might as well make them useful – compost them.

The resources of these oil and gas companies, namely their money, their expertise, and their employees, can do a lot of good – but most of them need to be broken down to do so.

The 2023 UN production gap report, which tracks the discrepancy between governments’ planned fossil fuel production and global production levels consistent with limiting warming, doesn't paint a pretty picture. The report finds that governments plan to produce around 110% more fossil fuels in 2030 than would be consistent with limiting warming to 1.5°C, and 69% more than would be consistent with 2°C. The report states that countries should aim for a near-total phase-out of coal production and use by 2040, and a reduction in oil and gas production by 3/4 by 2050 from 2020 levels.

Another recent study finds that the majority of existing fossil fuel reserves need to be left in the ground – 90 percent of coal reserves, and 60 percent of oil and gas reserves.

 We are nowhere near on track for that.

Another Carbon Tracker report, Adapt to Survive set out the choices oil companies face. Either they phase out their production to keep the world on track, or they continue to grow production, risking increased environmental risks and increasing risks of stranded assets.

The “last man” standing is likely not going to be one of the publicly traded major oil companies. It is likely going to be Saudi Aramco that can produce a barrel of oil for under $10. The average cost around the world is in the $30 – $40 range.

Companies with high costs such as smaller oil companies, and those that rely on costly technologies such as deepwater drilling (Petrobras) or oil sand (Suncor) are likely to be out of luck sooner than their competitors.

The oil majors aren’t much better off. If no new oil and gas projects come online,  ConocoPhillips is the integrated oil major with most of its production at risk. In such a scenario, about 69 percent of Conoco’s output would decline. Then Chevron (52 percent), Eni (49 percent), Shell (44 percent), BP (33 percent) ExxonMobil (33 percent), and Total Energies (30 percent). The world we need to get to, with no new oil projects coming online – would cripple these companies.

Whistling past the oil field.

What proportion of the investors in those companies that are most at risk do you think know these numbers? Some do, and that may be why over the last decade or so (until Russia Invaded Ukraine) oil and gas companies haven't performed as well as the market in general. But the writing is on the wall, many of these companies are in a very bad position long term. And it would behoove some of them to get out while the getting is relatively good.

Most competitors won’t be able to compete with Saudi Aramco or other low-cost providers in the long run. The math here is pretty simple. You have a resource that the world will increasingly use less (oil & gas) and dominant players who are already well-established as low-cost providers. Those companies with the highest costs of production won’t survive. Not, “maybe might have a challenging future”. They won’t survive.

If they continue on the current path, those high-cost oil providers will go out of business, some sooner rather than later. These high-cost providers have two options:

• A wind-down of operations, returning capital (money) to investors.

• Transition the company to something else (like cleaner energy).

Here is how that can happen:

Governments - Stop subsidizing fossil fuel production and stop subsidizing low gas prices. This can be phased in over a reasonably long period – say 10 years, so the disruption can be more orderly, but there is only so much that can be done to cushion this landing. According to the IMF, fossil fuel subsidies in 2022 were $7 Trillion, or 7.1 percent of global GDP. Phase those out over the rest of the decade and redirect those funds to climate mitigation, a just transition, clean technology, etc.

Governments – Put a price on carbon. Currently a little over a quarter of all emissions have a carbon price. A true price on carbon that reflects the damage of climate change will increase the costs of fossil fuels and make companies and consumers less willing to pay the price, decreasing demand. If you are concerned that this will hurt the pocketbooks of the poor, I know of 7 trillion dollars you can start using to help them.

Banks - Funds for oil and gas production come from financial institutions. Banks should stop funding them. Many banks with rosy net zero plans are heavy funders of the fossil fuel industry. This information should continue to be disclosed so we can see where the money to continue business as usual is coming from.

Workers – According to the 2019 U.S. Energy and Employment report, the fossil fuels sector employed about 1.1 million Americans. Oil and Gas Recovery combined employ about 874,000, and coal about 75,000. Together the broad energy sector in the U.S. employs about 6.7 million Americans. Many of these people, and others like them around the world, already know that their jobs are at risk and should plan accordingly. There is a $7 trillion pot of money I know of that can help them with a just transition.

The energy market of the future needs to be smaller, but it is still needed. Hydrogen, Carbon Capture and Storage, Offshore Wind, Biofuels, and geothermal energy all have aspects of their businesses that can benefit from workers who have worked for oil and gas industries. Not all these technologies will succeed (I’ll write more on CCUS soon), but some will. Governments, companies, and investors should do what they can to support workers in this transition.

Consumers – It is starting to happen, but we need to understand better how much our lives depend on energy. Energy needs to be priced into our economics, and our decision-making. It determines where we live, what we eat, when and how we travel, what we buy, and when. This is again where I say” degrowth is the answer,” because a shift away from hyper-consumerism and living within our ecological means will do a great deal to address climate change and overconsumption. But we have to start doing that.

Companies - There is something to be said for being the one who turns the lights out, instead of having them turned out for you. The first CEO at an oil and gas major that sees the writing on the wall and admits to shareholders that they can't compete in the long term, and will slowly and orderly wind down their oil and gas operations will be the winner of the fossil fuel game of musical chairs. No publicly traded oil and gas company is going to beat Saudi Aramco. None of them are going to be the last man standing.

The CEO who cashes out first may cause the other dominoes to fall. Once that CEO admits to the markets and their shareowners that they can't win this game in the long term, many other oil majors with stranded assets will be left holding the bag, and their assets will be revalued and most likely their stock prices will go down never come back up.

CEOs of oil majors are gambling that they can get a few more years maybe even a decade out of the current paradigm. It's a bit of a prisoner's dilemma. The first company to cash is likely to do better than all those that follow. But no one wants to be that first one because they think they can get a couple more years of million-dollar salaries out of this dance before the music stops.

But what happens if one of the companies themselves stops the music? And they say:

• No more new fossil fuel exploration

• Winding down our current fossil fuel assets

• No new hiring in fossil fuel areas

• Shutting down the company. Returning cash to shareholders.

• Working with the government on a just transition to retrain staff.

OR

• Transitioning to cleaner energy.

• Purchasing cleaner energy companies.

• Replacing all fossil assets with clean energy assets over an X number of years.

Those are two ways to compost an oil company. In each case you end up with something new growing from the remains of what was before.

Don’t delay, compost today.

The recent report from the IEA, The Oil and Gas Industry in Net Zero Transition, cited that the large, international majors hold less than 13% of global oil and gas production and reserves. National oil companies account for more than half of global production and close to 60% of the world’s oil and gas reserves.

The publicly traded major oil companies are not going to be the last ones standing. With each passing year, this will become more evident. Those that are “composted” first, will bear the most fruit for their shareholders and employees. Those that are composted last will have little to show for holding out to get that last chair that is already reserved for national oil companies.

The same IEA report noted that oil and gas producers account for only about 1% of total clean energy investment globally. This is short-sighted, but there is a way out of this.

Some of those $7 trillion in oil and gas subsidies can be switched to clean energy subsidies for companies that want to enter public-private partnerships to emerge as clean energy companies.

There is more than one way to compost an oil company.