Guyana, a poor South American nation best known for cricket and calypso music, will become a petrostate by the end of the decade. After identifying massive oil and gas reserves in the region, Exxon Mobile began drilling a well this year that will enter production as soon as 2020. Exxon’s latest discovery contains close to four billion barrels of oil—a quantity that is enough to supply France for roughly seven years. The project in Guyana began amid efforts by countries around the globe to follow through on their commitments under the 2015 Paris Climate Agreement. How did the world’s second largest oil company have the confidence to invest in a risky, capital-intensive project despite efforts by governments and investors worldwide to promote renewable energy?
Since the world’s Oil Majors (Total, Shell, BP, etc.) have been skittish about investing in offshore projects for several years, Exxon’s interest in Guyana came as a surprise. The average offshore well costs 15 to 20 times more than the average onshore well, and there are substantial risks associated with drilling for oil in a challenging environment. Drilling offshore requires a sophisticated network of equipment spread over 30,000 feet to work seamlessly. Unpredictable environmental conditions and technical malfunctions could compromise the integrity of an offshore project at any point along this spread. Offshore projects also have longer life cycles, significantly increasing the cost of a project and exposing a company to greater risk.
After swinging wildly between $35 and $150 per barrel for several years, the price of oil has stabilized in the $50 to $70 range. To survive, oil companies came under pressure to improve their resiliency to market volatility by reducing the cost it takes to produce a barrel of oil. Thanks to new technology and automation, the cost of producing a barrel of crude oil dropped from $45 in 2013 to $32 in 2018. Today’s companies are leaner and more efficient than they were several years ago.
At a time when environmental counter-currents challenge the future of Big Oil, these rapid improvements in efficiency demonstrate that companies like Exxon, Shell, BP, and Total can adapt to challenging circumstances. In its latest Energy Outlook—a comprehensive report containing long-term projections about the energy industry—BP acknowledged that by 2030, the demand for oil will peak and the share of energy produced by renewable sources will double. Although the demand for transportation will grow, an increasing number of electric vehicles on the road and significant improvements to engine efficiency will put downward pressure on the demand for oil. China’s transition to a less energy-intensive economy will further reduce demand.
Oil Majors have acknowledged these inevitable shifts and invested, albeit cautiously, in promising alternative energy sources. Last year, BP acquired Lightsource, one of Europe’s premier solar panel manufacturers. Norwegian oil giant Statoil changed its name to Equinor to reflect its investments in offshore wind in the North Sea. Perhaps a little more confusingly, BP changed its official name from “British Petroleum” to simply “BP” as part of an effort to rebrand itself as an energy company rather than just an oil company.
However, despite talking the talk, oil companies have not yet made truly meaningful steps towards embracing a low carbon future. Far from questioning the long-term viability of their core business, they strategize seemingly under the assumption that the world will fail to meet the goals of the Paris Climate Agreement. Specifically, they are gambling that the world will not achieve the Paris Agreement’s long-term goal to keep the increase in global average temperature to well below 2°C above pre-industrial levels. According to BP’s Energy Outlook, “trillions of dollars of investment in oil is needed” to satisfy global demand for energy. The same report predicts that liquid fossil fuels will continue to dominate transportation well into the middle of the century despite an increasing number of electric vehicles on the road.
Disenchanted by their relative infancy and low rates of return, institutional investors remain wary of renewables. In fact, the shareholdings in Oil Majors of the country’s largest mutual funds— the class of investors that are most risk-averse—rose last year. For the same reasons as mutual funds, Oil Majors have avoided making large investments in solar and wind technologies. Darren Woods, the CEO of Exxon, justified the company’s reluctance to follow in the footsteps of industry peers like Equinor by asserting that “(They) have much higher expectations for the returns on the capital (they) invest.”
Improvements in operational effectiveness will enable producers to fight battles for market share that would depress oil prices and otherwise make production unprofitable. If this occurs, lower prices would boost demand for oil, especially among price-sensitive consumers in developing world markets where BP projects the demand for energy to grow the most rapidly. Against this backdrop, the world’s current level of commitment to combating climate change by reducing carbon emissions appears insufficient. Left to their own devices, markets will not shift quickly enough to renewable power generation to avoid climate change catastrophe.
Time is running out and governments need to consider taking drastic measures to reduce carbon emissions. To demonstrate its commitment to mitigating climate change, the US government needs to stop subsidizing the oil and gas industry. The American oil and gas industry is strong enough to stand on its own two feet and can turn a profit without government aid. It remains an object of bewilderment that Exxon, which made $20 billion in profit last year, receives up to $1 billion every year in subsidies. These subsidies have a massive impact on oil production. According to the Stockholm Environment Institute, subsidies “push nearly half of new, yet-to-be-developed oil into profitability.” In other words, subsidies double the number of oil fields that companies drill.
At the same time, Congress must impose a carbon tax. Polluting the environment comes at a great social cost that should be reflected in a nation’s tax code. Scientists at the National Oceanic and Atmospheric Administration concluded that extreme weather patterns such as this year’s polar vortex are more likely to occur in the future as a result of climate change. According to researchers at MIT, a carbon tax of $25 per ton of carbon emissions produced could lead to reductions significant enough to help America meet the near-term goals in the Paris Agreement. Last year, lawmakers introduced the first bipartisan carbon tax bill that would initially tax carbon at $10 a ton. That price would rapidly increase by $10 a year until 2030. However, the same Democrats who voiced their support for the Green New Deal remained silent on a bill that would have received robust Democratic support just several years ago. Why? Because a modest carbon tax does not go far enough in transitioning America from fossil fuels to renewables. Though perhaps true, this line of thought will alienate moderate Republicans and limit meaningful progress on climate change.
Meanwhile, it’s business as usual for Big Oil. The world’s top 24 oil companies allocated 1.3% of their total budgets towards alternative energy in 2018. European companies like Total, which spent 4.3% of their budget on alternative energy, vastly outspent their American counterparts. While Exxon dished out $1 million last year lobbying for a carbon tax, it also spent $8 million to block climate change legislation.
One hundred miles off the coast of Guyana, Exxon’s offshore rig remains moored over enough oil to transform the underdeveloped country into a wealthy petrostate. The country’s leaders are debating how to use the royalties from oil, which could be used to fund poverty reduction programs. Some of the royalties could go towards levy construction to safeguard the country’s coastline against rising sea levels. Guyana’s capital, Georgetown, sits below sea level. Water that gently laps the city’s harbor today is a harbinger of the havoc that climate change could wreak tomorrow.
Categories: Foreign Affairs