In a warming world, coal, oil and gas companies have a decision to make – how can they transition out of fossil fuels?
While the default assumption is that these companies will transition to become ‘energy’ companies, with renewables at its core, this may not be the only way forward.
It might sound radical, but multiple groups are suggesting that oil and gas companies’ best option – for both investors and the planet – might just be to shut down.
“There’s valid reasons to think that companies should transition [into green energy] and there’s valid reasons to think that companies should just stick to what they’re good at for as long as the world needs them and then shut down,” Alex Hillman, lead analyst at the Australasian Centre for Corporate Responsibility (ACCR), told Cosmos.
Hillman worked for over a decade in the industry, and was Woodside’s climate change advisor.
“The world needs large renewables companies, but I don’t think there’s anything intrinsic about being a large oil and gas company which means you’ll be a good large renewables company.”
Of course, groups like ACCR are not suggesting an unmanaged shutdown tomorrow. An analysis from the think tank in August looked at whether shareholders would benefit more from Woodside investing in new fossil fuel projects, or a ‘buyback’ to increase the value of the remaining shares.
“Our conclusion was that of those two options, giving money back to shareholders was clearly the better financial outcome,” Hillman told Cosmos.
“I think that needs to be seriously on the table, but there’s not many companies – I can’t think of any examples in fact – where it is.”
Over time, the company would undertake more buybacks and provide more dividends to shareholders, until it eventually winds up.
“Investors could arguably – and in some cases we’re pretty sure would – be much better off if a company didn’t try to transition,” Hillman added.
It’s important to note that although this is better for the planet, it’s also in some cases a better financial decision.
Another think tank from the UK called Carbon Tracker last week released a report which corroborates these findings. The report – titled Navigating Peak Demand – looked into strategies for oil and gas companies as the demand for these resources drops.
“The message from many industry incumbents is that oil and gas is an essential part of the development of the new energy system, leading many to comment that they are well equipped to lead society through the energy transition,” the report states.
“Yet the numbers just don’t bear that out: the leading oil and gas companies are simply not investing at anything approaching the level that the rhetoric would have you believe. According to the [International Energy Agency], $1.7 trillion is set to be spent globally on clean energy technologies in 2023; collectively, private oil and gas companies invested just $17.5bn in 2022 – just 1% of the total.”
So, while it seems hard to imagine a world without oil, gas and coal companies dominating Australia’s largest stocks, there’s plenty of reason to think that our markets could be fossil fuel free.
“The energy transition requires a whole-of-economy, almost ‘warlike’ footing,” said Hillman.
“I don’t think there’s anything that necessitates that these companies need to transition in order to make sure that we can transition as a society.”