In the world energy market, specially in European developed countries, tectonic changes are taking place as they transition from fossil fuels (coal, oil and gas) to renewable energy sources. Decarbonising the energy sector is the new mantra. Enlightened youth, investors, green activists and media houses are in the forefront of this transition. Unfortunately, we in India have not yet realised the urgency of managing this transition.
The Norwegian sovereign fund, with assets of $1 trillion (India’s current GDP is a little over $3 trillion), decided in March to sell some of its oil and gas investments. Norway is Western Europe’s biggest oil and gas producer and its economy is dependent on oil and gas revenues. The fund managers argue that the decision is influenced mostly by the need to diversify risk, since Norway will continue to depend on oil and gas for years to come.
However, in some quarters, such a strategic move has been interpreted as a concerted effort by Norway to reduce greenhouse gas (GHG) emissions and support the UN climate change movement to keep the temperature rise to less than 2 degrees Celsius. This has to be interpreted in the background of Norway’s initiative to replace all new sales of internal combustion engine vehicles by electric vehicles (EV) by 2025. Currently, 58% of cars sold in Norway are EVs. Some 99% of electricity generated in the country is from renewables. It has become Europe’s posterchild to fight climate change.
Norway’s move to divest from oil and gas investments comes at a time large oil companies are increasingly coming under attack not just from green activists but from some investors for perpetuating climate change by continuing to invest in fuels that add to global warming. The idea of divesting from fossil fuels started to gather momentum soon after the Paris Accord of December 2015.
It started with US universities, where students demanded that they divest from their fossil fuel investments. Universities like Stanford, MIT, Harvard, etc., began doing so. By the end of 2018, about 1,000 institutions and over 52,000 individuals, in all representing about $8 trillion, have divested from the fossil fuel sector.
Activists have started to use annual general body meetings (AGM) of large oil companies to register their opposition to the companies’ continuing investments in oil and gas exploration. This year, at BP’s AGM in Scotland, protesters had to be forcefully removed.
About 99% of BP’s shareholders passed a resolution asking the company to disclose more information on how its investments align with the Paris agreement. Shareholders were critical of BP for wasting money to lobby against climate change policies. They also asked the BP management to set specific emissions targets, including that for its consumers, which was rejected. On the other hand, Shell has agreed to look into the emissions by their customers and got praise from activists. Like BP, ExxonMobil and Chevron, too, refused to set any specific emissions targets for themselves.
Activists are demanding that oil companies hasten the energy transition by reducing investments in oil and gas and increase them in renewables. There are many other drivers, too, which are pushing the oil companies towards this transition. They are: falling costs of renewable energy sources, government policies, real possibilities of stranding of oil and gas assets, and international agreements to reduce GHGs.
Oil companies are developing different strategies to deal with the energy transition. Some have started to invest in renewables, electric vehicles and other associated infrastructure and utilities. Most are continuing to invest in oil and gas, though in those projects with short-cycle returns unlike the conventional or offshore long-term projects. However, most are concentrating on gas, since they believe gas will play a critical role in the transition to decarbonise the energy sector.
When the world energy transition occurred from wood to coal and then from coal to oil, each transition took place over some 75 years. How long will the transition from oil to renewables (solar, wind, biomass, ocean energy) take? It’s a multi-trillion-dollar question. The transition from coal is not yet complete. But in the developed countries, specially in Western Europe, the coal era is coming to an end. In the US and China, it is not clear when it will end. Though wood has been more or less completely replaced in developed countries, in developing and emerging countries like India, wood is still prevalent.
Unfortunately, in India, there seems to be no urgency in preparing for the energy transition. One example of how the government has failed spectacularly to develop renewables proves this point. The Modi government set the ambitious but achievable target of 175GW by renewables — 100GW solar, 60GW wind and the rest by biomass and small hydropower — by 2022. But in its first five years, only 28GW of solar and 14.5GW of wind has been added.
Unless some miracle takes place, it will be impossible to meet the 175GW target. This, despite the fact that the cost of solar has fallen dramatically — module prices from the US have fallen from 63 cents per watt in 2014 to 23 cents now. Corruption, wrong tendering processes, lack of proper incentives to manufacturers, and unstable policies on import of solar panels have all affected the solar sector. No serious thought has been given to develop the entire solar value chain in the way China has been able to do and dominate the world solar market.
Since ‘Big Oil’ is looking for new investment opportunities in renewables, India should invite them to invest. No country has any such plans, so India could lead. ‘Big Oil’ has the needed capital, the management know-how to handle complex value chain projects, and it’s looking for opportunities to diversify.