Financial Times: Oil and gas: ‘In a bit of a limbo phase’

By Dino Mahtani
Published: October 12 2007 06:00 | Last updated: October 12 2007 06:00

The sustainability of the global energy industry is increasingly under scrutiny in an age where apocalyptic fears about global warming and peak oil production are creeping into the public’s imagination.

Apart from the damaging effect on the environment caused by the release of carbon dioxide during the extraction and end use of oil and gas, there are a whole raft of other issues towards which shareholders have become more sensitive.

From the direct impact on local environments and communities, to the management of hazardous and combustible substances, to the political risks of operating in hostile environments and the need to develop renewable energy portfolios, the industry is under pressure to find solutions.

It is becoming increasingly difficult to keep these issues out of the public eye, and when companies operate in ways that are perceived as unsustainable it can be detrimental to their business.

From restrictions on BP’s freedom of action after its 2005 Texas refinery fire, to the environmentalist opposition against the effects of developing the Canadian oil sands, concerns over environmental sustainability are raising the pressure for tighter regulation.

The Russian government’s campaign to force Shell to sell a majority stake in the Sakhalin-2 project to Gazprom was driven by a desire for financial control, but environmental allegations provided the pretext.

In Nigeria, Africa’s biggest oil producer, the widespread and harmful practice of burning off unused gas has given militant groups a pretext to attack oil facilities.

Renewable energy sources are also grabbing the attention of boardroom policy makers who want to diversify their energy portfolio.

This is because international companies know they face the prospect of a long-term depletion in reserves amid an increasing trend of resource-rich governments to assert more control over their natural assets.

But the energy industry is caught between global demand for its core products – oil and gas – which will keep rising over the coming years, and the need to temper the production of these resources in a sustainable way. Industry-wide cost increases are also squeezing profit margins, making it harder for companies to diversify into less economically viable renewable projects. “Currently the oil companies are in a bit of a limbo phase,” says Bjoern Tore Urdal, senior equity analyst at Sustainable Asset Management.

“The issue of sustainability has risen high on the boardroom agenda in the past three years but there is a lot more uncertainty about what methods and technologies to use going forward.”

The International Petroleum Industry Environmental Conservation Association (IPIECA), the industry body for environmental and social issues, estimates that by 2030, 56 per cent of energy demand will be met by oil and gas – nothwithstanding theories that oil production may have peaked by then.

That figure, which is 1 per cent higher than it is today, belies the belief that there can be a major step change towards renewable energy and a more carbon free portfolio. Instead, oil companies have focused on ad hoc measures to improve their own efficiency standards and devote time and effort research and development.

But the spending on R&D, in which no major company is clearly a leader, has not grown in line with profits. Moves towards developing solar, wind and biofuel technologies have not reached a point where they can economically drive change in the future, say analysts.

“Cogeneration”– the use of heat from operations to create steam for ploughing back into power generation – the deployment of carbon capture and storage technology, and the gradual substitution of oil for gas in the energy market are some methods companies are focusing on.

The costs of extraction are increasing because of the complexity of tapping into maturing fields or meeting stiffer environmental regulations on refined products.

IPIECA estimates that the energy intensity of oil and gas extraction has increased by more than one third in OECD countries since 1980.

Geoff Lane, a senior sustainability analyst at PwC, says that oil companies are under pressure from shareholders and governments to deliver returns on projects, leaving little room for sustainability. “Oil and gas companies should be doing more, but so should a lot of other actors.”

Copyright The Financial Times Limited 2007

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