2021: A momentous year for oil and gas supply
The last 12 months have been a breakthrough year on the issue of oil and gas production. Reports like the International Energy Agency’s that found there should be no new oil and gas projects, important government and private sector announcements to curb production, along with numerous major campaign victories, have all created significant momentum. Whether governments, financial institutions and companies have policies to stop new projects and phase-out production aligned with 1.5°C, in a just and fair way, became a recognised test of whether they can claim to be genuine climate leaders.
In contrast to this progress, the cold reality of the data showed the immense challenge that lays ahead. The world’s governments are planning to produce more than twice the amount of fossil fuels in 2030 than would be consistent with limiting warming to 1.5°C. However, the shift in the debate and the seminal policies adopted by first movers has given many commentators cause to suggest that 2021 might have heralded the beginning of the tide turning on oil and gas production.
For this end of year edition of OilWire, we’ve tried to pick out some special highlights from the last 12 months. With so much happening across civil society, policy, finance, law, and the industry, this is hopefully a useful if inevitably insufficient snapshot.
Major government announcements
The breakthrough began with promising announcements from Denmark and the UK in December 2020. Denmark, the largest oil producer in the EU, announced a ban on all future oil and gas licensing, and set a final phase-out date of 2050 for all fossil fuel extraction. Shortly afterwards, the UK became the first major economy to end financial support (including export finance and aid funding) for overseas fossil energy projects.
Many countries and regions made moves to limit or phase out domestic production throughout 2021. In April, Spain introduced a new climate law that banned fracking and new licences for oil and gas exploration. The State of California announced an end to oil extraction no later than 2045, becoming the world’s largest oil producer to set a phase-out date. A bill was proposed in Costa Rica in May that would permanently ban licensing for fossil fuel extraction. In July, a bill banning new extraction came into law in Ireland, and Greenland announced it would also end exploration.
Commitments continued through the year, with Quebec announcing plans to ban extraction in October, followed by the new Iceland government agreeing to end extraction too. Additional national government policy progress was made in Argentina, where the government suspended the permitting process for offshore exploration. Elsewhere, oil and gas supply also became a key electoral issue in Norway, Germany, and Canada
The momentum of these commitments was crystalised at COP26 when Denmark and Costa Rica formally launched the Beyond Oil and Gas Alliance (BOGA), along with 10 other founding member governments. the BOGA is the first international diplomatic initiative focused on reducing oil and gas supply. Its purpose is to facilitate the managed phase-out of oil and gas production and to implement a just and equitable energy transition.
Action on finance
In addition to progress on domestic production, commitments on limiting public finance have also advanced substantially. As hosts of COP26, the UK followed up their December 2020 commitment by persuading other countries to adopt similar policies. This eventually led to 39 countries and institutions, including the US, Canada, and many European countries. unveiling a commitment to end new direct financing for fossil fuels, thereby removing an estimated $24 billion in support for the sector. In December, the US ordered an immediate end to federal aid for new fossil fuel and carbon intensive infrastructure projects overseas. While the new policy includes limitations, it is a significant shift that may affect billions of dollars in annual funding.
Beyond governments, the last 12 months saw a ramping up of investor action. Divestment commitments proliferated, with high profile institutions including major pension funds including the Dutch ABP, one of the world’s largest pension funds, as well as CDPQ, PME, the French central bank La Banque Postale and other influential institutions such as Harvard University
In addition to divestment commitments, shareholders demonstrated increased scrutiny of corporate behaviour on climate. Exxon faced a major shareholder rebellion, where activist investors appointed three new board members in protest. On the same day, at Chevron’s AGM, 61% of shareholders voted in favour of a proposal to cut the company’s Scope 3 emissions. In a similar move, 58% of investors in ConocoPhillips backed a resolution urging the company to set targets to reduce all scopes of emissions.
The industry has also been rocked this year by precedent setting legal developments. In the Netherlands, Shell was mandated to comply with the Paris Agreement targets and reduce its emissions by 45% by 2030 below 2019 levels. Lawyers claimed that this is a ground-breaking case, which establishes a precedent on corporate liability for climate change. Similar cases are being brought against Total and Wintershall. In a separate case, Shell was ordered to pay compensation to Nigerian farmers over oil spills. Additionally, the Australasian Centre for Corporate Responsibility (ACCR) has filed a case against Santos; which it claims is the first to challenge the veracity of a company’s net zero emissions targets.
2021 also saw continuation of a growing trend to connect concerns around oil and gas extraction with biodiversity issues, as evidenced when the International Union for Conservation of Nature (IUCN) congress voted in favour of motions to safeguard Okavango and the Amazon from oil and gas extraction.
There are signs that the variety of campaign successes and other developments are having an impact on the industry. Looking at two of many examples, in Brazil, an auction for offshore oil and gas exploration licences underperformed after just five of the 92 licences were sold, while in the UK, extraction at Cambo, a flagship new project has been indefinitely paused throwing the future of North Sea production in doubt.
Much of the progress this year was made possible thanks to groundbreaking research projects that shifted the terms of debate. Arguably, the most important of these came when, after years of dedicated engagement from committed advocates, the International Energy Agency (IEA) published a new “net zero” (NZE) scenario in May, which also featured in their influential flagship World Energy Outlook report, released in October. The report stated that under their Net Zero scenario, there is no room for new oil and gas projects after 2021. This created a major turning point for the movement and helped shift mindsets around the world.
Other important research included the third Production Gap Report, which showed that emissions from planned oil and gas production would well exceed the limits of a 1.5°C world. Additionally, the recently launched Global Oil & Gas Exit List (GOGEL) found that over 95% of the upstream oil and gas companies listed are continuing to explore or develop new reserves.
Enormous challenge remains
While this year has seen many positive developments, the reality is that the scale of the challenge remains immense. In the US, where extraction is projected to grow the most, the Biden administration started they year by revoking the permit for Keystone XL in January, but has concluded the year by opening 80 million acres for exploration in the Gulf of Mexico. It did so after allegedly falsely claiming there was a legal requirement to proceed. Moreover, oil majors’ commitments on climate remain inadequate to meet the scale of the challenge.
Overall, while the data shows the enormity of the problem of oil and gas production the year ends with a genuine sense that momentum behind the movement working to address this is accelerating. Time will tell if 2022 will be a year of further transformation, but we look forward to sharing developments with you each month through Oilwire.
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