Aberdeen, Scotland (CNN Business)The people who made their fortunes in the oil capital of Europe need a new plan.
For decades, Aberdeen, a port city on Scotland’s northeast coast, has served as the commercial gateway to the North Sea, where powerful companies have navigated deep and dangerous waters to extract tens of billions of barrels of crude.
But the basin isn’t what it used to be, even with oil back above $80 per barrel. Production has been on the decline since the turn of the century. Downturns caused by twin price shocks — one in 2015 and one triggered by the Covid-19 pandemic — are harrowing reminders of what happens when a boom turns bust.
Then there’s the COP26 climate summit in the Scottish city of Glasgow, which kicks off Sunday. The United Nations and partner scientists have delivered a clear message: The world needs to “immediately and steeply” cut back on fossil fuel production to maintain a livable planet.
Attention is focused on huge energy producers like Saudi Arabia, Russia and the United States and top consumers like China and India. But the United Kingdom’s North Sea is in focus, too — in part due to its proximity to Glasgow, but also because of huge efforts to dramatically overhaul the region’s business model.
There’s a growing movement in Aberdeen for the region to lead the transition from Big Oil to Big Energy, using its deep-sea expertise to construct floating wind farms alongside offshore rigs.
“I think 2015 was the wake-up call that Aberdeen actually needed to say, ‘This ain’t going to be around forever,'” said Russell Borthwick, the local chamber of commerce’s chief executive. “When the oil price comes back, you [can] go back to just cigar smoking, wine drinking — ‘life’s great in Aberdeen isn’t it’ — but one day you’re going to wake up and there’s going to be nothing left.”
But it’s not yet evident whether the North Sea can successfully pivot away from its oil roots and serve up a model for the rest of the world. Companies in the region are determined to keep drilling. They say that money from oil and gas is essential to fund new renewable investments, and emphasize that the United Kingdom still needs fossil fuels to heat homes and keep the lights on for years to come, pointing to anxiety around an energy crunch that’s gripping Europe.
“[Renewable] investments are going to have to come from companies like ourselves, but we need to be able to have the balance sheet and the cash flow generation [from oil and gas] to be able to do that,” said Wael Sawan, Shell’s head of gas and renewables and a member of the company’s executive committee.
Shell, together with Blackstone-backed Siccar Point, is still waiting for the government’s permission to launch a new North Sea oilfield project known as Cambo, which is expected to produce oil until 2050.
There’s skepticism that the United Kingdom can have it both ways, however. The oil and gas sector maintains the government can approve new ventures and still meet its 2050 climate targets. Yet the International Energy Agency has said that fresh oil and gas development must stop if the world is going to limit warming to 1.5 degrees Celsius and avoid the worst effects of the climate crisis.
Keeping that option open is the primary goal of COP26, where 197 nations and territories with different economic priorities will try to agree on a plan of action.
“Emissions don’t have a passport, so we need to have a more holistic view here,” said IEA Executive Director Fatih Birol.
The business of oil and gas
The United Kingdom’s North Sea accounts for a sliver of global oil and gas output, but remains an investment hub for both domestic and international oil companies.
While the basin is nearing the end of its lifecycle, it still holds 4.4 billion barrels of oil equivalent, according to the United Kingdom’s oil and gas regulator. OGUK, the industry lobby, estimates that £390 billion ($534 billion) has been invested off the coast of the United Kingdom over the last 50 years, and that in the next five years, companies could commit another £21 billion ($29 billion).
Driving that spending is forecasts for demand through 2050. In a report earlier this month, the IEA said that if countries live up to current climate pledges, limiting warming to 2.1 degrees Celsius, demand for fossil fuels will peak around 2025. But even under that scenario, the world will still be consuming 75 million barrels of oil per day by 2050 — just 25 million barrels per day less than today.
Companies like Shell (RDSA) emphasize that what will really help the world decarbonize is a “fundamental shift in demand” from its customers, which range from big businesses in shipping and aviation to commuters filling up their tanks at gas stations.
“Right now you can get all the [publicly-listed] companies like ourselves out of the production of oil and gas,” Sawan said. “It will not have a single barrel of impact on the overall demand level, because all of that production will in essence migrate to many other countries — national oil companies — who will satisfy that demand.”
The importance of abundant and reliable energy has been underscored in recent months as natural gas prices hit record highs in Europe and China has been forced to ration electricity supplies.
But as the climate crisis grows more urgent, the business environment for fossil fuel companies looks increasingly challenging. Over the summer, the UN Intergovernmental Panel on Climate Change issued “a code red for humanity” as the window to limit warming to 1.5 degrees Celsius rapidly shrinks.
“The climate movement is very, very powerful at the moment,” Philip Lambert, who runs an influential energy advisory firm in London, said at a recent industry conference. “It’s swept through most of the key institutions that underpin our society in the West, and they don’t want people to invest in oil and gas anymore.”
That’s squeezing access to capital across the sector. In the meantime, shareholders are reevaluating their oil and gas holdings as they prioritize companies that align with broader environmental and social priorities. They’re also asking serious questions about whether the big oil companies of today will still exist in 30 years’ time.
An existential debate
Fossil fuel production remains a lucrative business. The 10 largest publicly-traded producers are expected to bring in almost $466 billion in revenue this year from the business of searching for and extracting oil and gas, more than in 2019, according to an analysis conducted by Rystad Energy for CNN Business.
But funding troubles and the threat of tougher government policies have sparked an existential debate within the industry. The biggest multinational oil companies in Europe, including Shell, BP (BP), Eni (E) and Total (TOT), have started to reorient their businesses around this reality, pledging to reach net-zero emissions by 2050. That target includes the carbon released when products are burned. The pledges are positive steps, according to climate experts, though each comes with its own loopholes and qualifications.
BP has promised a 10-fold increase in annual low carbon investments by 2030, when it expects its oil and gas production to have fallen by 40% from 2019 levels. Shell has disclosed that it reached its maximum oil production in 2019, and that output will now fall 1% to 2% annually.
Their US counterparts haven’t been as aggressive. Chevron (CVX) recently announced its ambition to hit net-zero for its own operations by 2050, but that doesn’t include emissions from end users. ExxonMobil (XOM) hasn’t set a long-term target for reducing emissions, and is instead touting near-term efforts to mitigate its climate impact and invest in carbon capture technology, which prevents the release of carbon dioxide into the atmosphere.
National oil companies, which account for more than half of global production, have been among the most reluctant to address climate change. Saudi Aramco, Saudi Arabia’s state producer, said earlier this month that it would target net zero emissions for its operations by 2050, but the IEA has warned this group is “poorly positioned to adapt to changes in global energy dynamics.”
Rising energy prices provide some cushion for companies as they look for a path forward, allowing them to dangle share buyback programs or higher dividends that encourage shareholders to stick around.
Still, many observers are frustrated by the slow pace of change — especially because the oil industry spent decades downplaying its role in the climate crisis.
The amount of oil, gas and coal we use, it needs to go down substantially."
IEA Executive Director Fatih Birol
This week, activist investor Third Point revealed it had built a stake in Shell and called for the company to spin off its clean energy ventures into a separate business, warning it was trying to “be all things to all people.” The move comes after a Dutch court, in a landmark ruling, said that Shell must slash its CO2 emissions by 45% by 2030 from 2019 levels. The company has said it will appeal the verdict, but just tightened emissions goals for its own operations.
“More than 80% of the emissions causing climate change come from the energy sector burning oil, gas and coal,” Birol said. “The amount of oil, gas and coal we use, it needs to go down substantially.”
Changes in the North Sea
The fight over the future of the industry is playing out in real time off the coast of Scotland, 46 years after crude started flowing and government leaders proclaimed that North Sea oil would “lead to a new industrial revolution.”
Companies are still petitioning the government to kick off new fossil fuel projects, stressing the need to maintain UK production as aging ventures are decommissioned.
“If we cut back on oil and gas, all we’ll do is import,” said Ian Wood, a billionaire based in Aberdeen who made his fortune during the golden era for North Sea oil. Other countries, he noted, aren’t as committed as the United Kingdom to limiting carbon emissions from fossil fuel production. “We’ll actually damage the environment more.”
But efforts to diversify are ramping up.
Aberdeen’s Oil and Gas Technology Centre has rechristened itself as the Net Zero Technology Centre. An estimated £350 million ($479 million) has been put toward expanding the harbor to facilitate the movement of renewable energy infrastructure. And Wood, who supports the oil and gas sector but has focused on pivoting the region away from its dependence on fossil fuels since 2015, is leading the charge for a nearby energy hub intended to serve as a production, assembly and command center once more wind, solar and hydrogen projects go live. The project is expected to support 2,500 jobs by 2030.
“It is actually remarkable how fast things have changed in the past two to three years,” said Paul de Leeuw, director of the Energy Transition Institute at Aberdeen’s Robert Gordon University. “We have pressed the accelerator pedal. We’re off.”
Offshore oil and gas jobs in the United Kingdom still haven’t recovered from the pandemic. Companies are trying to stay disciplined on costs and keep shareholders happy even as oil prices climb. But researchers at Robert Gordon University suggest there are reasons for optimism.
An estimated 160,000 people are directly or indirectly employed in the UK’s offshore energy sector. By 2030, around 200,000 will be needed for the production of both renewables and oil and gas. About 65% of the workforce will “support low carbon energy activities,” up from 20% now.
Harbour Energy, the second largest oil and gas operator in the North Sea, is betting it can continue to prioritize production while investing in carbon capture. Earlier this month, the company was awarded a carbon storage license from the UK industry regulator.
“For five years, for 10 years, we will be predominantly a hydrocarbon-producing company,” said Phil Kirk, Harbour Energy’s president and CEO for Europe. “Might we [also] have a carbon capture business with transportation and service that adds to revenue? Yes, we might.”
Can Aberdeen succeed?
Not everyone thinks the UK’s transition is happening fast enough, especially given its resources and commitment to staying ahead of the pack on climate issues.
“We should be reducing our dependence on oil and gas, not adding to the supply,” said Charlie Kronick, senior climate adviser at Greenpeace, which thinks the United Kingdom should halt investment in new North Sea oil and gas projects.
Kronick also believes there’s too much emphasis on carbon capture technology, which he says “removes that sense of urgency that we need to reduce emissions.”
“There isn’t any pathway [to net zero] that doesn’t have some carbon removal,” he said. Some heavy industry sectors, like steel and cement, will be hard to decarbonize. “But to suggest that deploying [carbon capture and storage] in the future allows us to use oil and gas now is really seriously misleading,” he continued.
There are concerns among industry members that the UK government could cave to pressure and take a more aggressive approach, limiting oil and gas investment or production more sharply than expected.
The joint venture between Shell and Siccar Point, which would produce 164 million barrels of crude during the first phase of development, has become a flash point ahead of COP26. Activists claim approving the Cambo project would be hypocritical as the country strives to lead climate talks, while backers argue that domestic production remains essential to meet demand and limit reliance on imports.
Meanwhile, a British regulator recently blocked Shell’s plans to develop the Jackdaw gas field in the North Sea on environmental grounds. Conversations between the company and the regulator are ongoing.
“Recent decisions have made us question if we do indeed have that clarity [from the UK government],” Sawan said.
UK Energy Minister Greg Hands told CNN Business during a visit to Scotland that the government remains “supportive of the sector overall.”
“Some of the things that are talked about for new developments have already actually had their license approved some time ago,” he said. “So they’re already, if you like, sort of baked into our assessments on emissions.”
And for all the talk of big opportunities, local workers remain skeptical that they stand to benefit.
“The transition in terms of moving from oil and gas as an energy resource to renewables is happening — that’s happening all around us — but the workforce, I fear, [is] being left behind,” said Jake Molloy, a regional organizer for the trade union RMT based in Aberdeen.
Tuokpe Brikinns, a 41-year-old safety engineer who was laid off in May, said he’s trying to switch industries due to uncertainty about what lies ahead.
“I’m looking at a different sector, a place where there will be more job security,” Brikinns said at a local job fair earlier this month. “At the moment, oil and gas is not promising at all.”
Those working to build a hybrid basin are confident workers like Brikinns will be able to find employment in wind, solar or hydrogen as local investment increases. Whether they’re right will speak to what’s next for oil towns everywhere — and the oil industry.
“There’s a lot of other countries looking at the North Sea” as a model, said Malcolm Forbes-Cable, vice president of energy consulting at Wood Mackenzie.
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