An employee looks out over the separator facility, left, illuminated at night in the central processing plant for oil and gas at the Salym Petroleum Development oil fields near Salym, Russia, on Tuesday, Feb. 4, 2014. Salym Petroleum Development, the venture between Shell and Gazprom Neft, has started drilling the first of five horizontal wells over the next two years that will employ multi-fracturing technology, according to a statement today. Photographer: Andrey Rudakov/Bloomberg
© Bloomberg

The annual meetings of some of the world’s largest oil companies this week were like therapy sessions for an industry that is suffering from existential angst. The international objective of holding the increase in global temperatures to “well below” 2C, agreed at the Paris climate talks last year, implies the obsolescence of all fossil fuel production within the next few decades. The oil companies have not yet reconciled themselves to quite what this means.

If governments stick to that commitment, fossil fuel companies will either have to find ways to stop greenhouse gas emissions from their products, or shift into renewable energy, or go out of business. At the annual meetings of oil groups including ExxonMobil and Royal Dutch Shell, that prospect was argued over by executives and shareholders, without conclusive result.

In their public presentation, at least, the European groups including Shell and Total are more willing to face up to the threat of climate change than their US rivals. While accepting the conclusions of climate science, Exxon and Chevron stress the importance of energy security and affordability over reducing emissions.

Calls from investors for the US companies to assess how their operations would fare under policies for a 2 degrees temperature rise were opposed by their boards and rejected in shareholder votes, albeit with substantial minority support. The leading European oil companies have started publishing their views of how such constraints would bite, but they remain reluctant to explore in detail what that outlook would mean for their investment decisions and future profits.

Modelling published in the journal Nature last year suggested that to stay inside the 2 degree limit, about a third of the world’s oil reserves and half its gas reserves would have to remain unburned. That does not mean oil companies have to give up on all investment in future production. Different reserves have differing prospects, depending on production costs. Shale oil in the US, for example, probably has more growth potential than Canada’s oil sands.

Overall, though, the message is one that is always hard for investors and management teams to hear: room for growth is tightly constrained, and in the long term output will have to fall rather than rise.

One option for escaping those limits is for the big oil companies themselves to take part in the energy transition. Total, which has the most ambitious plans for diversification, has set a goal of having 20 per cent of its assets in low-carbon energy by 2035.

But decades of unsuccessful ventures into alternative energy — such as BP’s Beyond Petroleum initiative — suggest that is a long shot. Disruption in other industries, from computers to taxis, has generally been led by new entrants, not incumbents.

Rather than investing in potentially stranded oil and gas projects, or gambling on new technologies that they do not fully understand, the oil companies would do better to continue returning money to shareholders through dividends and share buybacks.

The commitments made by Chevron, BP and most other groups to maintaining their dividends during the downturn, even if they have to borrow to do so, is an encouraging acknowledgment of that reality, even if the companies do not put it in those terms.

Instead of railing against climate policies, or paying them lip-service while quietly defying them with investment decisions, the oil companies will serve their investors and society better if they accept the limits they face, and embrace a future of long-term decline.

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