Desperate times for petroleum?
The history of petroleum is filled with turbulent moments. During its course, oil and gas have gone through serious crises caused by wars, economic recessions, and international disasters.
Despite the losses incurred, the sector has always managed to survive. Lately, two seemingly unrelated global events (a pandemic and climate change) challenge anew, and perhaps to an unprecedented level, the sturdiness of the petroleum industry.
The coronavirus disease SARS-CoV-2 (commonly referred to as Covid-19) which was first identified in Wuhan, China, in late 2019, has swept over 200 countries.
The disease has cost hundreds of thousands of human lives, with fatalities expected to continue or even spike during subsequent infection waves. Apart from the loss of human lives, the pandemic has caused a new global economic collapse. The crisis has already affected numerous sectors, including the petroleum industry. The suspension of commercial activities due to mandatory lockdowns and personnel quarantines, combined with travel restrictions across the world has caused an unprecedented decline in fossil fuel demand. The price of oil has dramatically dropped, with US crude suffering a historic crash below zero in April 2020. Until lockdowns are entirely lifted, oil demand will remain low pushing companies into survival mode.
The pandemic and the fight against climate change pose a dual and unprecedented challenge to extractive industries. Fossil fuels are becoming less competitive than low-carbon energy resources."
Marianthi Pappa, Assistant Professor in Law
What makes this oil shock remarkable is that it transpired amid the rise of energy transition. In light of the global action against climate change, many countries have pledged to limit global warming and become climate-neutral within the next three decades. The reduction of carbon emissions calls for a shift from fossil fuels to renewable energy resources. The pandemic might give us a preview of how the world would look like with a lower-emission energy system. A decline of pollution markers has been observed over big cities and in rivers, lakes and seas. Some argue that the emergency restrictions on fossil consumption (with the alternatives of remote working, home delivery of goods, domestic travel, and teleconferencing) should remain in force once the pandemic is over. To that extent, Covid-19 could accelerate the energy transition, hitting oil even harder.
The impact of Covid-19 and energy transition on the extractive sector is yet to be quantified and assessed. Nonetheless, some preliminary observations can be made. Fossil fuels are becoming less competitive than low-carbon energy resources. Oil companies are under popular pressure to reform their emission policies, while a growing number of environmental and climate change lawsuits are being filed against operators.
Against this background, a new study by Assistant Professor in Law, Marianthi Pappa enquires: is the petroleum industry losing the social licence to operate (SLO)? How can oil companies tackle this challenge? Answering these questions is important for both theoretical and practical reasons. Our knowledge about the connections between the Covid-19 pandemic, energy transition and the petroleum industry is scattered and incomplete. These challenges have been discussed in literature, but not jointly. This is the first legal study to bring all these together; it is also the first to focus on the oil companies’ SLO. From a practical perspective, the study seeks to inform oil companies and energy policy-makers about the current challenges which threaten oil industry, about the steps which oil companies must take in order to overcome these challenges, and finally, about the lessons which the greater energy sector can draw from this experience.
Oil companies are under popular pressure to reform their emission policies, while a growing number of environmental and climate change lawsuits are being filed against operators. To address these challenges, the industry must take some drastic actions."
Marianthi Pappa, Assistant Professor in Law
Outcomes and recommendations include: reform of the oil companies’ internal policies to integrate with climate change, diversification of their investment portfolios, decarbonisation of operations, adoption of realistic emissions targets, and meaningful engagement with the public. In the bigger picture, the effort must be collective and involve all relevant actors.
The study concludes that the petroleum industry should no longer be perceived as cause of the problem, but as part of the solution.
Marianthi Pappa's research is set to be published in the Palgrave Handbook of Social Licence to Operate and Energy Transitions later this year.
Contact Marianthi Pappa for more information.