Oil industry searching for concrete measures to decarbonize

The Yomiuri Shimbun

9:50 JST, June 19, 2021

In response to the global trend toward decarbonization, the oil industry in both Japan and abroad is being forced to change its business structure, with an eye to developing renewable energy and next-generation fuels.

Such energy and fuels are expected to become a new revenue source of the oil industry, while the new energy market is getting more and more competitive as a number of firms are entering it from other industries.

Oil companies are being tested as to how strongly they can assert their presence.

Demand down 80%

In the report, the major oil retailer said: “The demand for fossil fuels will decline by 80%. The position of the fossil fuel business, which accounts for most of our profits, is expected to be taken by other businesses at some point.”

Idemitsu’s vision for the future is to place non-oil businesses at the center of its operations in 2050, such as the supply of next-generation fuels such as hydrogen and ammonia that do not emit carbon dioxide when burned, and car-sharing services for electric vehicles.

The company first hopes to build an ammonia business by 2030, storing ammonia in existing oil tanks at its refineries and turning them into the supply chain base for ammonia. It aims to achieve net zero CO2 emissions — taking into account CO2 taken out of the atmosphere through afforestation — in 2050.

Eneos Holdings Inc., one of the nation’s largest petroleum firms, expects gasoline demand to drop by half in the 2030s, earlier than the previous forecast of 2040. The company has announced it will give up its coal development rights, with an eye to reducing CO2 emissions to net zero by 2040 for the entire project.

However, the road to this target is still bumpy. Cosmo Energy Holdings Co. — which is focusing on the renewable energy business — has the largest power generation capacity among Japan’s oil industry. Its ordinary profit from the renewable energy business is ¥4.1 billion ($37 million), which accounts for only 4% of the total profits of the firm.

Eneos and Idemitsu are pinning their hopes on hydrogen and electric vehicles. Competition to develop them is expected to intensify beyond industry barriers, and it remains to be seen whether they will grow into mainstay businesses.

Eneos and Idemitsu are pinning their hopes on hydrogen and electric vehicles. But competition to develop them is expected to intensify beyond industry barriers, and it remains to be seen whether they will grow into mainstay businesses.

Global oil majors

The oil industry overseas is also facing increasing headwinds. At Exxon Mobile Corp.’s annual shareholder meeting, the Engine No. 1 hedge fund asked for environmentalists to be appointed to Exxon Mobile’s board of directors, claiming the firm is lagging far behind in decarbonization efforts.

Although Exxon Mobil resisted the appointments, it ended up accepting three of four nominees recommended by the fund. Engine No. 1 holds only 0.02% of Exxon Mobile’s shares, but the oil giant had to accept them as other institutional investors supported the proposal.

In Europe, The Hague district court ordered Royal Dutch Shell Plc. to increase its emissions reductions in a lawsuit brought by a climate activism group demanding the firm accelerate its decarbonization efforts. The ruling upset the industry because Royal Dutch Shell was considered to be proactive in decarbonization activities, spending $900 million on renewable energy-related projects last year.

Each country is searching for concrete measures on how to switch to next-generation energy sources after eliminating fossil fuels, which have supported the growth of developed economies. To realize the global trend of decarbonization, it is essential to involve emerging countries, which are highly dependent on coal and oil.

The transformation of oil companies’ business structure will be important as a model for a decarbonized society.