Before it all goes up in smoke: Lessons for Big Oil… from Big Tobacco

Big Tobacco and Big Oil have never been that far from one another.

If a decade ago one was asked what Big Tobacco had to offer the oil and gas industry, this would seem a most peculiar line of questioning. Yet with cigarette companies transitioning away from combustible tobacco and towards e-cigarettes, there seems to be a great deal that oil and gas businesses can learn from Big Tobacco after all.

Indeed, Big Tobacco and Big Oil have never been that far from one another. Both acted to stifle evidence that their products are bad for society long before such information became available to the public; and both now face a long-term structural decline. While the tobacco industry may be further along in this process than oil and gas, this also means that they’ve had a longer time to respond to such changes in the industry, investing heavily in new and emerging technologies such as e-cigarettes.

The tobacco analogy works because just as people responded to increasing information about the harms of smoking with anger and distrust, so too are they beginning to respond to news of the true health effects of fossil fuels in a similar fashion.

However, greater opportunities remain for the oil and gas sector than for Big Tobacco. It is relatively certain that people will continue to demand energy for a range of goods and services well into the foreseeable future. Smoking on the other hand, is already in decline across much of the developed world.

So while tobacco companies continue to experience great business volatility as investments in e-cigarettes ebb and flow, oil and gas companies have a once in a lifetime opportunity to invest in an increasingly certain investment: renewable energy.

Demand for renewable energy has continued to grow strongly at the same time as the cost of its generation declines. In fact, Morgan Stanley estimates that renewables will be the cheapest form of power by 2020 and in a number of markets, they already are.

Such changes mean that unlike the tobacco industry, companies dependent upon fossil fuels have a fantastic alternative to invest in to maintain profitability well into the future.

Indeed, this is something we’re already witnessing today. State owned Norwegian oil company Statoil has outlined its intention to grow its renewables business from 5% of total investment to between 15% and 20% by 2030, while others such as French gas producer Total are making billion dollar acquisitions of solar and other renewable energy businesses. Even telecommunications companies like Telstra are managing their own long-term power purchase agreements – going directly to the source and developing solar farms in Australia (creating 200 jobs along the way).Nevertheless, more clearly remains to be done. In the late 1990s and early 2000s, it was considered revolutionary when organisations began to forecast that renewable energy would grow to 30% of total supply by 2050. Now, it’s not uncommon for organisations to model an 80% or even 100% renewable scenario over the same time horizon.

While in 2014, renewable energy already provided 19% of final energy consumption, if we’re to avoid the catastrophic effects of irreversible climate change, we’ll need to radically improve upon this before it’s too late. In a survey of international experts for the Renewable Energy Policy Network, the most common expectation among a range of industry insiders was that renewables would increase to somewhere between 50 and 60% of energy demand by 2050.And forecasts from the European Union think we can go well beyond this, even to total decarbonisation.

It’s a rare opportunity that the right thing to do is also the profitable thing to do, yet as demand for oil and gas looks to be slowing, there appears to be a perfect storm (or sun-shower) brewing. Oil and gas companies, unlike Big Tobacco, now have an excellent substitute product in the form of renewable energy technologies to invest in.

Considering how little is being done on alternative fronts such as hydrogen, nuclear or carbon capture and storage, coupled with incredible cost efficiencies in renewables, strategies to survive and stay relevant in a decarbonising world are narrowing. As analysts at oil and gas research firm Wood and Mackenzie have noted, businesses that fail to diversify could be left “at a structural disadvantage” if renewables grow even quicker than anticipated.

Contrasting the rate at which the world is transitioning away from high-carbon energy systems with the speed at which public opinion turned against big tobacco demonstrates clearly that Big Oil has a lot to learn from Big Tobacco. While one can understand how hard it is to see through the smoke, now is definitely the right time to stop churning out all that smog and start letting in a little more sunshine, before it’s too late to do anything about it.

Michael Chaitow is Senior Campaigns Officer at ShareAction.