(Bloomberg Opinion) -- Honestly, it hasn’t been a great month for Franco-American energy relations. First, a Texas Railroad Commissioner fired off a jeremiad at Engie SA for turning up its nose at U.S. gas. Now Total SE, the French oil champion, is pulling out of the big kahuna of industry lobbyists, the American Petroleum Institute.
The move is a bombshell but one that’s been coming for a while. Total, similar to several other European oil majors, has staked out a decarbonization strategy at odds with the stance of the API and the U.S. oil and gas industry in general. Moreover, the particulars of Total’s strategy make the API’s positions not just philosophically dissonant. They’re plain bad for business.
Transforming a behemoth that’s been pumping oil and gas for decades into a giant in greener, more electrified energy markets is the innovator’s dilemma on steroids. Cutting emissions tends to mean cutting sales of the things that produce those emissions — oil and gas — which also happen to fund the company (including its dividends). Total wants to thread this needle with a plan to keep growing its energy production but cut the emissions-per-unit so much that its absolute emissions fall.
It’s also a tall order. Using Total’s objectives updated last September, HSBC calculates that in order for the company to cut its absolute emissions by 5% to 10% by 2030, while also growing energy production by a third, emissions intensity would have to drop by 35%. Getting there will require a herculean effort in terms of cutting emissions from Total’s own operations as well as encouraging faster sales of lower-carbon fuels than oil. In broad terms, that means selling more gas, eliminating methane emissions from that gas, building a giant renewable-power business and making carbon capture viable. All in the space of a decade.
This is the essential context for the three “divergences” Total emphasized in announcing its split with the API. These were the API’s support for weakening methane-emissions standards, opposition to subsidies for electric vehicles and its “differing positions” on carbon pricing. If your company its staking its future on higher sales of gas and renewable power, as well as being paid to capture carbon, then paying dues to a body that stands in the way of dealing with the methane problem and encouraging more battery-powered vehicles isn’t just hypocritical — it’s ridiculous.
The absurdity was continued, inadvertently, in the API’s response. Bidding farewell to Total, the group sniffed that “we do not support subsidizing energy because it distorts the market and ultimately proves harmful to consumers,” no doubt a reference to renewable energy and electric vehicles.
Yet the API also touts emissions reductions resulting from gas displacing coal and the potential for carbon capture, most recently at last week’s “State of American Energy” event. It’s an implicit recognition that there is value in reducing emissions — which is an implicit admission that every unpriced emission from American oil and gas is a subsidy to the API’s members. How distorting is it to the market that drivers don’t pay the cost of the harm they’re doing to the climate? At, say, $50 a tonne, the transportation sector’s carbon emissions from burning oil cost $93 billion in 2019. But the oil industry didn’t pay that and its customers didn’t either; society did. Some might try to convince you otherwise, but it isn’t being anti-oil to demand that the industry — any energy industry — internalize its costs fully. It’s just capitalism, albeit of the transparent, fair and sustainable variety.
In breaking with the API now, Total may be hoping to capitalize on the change in government in Washington. Democrats aren’t exactly going to embrace a French oil major; but when it comes to issues such as carbon pricing, green-energy stimulus spending and limiting emissions, they are on common ground. Moreover, by being the first oil major to break with the API, Total ensures it gets attention; which is important in selling its strategy not just in Washington but also on Wall Street. “It’s a statement that energy and politics have changed and the industry has to move with it,” says Robin West, who leads Boston Consulting Group’s Center for Energy Impact.
As for the API, the loss of one foreign oil major may not seem like the biggest blow. At the very least, though, in exposing the sheer incongruity of lobbying against your own business plan, Total’s move will put pressure on BP Plc and Royal Dutch Shell Plc to follow suit. And above all, like electric vehicles nibbling at oil’s incumbency, even a small challenge to the API’s position portends a fundamental change in the climate.
These are scope 1-3 emissions, which includeemissions from customers' use of the energy sold, not just the company's own emissions from operations.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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