Machiel Mulder (programme director of the Executive MBA Energy Transition), Daan Hulshof, Peter Perey, and Lennard Rekker of the University of Groningen investigated the effect of a reduction in oil and gas extraction on global consumption. A number of environmental organizations had previously argued that the partial or complete discontinuation of oil and gas extraction by a single energy company, such as Shell, would contribute to reducing global CO2 emissions. However, according to the researchers, this is unlikely because the oil and gas markets are global markets in which many companies and governments are active. Many other companies also operate in the countries in which Shell is active in oil or gas extraction; these companies are likely to take over Shell’s activities should Shell cease its operations.
Furthermore, governments of countries with oil or gas reserves would simply ask other companies to extract the oil or gas from the ground because they want the income. According to the researchers, even if other companies and governments did not react in this way, it is likely that there would be no impact on global consumption. This is because, as events in recent decades have taught us, the oil and gas markets operate in such a way that a reduction in production by one company or country is quickly offset by increases in production elsewhere.
The four economists* investigated the extent to which a reduction in Shell’s oil and gas extraction can be expected to lead to a reduction in global oil and gas consumption, taking into account the functioning of the oil and gas markets. The research is based solely on the analysis of publicly available information and academic literature.
Shell operates in many countries. It extracts most of its oil in the United States (26%), Brazil (19%), Oman (11%), Nigeria (9%), Russia (5%), and the UK (5%), and most of its natural gas in Australia (19%), the United States (10%), the Netherlands (6%), Malaysia (6%), Nigeria (6%), Canada (6%), and Norway (5%). In most countries a large number (often dozens) of companies are involved in oil and/or gas extraction. Hundreds of companies are active in this industry worldwide – and these companies are very diverse, ranging from state-owned companies, commercially integrated companies (such as Shell), and specialist oil or gas companies, some of which are funded by private equity.
Companies often work together on individual projects so as to spread the risks (e.g. technical and economic risks) associated with oil and gas extraction. Companies also seem to change their project portfolio on a regular basis,often as a result of the frequent exchange (i.e. sale) of licences between companies, but also the termination, extension, and renewal of licences. If Shell were ordered to reduce its activities in oil and gas extraction, it is likely that Shell would either transfer its existing licences (or participations in them) to other companies or return them to the government concerned.
Governments of countries with oil and gas reserves generally aim to maximize financial returns from these reserves. Agreements are therefore usually concluded with the companies involved in the extraction process regarding the volume, the rate of extraction, and the distribution of financial returns. For several of the countries in which Shell is active, oil and gas revenues are an important source of income for the government. Consequently, should Shell be forced to reduce its production and not be able to transfer its licences to other parties, it can be expected that the authorities will cancel the licences or existing production agreements in order to allow other companies to take over the activities, for example through an auction.
If Shell did not sell its licences to other companies and if governments did not then ask other companies to take over Shell’s activities, for the oil and gas markets this would mean that the reserves that Shell currently holds would be withdrawn from global markets. At present, this fall in production by Shell would amount to a maximum of 2% of global consumption. Past oil and gas crises, such as after the revolution in Iran in 1978 and after the invasion of Kuwait by Iraq in 1990, which resulted in a drop in oil production in those countries by 4 to 6% of global production over a series of years, did not lead to a reduction in global production, because other producers were able to rapidly increase their production.
Considering these previous experiences in the oil and gas markets with sudden substantial reductions in production by/in some countries, we can expect that a drop in production of a few percent will have no effect on global consumption. This is because global oil and gas markets operate in such a way that other producers will have economic or other incentives to compensate for this decline in production. This effect will be all the more pronounced if an intended reduction in Shell’s production were to span the period up to 2030, giving other market players plenty of time to prepare and expand their production capacity or increase production from existing fields. Such opportunities to expand production exist because there are still significant global reserves of oil and gas, and Shell has only a limited share of current global reserves of oil (0.25%) and gas (0.5%).
Contact: Machiel Mulder, Professor of Regulation of Energy Markets, email: firstname.lastname@example.org, tel.: +31 (0) 6 31035729
Report: Machiel Mulder, Daan Hulshof, Peter Perey, and Lennard Rekker (2020), Company-specific restrictions on exploration and production and the effect on global fossil energy consumption; an analysis of Shell’s position. CEER, Policy Paper 8
* This research was carried out at Shell’s request as part of legal proceedings initiated by, among others, Milieudefensie (Friends of the Earth Netherlands). Milieudefensie has claimed that Shell should be forced to reduce the Shell Group’s CO2 emissions as well as CO2 emissions associated with the production, sale, and use of Shell products by up to 45% by 2030.
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