Greening state capitalism will become increasingly necessary as global competition and the world both continue to heat up.
Governments and their national (i.e., state-owned) oil companies (NOCs), which claim up to an estimated ninety percent of the world’s oil and natural gas reserves, stand to lose much from the green energy transition. According to a 2021 report by the Natural Resource Governance Institute, “If national oil companies follow their current course, they will invest more than $400 billion in costly oil and gas projects that will only break even if humanity exceeds its emissions targets and allows the global temperature to rise more than 2°C.”
Yet, following their governments’ commitment to decarbonization, flagship NOCs have been pursuing seemingly ambitious green policies alongside their traditional operations. China’s big three are prime examples. China National Petroleum Corporation (CNPC) is investing in carbon capture and storage, geothermal, and hydrogen, while Sinopec is targeting green hydrogen production, electrochemical technologies to convert carbon dioxide to useful chemicals, electric vehicle charging, and LNG refueling. China National Offshore Oil Corporation (CNOOC) has achieved a world’s first seawater electrolysis hydrogen generation system and continued to invest in offshore wind power.
Similarly, Colombia’s NOC, Ecopetrol, adopted a net-zero target in March 2021, aiming to add up to 400-450 megawatts in renewable energy capacity by 2024 and reserve seven to eight percent of its 2022-2024 spending for low-carbon energy. It is also exploring alternatives to fossil fuels, such as geothermal, wind, and hydrogen, while preparing to eliminate routine gas flaring by 2030 and add leak detection and repair programs. While it is too early to tell whether NOCs’ decarbonization efforts will be impactful or enduring, useful clues may be found in considerable variations that exist among NOCs and the different institutional ecosystems in which they operate.
Institutional Ecosystems Matter for Driving NOC Decisions
In my book, Fueling State Capitalism, I examined a range of state capitalist countries — from democracies like India, Norway, and Brazil to the one-party states of Russia and China. I found that the absence of democracy and the prevalence of bureaucratic competition have afforded NOCs significant autonomy in expanding their operations abroad. Government support, both political and economic, has also allowed them material advantages in competing globally with the likes of ExxonMobil and BP.
However, these material advantages do not come without costs, especially because governments and NOCs may essentially agree on the goal, such as energy security, while disagreeing on the appropriate strategy, such as where to invest and how much. When politically driven government priorities and commercially driven NOC priorities are not aligned, whether the government or the NOC has the upper hand depends on their institutional ecosystems. In countries with a strong and centralized energy ministry, political pressure from governments may place undue restrictions or unsustainable burdens on NOC finances. Norway’s Statoil needed to wait six months to a year for the government to approve its access to international capital markets. In other cases, such as Iran and Saudi Arabia, NOC revenues were subject to government “raids” on their funds to subsidize a variety of agendas, leaving less room for additional profit-seeking or investment. In countries without such a ministry, NOCs may exploit bureaucratic competition to prioritize their own commercial interests over the national interest. Chinese NOCs found themselves outbidding one another in purchasing energy assets abroad.
Privatization or partial privatization of successful NOCs can be seen in part as efforts to avoid the trade-offs between reliance on government resources for material advantages and operational autonomy from politics. Many recognizable NOCs today, such as Norway’s Statoil, Saudi Arabia’s Saudi Aramco, and Colombia’s Ecopetrol, are at least partially privatized entities rather than mere extensions of government ministries, further strengthening their commercial incentives.
There are Market and Non-Market Incentives Driving NOCs Towards Decarbonization
What does this all mean for climate change? It is important to recognize that, like energy security, energy transition is a goal on which politically-driven governments and commercially-driven NOCs can essentially agree.
The Paris Agreement has catalyzed civil society pressure (“naming-and-shaming”) on governments to meet their emissions reduction targets. Particularly notable has been the global diffusion of anti-fossil fuel norms designed to stigmatize and disincentivize fossil fuel production. Under pressure from the international community, image-conscious governments could underwrite for their NOCs the risks associated with investment in renewables, the adoption of more stringent technical standards, and the exploration of technological solutions such as cleaner oil products and carbon capture and storage in ways private shareholders cannot. In fact, NOCs may hold greater promise for climate action than multinationals precisely because of their state ownership.
Keenly aware that fossil fuel assets may become “stranded assets” in the long run, fossil fuel companies — both NOCs and multinationals—are slowly but surely responding to market incentives by diversifying their portfolios. By 2022, two-thirds of utility-scale solar and wind energy projects in Texas were owned by utilities and energy companies with fossil fuel assets that have opposed renewable and climate policies elsewhere. What is more, major banks, such as JPMorgan Chase, Citi, and Bank of America, have financed hundreds of billions of dollars per year to the largest NOCs, making even NOCs vulnerable to pressure from climate-ambitious investors.
The Decarbonization Efforts of Some NOCs May be More Impactful and Enduring Than Those of Others
While governments and NOCs may already agree on the goal (i.e., that some adaptation to the energy transition is necessary), they must also agree on a strategy to achieve impactful and practical decarbonization efforts. This means having a concrete and coherent plan to which both the government and NOCs can commit their resources and political will.
For both parties, this means resisting some of their strongest temptations, perhaps through institutionalized agreements. Governments must resist the temptation to unduly strain or restrain NOC finances. They must screen NOC investments where applicable but also be sufficiently flexible to underwrite risky but well-researched and potentially rewarding investments that could unlock meaningful carbon emissions reductions. The government can also relieve NOCs of duties that distract from their core operations, such as providing employment for elites and hiding the fiscal burdens of fuel subsidies.
NOCs must resist the temptation to abuse potential government bailouts by investing beyond their risk management capacity only when necessary and taking calculated risks to become both greener and more commercially successful. NOCs must also avoid taking the easy way out, such as making pronouncements of net-zero plans they have no intention of honoring, being content with relatively negligible investments in carbon capture and storage being defined as doing their part, and striking oil and gas deals while sponsoring and attending the Conference of Parties (COP).
While formidable obstacles stand in the way of governments and their NOCs in playing a constructive role, one factor stands above others. I anticipate significant challenges for climate-ambitious governments that manage their NOCs without a centralized energy ministry because government bureaus themselves can vehemently disagree on the appropriate strategy while essentially agreeing on the goal. Without a clear line of authority among the relevant bureaucratic actors, governments’ decarbonization push could simply lose momentum. Countries like China and India could potentially improve their climate leadership by establishing centralized ministries to oversee their NOCs.
The Re-intensification of Great Power Competition Presents a Threat and an Opportunity
When we fast-forward to the present — a world of mounting China-US tensions, the Gaza War, and the Ukraine War — the picture looks bleak. The energy transition remains incomplete, hydrocarbon access remains crucial to military and economic security, and political control of global hydrocarbon resources remains highly relevant. If current trends hold, countries may wind up competing to control access to said resources precisely because future climate agreements will impose fees on fuel imports. While the uneven and incomplete energy transition has undoubtedly brought forth changes, NOCs are primarily operating under the assumption that fossil fuels are here to stay.
As relations between China and the United States continue to deteriorate, the operations of NOCs may once again contribute to geopolitical tensions, overshadowing the commercial incentives behind them. Throughout the 2000s, the foreign investments of China’s NOCs were widely seen as “locking up” finite global energy resources to fuel its breakneck economic growth amid rising oil prices. Supporting this narrative, China had claimed almost ninety percent of Ecuador’s oil exports by 2015, most of which were used to pay off “oil-backed” loans to Beijing. My book sought to complicate the notion that NOC operations were coordinated efforts by governments, such as Beijing’s, to enhance their military and economic security at the expense of other states by underscoring the role of commercial incentives and bureaucratic competition in state capitalist countries.
In this geopolitical environment, NOCs and their governments have an unprecedented opportunity for an image makeover. NOCs and governments are heavily represented among the “hundred companies responsible for seventy-one percent of global emissions” over the years 1988 to 2015, with five NOCs and three national coal companies represented among the top ten. If NOCs can demonstrate unlikely but surprising climate leadership amid growing geopolitical tensions in close coordination with their governments, they may be in a position to upstage their multinational counterparts as part of the solution rather than the problem. In short, they may become global players for not only their wealth of resources but also their international clout.
NOC climate leadership is far from becoming a reality. Nonetheless, while NOCs may vary in their inherent capacity and willingness to shoulder the risks of green investments and policies, a decarbonization push from their governments, backed by transparency and institutional commitments, could help NOCs ensure their longer-term commercial viability via a managed transition to renewables. For now, the good news is that there is significant complementarity between governments facing reputational incentives to decarbonize and forward-thinking NOCs commercially positioning themselves for the post-carbon world.
About the Author: Andrew Cheon
Dr. Andrew Cheon is Associate Professor of International Relations at Duke Kunshan University. Prior to joining DKU, Dr. Cheon was Assistant Professor of International Political Economy at the Johns Hopkins School of Advanced International Studies (SAIS). He is broadly interested in pressing issues of governance, contestation, and conflict in the age of climate change and great power competition. He is the author of “Fueling State Capitalism: How Domestic Politics Shapes Foreign Investments of National Oil Companies” (Oxford University Press, 2023) and the co-author of “Activism and the Fossil Fuel Industry” (Routledge, 2018). Dr. Cheon’s work also appeared in outlets such as “Comparative Political Studies,” “Global Environmental Change,” and “Journal of Conflict Resolution.”
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