Oil & Gas Companies Boast Few Long-Term, Low-Carbon Ambitions & Minimal Investment

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Two new reports published within days of one another have outlined the difficulties inherent in continuing anything close to “business-as-usual” for oil and gas companies around the world, and the increasing pressure to begin transitioning to low-carbon operations.

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The first report, published by the Transition Pathway Initiative (TPI) — a global asset-owner led initiative which assesses companies’ preparedness for the transition to a low carbon economy — assessed corporate public disclosures made by the 10 largest publicly-listed oil and gas companies and found that only 2 have set long-term ambitions which are compatible with the emissions pledges made by governments as part of the Paris Climate Agreement.

Specifically, only British-Dutch oil and gas company Shell, and French competitor Total, have set long-term ambitions, but even so, these are not yet ambitious enough to align with a pathway that limits global warming to 2°C or below before 2050.

The report also showed that BP, ConocoPhillips, and Eni have each set emissions reduction targets over the coming decade, but that these targets only reduce the companies’ carbon emissions intensity by a small amount, and are focused on their operational emissions (Scope 1 and 2). The remaining five oil and gas majors — Chevron, EOG Resources, ExxonMobil, Occidental, and Reliance — have set no quantified targets to reduce their emissions.

“The most significant finding is the emerging status of companies’ future ambitions,” explained Professor Simon Dietz, leading TPI’s Research at the Grantham Institute, London School of Economics. “It is encouraging to see two major oil and gas companies, Shell and Total, setting out long-term ambitions to reduce carbon emissions intensity in a way that is compatible with the government pledges made at the Paris climate agreement. However, there is a long way to go. None of the ten largest global oil & gas firms currently set a path that would align them with limiting global warming to 2°C or below before 2050. To reduce the carbon footprint of the sector these companies need to set more stretching low carbon targets.”

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The Transition Pathway Initiative’s report, Carbon Performance Assessment in Oil and Gas, was explicit in focusing on the oil and gas industry’s Scope 3 emissions — those emissions that derive from the burning of a company’s product in electricity generation. In other words, while Shell and Total are not responsible for the actual burning of their product, they are nevertheless indirectly responsible by having extracted and provided the product. Scope 3 emissions account for the largest share of these companies’ lifecycle emissions and often account for over 80% of a company’s carbon emissions footprint.

“It’s hardly surprising that most oil and gas companies have no long-term climate plans – and that the few that do don’t have plans that are consistent with the Paris Agreement,” said Gareth Redmond-King, Head of Climate and Energy Policy at WWF UK, when reached for comment. “After all, to keep global warming below 1.5°C and avoid catastrophic climate impacts we need to phase out all fossil fuels as soon as possible. In the rapid move to a low-carbon economy, fossil fuel-related investments are at risk of becoming stranded and investors should act accordingly.”

Two Bright Spots

The bright spot from the research was obviously the ambitions that have been set in place by Shell and Total — both of which have set in place ambitions to reduce both their operational emissions as well as emissions from up and down their value chain — a move which brings the two companies in line with the Nationally Determined Contributions (NDCs) made by governments as part of the Paris Climate Agreement.

“Forward looking lifecycle emission targets that take account of all the impact of a company’s carbon footprint are essential if we, as investors, are going to have confidence in the strategy of companies we invest in,” said Adam Matthews, Co-Chair of the Transition Pathway Initiative and Director of Ethics & Engagement, at Church of England Pensions Board. “We want to see evidence of a company’s commitment to the transition to a low carbon economy, and this latest research from TPI is not comfortable reading. We welcome Shell and Total’s leadership in setting out their ambitions. We note that while they are moving in the right direction, and are ahead of their peers, this study suggests they are not yet ambitious enough to align with a pathway to below 2 degrees of warming by 2050.”

“Targets that cover all of a company’s emissions, from production to use of their sold products, provide a transparent basis for asset owners to engage with oil and gas companies on their strategies to transition.”

Outside Pressures

These ambitions serve as isolated but important shifts away from business-as-usual for the oil and gas industry and are representative not only of the importance of such ambitions, but the increasing pressure coming from without — such as investors, banks and financial institutions, and the global fossil fuel divestment movement.

“In the case of Shell and Total, their relatively ambitious targets for long-term reductions in their carbon emission intensity do reflect a new business-as-usual path, and we’d like to see more oil and gas firms follow this example,” explained Dr Rory Sullivan, Chief Advisor to the Transition Pathway Initiative, who spoke to me via email. “These are targets that have emerged because of the growing societal pressure on oil & gas companies, including pressures from NGOs and other civil society movements – of which divestment campaigns are a part.”

“There is a clear trend in the oil & gas sector – pressure from investors and other stakeholders is forcing companies to explain their positioning on climate change and how they will contribute,” said Andrew Grant, Senior Analyst at Carbon Tracker, when reached for comment. “We are seeing some companies differentiate themselves from others with their approaches, however there is a long way to go if the industry wants to be seen as part of the solution.”

One company which has made noises in both directions is BP, a company which has made some moves to begin transitioning towards a low-carbon economy, but which is led by CEO Bob Dudley, who only last month raised concerns with the global divestment movement — a movement which he said “could lead to bad outcomes.”

“BP has only set emission reduction targets in relation to its direct operations,” said Rory Sullivan. “These are welcome in the sense that they will make the business more energy efficient, but they neglect the enormous part of the climate footprint that comes from ‘sold products’ – which is approximately 80% of an oil & gas firm’s typical footprint.  Unless BP do adopt more holistic targets, that look to reduce emissions along their entire value chain, then investors will be left to conclude that their business-as-usual planning as we transition towards a more low-carbon economy is well behind the leaders in the sector, and well behind that required to meet the Paris Agreement.”

European Leaders

Only a few days after the Transition Pathway Initiative’s report, environmental non-profit and investment research provider CDP (formerly the Carbon Disclosure Project) published a report of its own, entitled Beyond the Cycle, which ranks 24 of the largest and highest-impact publicly listed oil and gas companies on their business readiness for a low-carbon transition. The companies represented in the report account for 31% of global oil and gas production and 11% of proved reserves.

The report found that Norwegian multinational energy company Equinor remains convincingly in first place, followed by Total, Shell, and Eni all ranked closely together in the next three spots.

CDP highlighted the role of European companies, which come out on top in most key areas thanks to a large-scale pivot towards portfolios made up of natural gas, setting climate-related targets, and investing in low-carbon technologies. Specifically, European oil and gas majors account for 70% of current the industry’s 7 gigawatts (GW) worth of renewable energy capacity and nearly all of the 10 GW worth of capacity under development.

Unsurprisingly, US-based oil and gas majors have not diversified to the same degree.

Even with this, however, CDP found that since 2010, the 24 companies from the ranking invested only $22 billion in alternative energy, and that low-carbon spend will remain low, expected to account for only 1.3% of total 2018 CAPEX.

“Low-carbon technologies and regulatory change is disrupting the established order of the energy industry,” said Luke Fletcher, Senior Analyst, CDP.

“The shift to a low-carbon economy presents the question of what role oil & gas companies will play in this transition, and what their strategic options are in the more immediate and longer term. Equinor’s recent rebrand to a broad energy company, expecting to invest 15-20% of CAPEX in new energy solutions by 2030, is symbolic of this shift.

“With improved efficiency, lower costs and higher prices, free cash flow for the sector is at its highest level since the first quarter of 2012. However, companies are now facing increasing scrutiny from investors to look beyond the current cycle and deliver value in the long-term. As well as diversifying into clean energy assets, oil & gas companies are shifting focus to multi-staged developments and shorter-cycle opportunities to improve their capital flexibility and resilience for the changes ahead.” – Fletcher

Other highlights from the report include:

• Companies are pivoting towards less polluting gas and reducing exposure to oil sands. Across the 24 companies, the share of production from gas has increased at an average rate of 1.4% per anum since 2002. Five companies have also recently divested from oil sands assets.
• New analysis shows 15 of the 24 oil and gas companies have now set climate targets, with Repsol, Shell, and Total the most ambitious.
• 10 companies are involved in Carbon Capture, Utilization, and Storage (CCUS) projects and collectively account for 68% of current global capacity. Expertise in this technology may form part of the oil & gas industry’s social license to operate in the coming years.
• Given 90% of the industry’s carbon footprint is from the end user (Scope 3), managing these emissions is key for the sector’s ability to be more sustainable. 18 companies disclosed Scope 3 emissions.
• Efficiency remains an issue in the industry and needs to be addressed. On average companies are losing 3.3% of their natural gas production through flaring, venting and methane leakages – worth almost US$5bn at the current gas price.

Investor Pressure

Further, CDP found that votes for shareholder resolutions relating to 2°C analysis grew from an average of 21% in 2014 to an impressive 53% in 2018. “Oil & gas companies are coming under increasing pressure to demonstrate portfolio resilience and adapt business models to align with a low-carbon energy transition,” the authors of the report explained. “Post-Paris they have faced increasing investor scrutiny and with the recommendations from the G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), they now face a new normal in climate risk reporting.”

“As CDP state in their report votes for climate shareholder resolutions have more than doubled from 2014 to 2018 – and its clear we are seeing more pressure from shareholders on oil and gas companies to move on low carbon,” explained the Transition Pathway Initiative’s Dr Rory Sullivan. “Taken together the two reports both draw the same conclusion on the sector – which is that on the one hand, there are encouraging examples of good practice emerging from the sector – such as  Shell and Total’s long-term target setting, but that on the other hand,  the sector as a whole is not responding with the level of ambition and scale of action required.”

In the end, it is clear to see that the tide is turning for the oil and gas industry, but it is a low tide, one which will take years to fully develop and begin to sweep away the dross of decades.

“It’s hardly surprising that so few oil companies are taking their climate responsibilities seriously,” concluded Ben Ayliffe, Senior Strategist with Greenpeace International.

“This is an industry whose entire business model is predicated on the practically endless search for and production of more oil we cannot afford to burn. These companies have often been a regressive force in global climate politics and, despite the need for urgent action to reduce emissions being crystal clear, are determined to open up vast new oil frontiers in areas like the Amazon Reef, the Arctic, Patagonia and the Great Australian Bight. Big Oil’s willingness to pay only lip service on tackling climate change is why millions around the world have taken action to resist their operations.

“It’s also why we’ve seen so many court cases launched by civil society organisations in places as far apart as Norway and the Philippines aimed at ensuring oil companies and the governments that support them are held responsible for their climate impacts. A few years ago the industry was telling us that oil production in ever-more remote places was inevitable and that the uptake of clean technologies like electric vehicles a pipe dream, yet today we see countries like New Zealand banning all future oil exploration and major car companies setting dates to phase out diesel engines. Whether oil companies chose to admit it or not, we’re heading towards a cleaner future with or without them.” – Ayliffe