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When it comes to climate change and the need to decarbonize, the oil majors have changed their tune in recent years.
In the wake of the Paris Agreement on climate change and increased pressure from investors, many have agreed to shareholder resolutions asking them to explain how they will deal with climate impacts, they have stepped up their investments in renewable energy and electric vehicle infrastructure, and a number have even set dates by which they believe oil and gas demand will peak.
And yet, two new pieces of research suggest that the industry still has a long way to go on its journey to acknowledging what needs to be done to deal with climate change .
The Transition Pathway Initiative, backed by investors responsible for $9.1 trillion of assets and based at the London School of Economics, assessed the 10 largest publicly-listed oil and gas companies and found that only two, Royal Dutch Shell and Total, have set long-term ambitions that would result in a large reduction in their carbon intensity in line with the Paris targets to keep temperature rises below 2°C.
BP, ConocoPhilips and Eni have set targets to cut emissions from their own operations in the next decade, but, according to the Initiative, “these targets only reduce the companies’ carbon emissions intensity by a small amount as they are focussed only on their operational emissions”. And five of the 10 biggest groups – Chevron, EOG Resources, ExxonMobil, Occidental and Reliance, still have no quantified targets to cut their emissions.
Meanwhile, in a new report entitled Change in Pressure, environmental research group CDP says that European oil and gas majors, including BP, Eni, Equinor, Total and Shell are investing the most in low carbon initiatives, but the industry as a whole is spending just 1.3% of its investment budget on low carbon.
CDP says it is clear that there is a geographical divide, with European companies leading the way, while groups such as China’s CNOOC, Rosneft of Russia and the US group Marathon Oil are lagging.
European majors account for 70% of the oil majors’ current renewable capacity and nearly all capacity under development. With less domestic pressure to diversify, US-based companies have not embraced renewables in the same way, while state-owned groups in Russia have less flexibility, so they may be slower to react to future disruptions such as climate regulations. Lack of disclosure of emissions data is a key issue for Chinese companies.
The oil & gas sector is under increasing investor pressure, with votes for climate shareholder resolutions doubling from 2014 to 2018 at company AGMs. Following the findings of the recent report from the UN’s Intergovernmental Panel on Climate Change (IPCC), the urgency of the company response to climate change is more important now than ever before.
Although they still spend a small proportion of their budgets on low carbon assets, the pace is accelerating. Since the start of 2016, 148 deals have been made in alternative energy and Carbon Capture, Utilization, and Storage (CCUS), with $22 billion invested in alternative energies since 2010, says CDP.
It is vital that the oil and gas sector acts to cut its emissions because the industry makes up over half of global emissions of greenhouse gases from energy. Investors have increased pressure on the sector, with the number of climate-related shareholder resolutions doubling from 2014 to 2018.
The Transition Pathway Initiative (TPI) paper focuses not just on the oil companies’ direct emissions but also on emissions produced when their products are used to generate electricity, power industry and fuel cars and trucks. These emissions can account for more than 80% of an oil and gas company’s carbon footprint.
Despite the encouraging development of the industry starting to take action, no company has proposed to reduce its carbon intensity sufficiently to be aligned with a Below 2 Degrees benchmark or to achieve net zero emissions by 2050, TPI says.
“The most significant finding is the emerging status of companies’ future ambitions,” said 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 10 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.”
Adam Matthews, Co-Chair of the Transition Pathway Initiative and Director of Ethics & Engagement, at Church of England Pensions Board, added: “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. 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.”
Low carbon technologies and regulatory change are disrupting the established order of the energy industry, said Luke Fletcher, Senior Analyst at 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. Companies are now facing increasing scrutiny from investors to deliver value in the long-term.”
