Oil & Gas Carbon Transition
Investor pressure, regulatory action, and shifts in demand push oil and gas companies to reduce their greenhouse gas emissions.
Oil & gas carbon transition
A Bloomberg Intelligence report
Inaction and ambition:
Two sides of oil and gas
This analysis is by Bloomberg Intelligence senior ESG analyst Eric Kane. It appeared first on the Bloomberg Terminal.
As investor pressure, regulatory action and shifts in demand push oil and gas companies to reduce their greenhouse gas emissions, two distinct camps have emerged. Roughly half of the 39 integrated, exploration and production, and refining and marketing companies we analyzed have yet to set targets to reduce their Scope 1 and 2 emissions. For the other half, transition strategies are increasingly ambitious, with leaders aiming for net zero. Only five companies, including Eni, Total and Woodside Petroluem, have set targets putting them in-line with the International Energy Agency's Sustainable Development Scenario, in our view.
Just eight companies established targets to reduce their Scope 3 emissions, suggesting others may face significant risk as the economy shifts away from carbon-intensive energy.
- Oil and gas companies fail to meet 2-degree scenarios
- Gaps widen between oil and gas transition strategies
- Historic trends show uneven efforts to reduce carbon
- Scope 3 key to oil and gas carbon transition
Oil and gas companies fail to meet 2-degree scenarios
Oil, gas C02 strategies won't limit warming to 2 degrees Celsius
Only five out of 39 oil and gas companies have carbon-reduction targets that match levels needed to avoid a 2-degree Celsius temperature rise. While carbon transition paths will vary by company, renewable energy, offsets and carbon capture are key components. Despite the risks, many companies have yet to develop reduction strategies.
Leaders emerge in carbon transition
Oil and gas companies continue to set targets to reduce their operational (Scope 1 and 2) greenhouse gas emissions, but most may fall short of the International Energy Agency's 2030 Sustainable Development Scenario. Eni, Total, Reliance, Galp and Woodside are the only companies, in our view, that have targets in-line with the scenario for 2030. Eni aims to have net-zero upstream emissions by 2030 and net-zero emissions for the entire company by 2040. The European integrated oil companies continue to set more ambitious targets than their non-regional peers and to companies in the refining and marketing and exploration and production industries.
Shell, BP, OMV, Repsol and Santos aim for net zero by at least 2050, suggesting a positive long-term transition outlook.
Carbon cuts needed to limit warming to 2 degrees Celsius
Based on our analysis, just five of 39 companies are expected to meet the IEA's Sustainable Development Scenario (SDS). According to the SDS, which is aligned with limiting warming to well below 2 degrees Celsius, oil and gas companies must reduce their operational Scope 1 and 2 greenhouse gas emissions intensity by 44% by 2030 from 2018 levels. The IEA estimates that a majority of these reductions can be achieved by cutting methane emissions. Given that Scope 1 and 2 emissions from companies we analyzed account for almost 4% of global emissions, their failure to meet this target could have a significant impact.
To achieve its goal, the IEA says oil production must decrease to 85 million barrels a day in 2030 from 95.4 million in 2018, while natural gas production increases to 4,264 bcm from 3,937 in the same period.
With no direct path, different approaches to net zero emerge
Oil and gas companies continue to develop strategies to reduce their carbon intensity in response to investor pressure and shifting demand away from fossil fuels. However, these paths vary significantly in ambition and focus. For the eight companies in the peer set that announced carbon-neutral ambitions, renewable energy, offsets and carbon capture may be integral. Eni, Repsol and Total announced targets for renewable or low carbon-generating capacity. Eni plans to have more than 55 GW of installed renewable capacity by 2050.
Shell has announced plans to invest up to $200 million in natural ecosystems between 2020-21 as a way to generate carbon credits and offset emissions. BP is among those that acknowledge that carbon capture, use and storage will be critical to their transition efforts.
As climate crisis nears, transparency is a challenge
Climate change and the need to transition to a low-carbon economy pose a significant challenge to the oil and gas sector. Greenhouse gas emission data continues to improve in consistency and comparability as investors demand transparency on how the issue is managed. However incomplete data sets and lack of information still present challenges when assessing carbon performance and transition strategy. Of the 39 companies we analyzed, only Valero doesn't report greenhouse gas emissions. Seven other companies don't provide enough historic data to determine reduction trends. Further, 19 companies failed to offer comprehensive greenhouse gas-reduction strategies.
For those that provide quantitative targets, units, timelines and details can vary significantly, making a comparative analysis challenging.
Gaps widen between oil and gas transition strategies
Winners and losers are clear in oil & gas carbon-transition race
More than half of the 39 oil and gas companies we've analyzed have strategies to reduce operational greenhouse-gas emissions. Ambitions vary, but most don't meet the IEA's Sustainable Development Scenario guidance. The strategies could increasingly serve as a bellwether of which companies may be best-positioned in a low-carbon economy.
Gulf between transition strategies widens for integrated oils
European integrated oil and gas companies are enhancing their carbon-transition strategies, though a majority of their non-regional peers have been slow to address the issue. Eni, Galp and Total could surpass the 44% reduction in operational emissions intensity the IEA suggests for its Sustainable Development Scenario by 2030, in our view. Eni aims to have net-zero upstream emissions by 2030 and net-zero emissions for the entire company by 2040. For the 13 companies with carbon-reduction targets, their average carbon intensity -- million tonnes CO2e/invested capital plus depreciation ($/billion) -- could decline by almost 30% by 2030 and more than 60% by 2050.
Exxon, Chevron and Saudi Aramco are among companies that haven't disclosed comprehensive carbon-transition strategies.
Reliance stands out among refining peers with net-zero target
The refining and marketing industry could be slow to reduce operational carbon emissions, with few companies setting comprehensive transition strategies. Reliance Industries's net-zero target by 2035 suggests the company may be an exception. The company could exceed the IEA's SDS target of a 44% reduction in carbon intensity by 2030 vs. 2018, in our view. Reliance said it would replace transportation fuels with clean electricity and hydrogen, while enhancing its carbon capture and storage technologies, and examining methods to use CO2 as a feedstock.
Formosa Petrochemical, Indian Oil, Phillips 66 and Valero have yet to announce comprehensive carbon-transition strategies.
Woodside leads E&Ps with focus on net-zero direct emissions
Woodside is the only exploration and production company in the peer set we expect to meet the IEA's 44% reduction in Scope 1 and 2 emissions intensity by 2030 from 2018. The company plans to be net-zero direct CO2 emissions by 2050. As a signatory to the World Bank's Zero Routine Flaring by 2030 initiative, the company is focused on reducing methane emissions and better energy efficiency, with increased use of offsets to reach the target. Santos, which targets net-zero operational emissions by 2050, could have higher absolute emissions and carbon intensity than Woodside in 2030, our analysis shows, suggesting a steeper reduction in 2030-50.
CNOOC, Devon Energy, EOG Resources and Occidental Petroleum haven't set comprehensive carbon-reduction strategies for their operational emissions.
Historic trends show uneven efforts to reduce carbon
Oil and gas looks within to lower its carbon-intensity levels
As the carbon transition progresses and increasingly rewards efficiency, oil and gas companies are reducing their operational intensities, with more than half of the 39 companies analyzed showing carbon-intensity reductions during the latest five-year period. The refining and marketing segment trails others with the highest average intensity.
Integrated oils lead on historic emissions reduction
A higher percentage of integrated oil and gas companies are reducing their operational carbon intensity -- million tonnes CO2e/invested capital plus depreciation ($/billion) -- than in others in the industry, our analysis suggests. In the latest five-year period, 15 out of 23 companies reduced emissions intensity, while four experienced a gain. Four didn't provide enough data for comparison. Rosneft, OMV and PTT achieved the most significant reductions, while Oil & Natural Gas, Imperial Oil, Gazprom and Eni reported increases. Neither Oil & Natural Gas nor Gazprom have announced comprehensive targets to reduce carbon emissions.
OMV aims to have net-zero operations by 2050, and seeks to lower its upstream carbon intensity by more than 60% and refining intensity by 20% from 2010 levels by 2025.
Marathon leads refiners on CO2 reductions
Over the latest five-year period, the average combined Scope 1 and 2 carbon intensity -- million tonnes CO2e/invested capital plus depreciation ($/billion) -- for six refining and marketing companies we analyzed decreased by more than 20%. Marathon led peers with a reduction of more than 50%, while Indian Oil was the only company to see an increase. Marathon reduced its intensity by diversifying its portfolio to include less carbon-intensive operations, including biofuels, while enhancing natural-gas recovery and processing. The company plans to reduce Scope 1 and 2 emissions per barrel of oil equivalent processed by 30% by 2030 from 2014 levels.
Valero is the only company in the peer set not to disclose GHG emissions data and ENEOS doesn't provide data before 2017. Both were excluded from industry average calculations.
Devon lags behind in decarbonizing among E&Ps
Of the eight exploration and production companies we analyzed, just two lowered CO2 emissions intensity -- million tonnes CO2e/invested capital plus depreciation ($ billion) -- in the latest five-year period. This suggests the industry is slow to decarbonize. Devon Energy trails all peers with a 150% increase from 2014-18. Santos, which targets net-zero operational emissions by 2050, had a 27% gain in intensity in the same period. The company attributes an absolute increase in several key GHG metrics, including Scope 1 emissions, to the acquisition of Quadrant Energy, completed in November 2018. Woodside, which aims to achieve net-zero direct emissions by 2050, led the peer set, reducing emissions by 35%.
EOG Resources and CNOOC don't provide enough historical emissions data and were excluded from the analysis.
Scope 3 key to oil and gas carbon transition
Scope 3: The elephant in the room for oil and gas transition
Oil and gas companies that omit Scope 3 emissions from transition strategies risk stranded assets and investor pressure, in our view. Shell and BP are among those to set ambitious low carbon-energy transition strategies. Exxon Mobil and others who fail to address such emissions exclude their biggest contribution to climate change.
Companies ignoring 85% of total GHG footprint
Our analysis of 39 oil and gas companies found that fewer than half report Scope 3 greenhouse gas (GHG) emissions, despite being more than 85% of the total footprint for the average company. Just eight of these companies use Scope 3 in their GHG reduction strategies, suggesting a significant gap as oil and gas companies aim to decarbonize. Shell, which seeks to achieve net-zero emissions by 2050, reports almost 700 million metric tons of Scope 3 emissions vs. 70 million for Scope 1 and 11 million for Scope 2. The company is aiming for net zero by improving operational efficiency and shifting toward natural gas, renewable-power generation and hydrogen.
This could reduce the carbon intensity of each unit of energy sold by 65%, while carbon capture and natural carbon sinks will address remaining Scope 3 emissions.
Focus must shift to carbon intensity of energy products
Only 20% of oil and gas companies analyzed have announced Scope 3 GHG-reduction targets, suggesting a majority of the sector may face risk in a low-carbon transition. Fewer disclose current carbon intensity (CO2e/megajoule) of the energy products they sell, which captures the overall carbon intensity of an energy product portfolio, including Scope 1, 2 and 3, and provides a measure of transition to low-carbon energy products. BP and Shell report the highest current carbon intensities, which are matched with ambitious transition strategies.
The Transition Pathways Initiative suggests that European oil and gas companies need to reduce their emissions intensity by 70% by 2050 from 2018 to align with a 2-degree Celsius climate scenario. A 1.5-degree scenario needs a 100% reduction in net emissions in the same period.
Carbon embedded in reserves signals transition risk
Oil and gas companies that don't reduce Scope 3 emission intensity may be more likely to strand assets, as policymakers curb fossil-fuel use in key regions. Our analysis, assuming $40 a metric ton for CO2 embedded in reserves, suggests carbon could account for almost 60% of average Ebitda for top producers. While carbon prices are hypothetical in many regions, some companies build them into internal calculations and advocate for the implementation of such mechanisms. Shell reports that its analysis assumes carbon prices will exceed 200 euros a ton of CO2e by 2050 to ensure the EU reaches climate neutrality.
Total, Cenovus, Eni, Suncor and BP are among members of the Carbon Pricing Leadership Coalition, a World Bank Initiative aimed at strengthening carbon pricing and applying it across the global economy.
Investor pressure mounts for top emitters
Top emitters that have yet to develop comprehensive greenhouse gas-emission reduction strategies, including Exxon Mobil, Chevron and Rosneft, will face increased investor scrutiny, in our view. As climate change presents risks to investment portfolios and assets, shareholders are seeking change at the companies that contribute most to global greenhouse-gas emissions. Since 2017, the Climate Action 100+ has grown to include more than 500 investors with over $47 trillion in assets under management.
Signatories to the group acknowledge that efforts to engage the world's largest greenhouse-gas emitters to curb emissions, improve governance and strengthen climate-related disclosures are consistent with their fiduciary duties. The list of target companies for the investor initiative includes almost 40 oil and gas companies.
`When effective corporate governance is lacking'
Following through on CEO Larry Fink's threat to vote against boards of companies BlackRock believes aren't doing enough to disclose and manage climate-change risk, the world's largest asset manager took action vs. Exxon Mobil. It withheld support for directors Kenneth Frazier (Exxon's lead independent director) and Angela Braly (public-issues committee chair), saying:
"When effective corporate governance is lacking ... voting against the re-election of the responsible directors is often the most impactful action a shareholder can take." These directors received shareholder support of 83% and 84% vs. a 96% average for other directors.
BlackRock also supported a resolution to require separation of the CEO and board chair roles to improve independent oversight and responsiveness of the Exxon board.