Investor Demands on Climate Jump Industry

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Investor demands on climate risk have accelerated to a pace the oil industry is struggling to match. The days when the climate conversation between investors and oil companies was just about disclosing emissions and climate-related risks are long gone. This was the focus only two years ago. In a few quarters, investor demands have rapidly evolved from reporting about the past to providing forward-looking scenarios, targets on direct Scope 1 and 2 emissions, and now targets and action on indirect Scope 3 emissions from products sold (PIW Mar.22'19). At the end of 2018, Total and Royal Dutch Shell were the first majors to set Scope 3 emissions goals to, respectively, 2030-40 and 2035-50. One year later, in December 2019, Repsol was first to target net-zero Scope 3 emissions to 2050, with intermediate intensity goals to 2025, 2030 and 2040. BP joined the net-zero club in February this year when Bernard Looney took over from Bob Dudley as CEO. It was followed in March by Eni, with absolute Scope 3 targets to 2050 and an interim target for 2035 -- and industry first (PIW Jun.26'20). Shell and Total upped their ambitions in May, and Occidental Petroleum became the first US company last month to target net-zero Scope 3 emissions to 2050 (PIW Nov.13'20). While European companies feel they have reacted quickly to investor demands, the fact is they are almost always playing catch-up -- meeting one set of objectives only to find the goalposts have moved to the next (PIW Oct.11'19). A good example is Total, which had to revise its targets -- and associated strategy -- many times since its first climate report was published in 2016, less than five years ago (PIW Jun.12'20). In 2016, Total's ambition was vaguely defined as "gradually decreasing the carbon intensity of our production mix," which it said would translate into oil accounting for 30%-35% of its sales in 2035, upstream gas for 45%-50% and low-carbon energy -- including midstream and downstream gas -- for 20%. In 2018 for the first time, Total announced quantitative Scope 3 intensity targets, namely minus 15% over 2015-30 and minus 25%-35% over 2015-40. By end-2019, soon after Total had told Energy Intelligence that "the most important is what we can realistically deliver between now and 2030," it upped its 2040 target to minus 25%-40%. This quickly became a more assertive minus 40%. Then in May 2020, following discussions with the Climate Action 100+ group of institutional investors, Total announced for the first time it was seeking net-zero Scope 3 emissions in Europe by 2050 while cutting emissions intensity by 60% worldwide. This would mean a 15%-40%-45% split in 2050 between oil, natural gas and low-carbon energy, Total said. In its last iteration this September, it announced it would reduce absolute lifecycle emissions in Europe by 30% over 2015-30, which would allow its global Scope 3 emissions to decrease -- by an undisclosed amount -- over the same period. The most recent trend in Europe is for investors to not only focus on long-term targets but also on the ways companies plan to reach them. That includes emphasis on short- and medium-term emissions goals and credible business models, strategies and investment plans to achieve these plans. It is also possible -- but not certain -- that investors could start to put more emphasis on absolute rather than emissions intensity targets. This could raise questions about the relevance of the very ambitious renewable capacity targets several companies have announced -- because renewable generation will not change those companies' absolute emissions (NE Oct.22'20). In the long run, it could result in pressures for them to separate green from legacy oil and gas businesses, similar to how Danish Orsted -- formerly Dong -- divested its oil and gas assets in 2017 to focus on green power generation. "Whether or not large renewable targets are necessary is open for debate," says Martijn Olthof, energy portfolio manager at Dutch asset manager APG (NE Sep.17'20). "Investors like us are also actively questioning the companies on how they will reach their targets and how they see their production volumes develop," he adds. Another "difficult question" is "how much offset versus shrink of the business" will be involved.

Coal, Carbon Capture (CCS), Biofuels (incl. SAF), Hydrogen
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