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Scope 3 Fight Comes to US Oil and Gas Sector

Copyright © 2021 Energy Intelligence Group

Investors are stepping up demands for concrete and ambitious emissions reduction targets from US oil and gas companies across the value chain. Those demands stop short of calling for the same diversification strategies embraced by the European majors -- a concession that in part reflects the US’ role as both a major oil and gas producer and consumer. But the days where end-use (Scope 3) emissions can be exempt from the conversation appear numbered. Partnerships with other industries could prove to be a key near-term solution. Recent shareholder votes at US E&P ConocoPhillips and independent refiner Phillips 66 are instructive. Nearly 60% of shareholder votes cast at Conoco’s recent annual meeting and 80% at Phillips 66 demanded emissions targets encompassing Scope 3. Both resolutions benefited from broad language: Companies were told to provide guidance on how they will address both operational (Scope 1+2) and end-use emissions, but not what their targets should be or how to reach them. Raised Bar Still, the support made clear that the bar for decarbonization is moving ever higher, even for relative leaders. Conoco has long been an early mover among US producers in incorporating the Paris climate agreement into its strategic thinking, and it adopted net-zero operational targets last year (NE Oct.22'20). Phillips 66 lacks the company-wide emissions targets of peer Valero Energy, but had set targets for specific facilities and is raising its renewable fuels production and tapping offset credits. Similarly, Occidental Petroleum -- the only US producer with net-zero targets that include Scope 3 -- would have faced a vote demanding it set concrete medium-term Scope 3 targets had it not volunteered in advance to meet the request by next year’s meeting. In all, the past several days have doubled the number of climate resolutions passed at US oil and gas companies to date, notes sustainability advocacy group Ceres. Several more were withdrawn after management teams agreed to take action, as Oxy did, negating the need for a vote. Chevron faces its own resolution next week to adopt Scope 3 emissions targets, while Exxon Mobil is locked in a battle over its board of directors as activist investors seek greater control over its wider strategic direction. Both also have matching proposals demanding reports detailing how a net-zero-by-2050 world would affect their strategic assumptions and valuations. If passed, those proposals could raise potentially troublesome prospects for the companies given the findings of this week’s net-zero report from the International Energy Agency (related). Concrete Action, Long-Term Ambition The nature of the various shareholder resolutions in play this year indicate that US investors increasingly have two demands: (1) long-term emissions targets that can remain aspirational for now, and (2) concrete medium-term goals that can track and benchmark performance. Most US producers still eschew setting long-term targets, even for their operational emissions, citing a lack of clarity given current technologies, costs and policies on how exactly they could be met. But with the conversation quickly moving to Scope 3, pushback on in-house emissions targets is becoming a nonstarter. Companies would also have multiple decades to sort out the finer points of delivery. Scope 3 is the far greater sticking point, but one proving impossible to ignore. Conoco, Exxon and others have long argued that advocating carbon taxes or similar policies would be the most economic and impactful way they can address Scope 3 emissions, with market incentives compelling consumer behavior to change and signaling to producers how, and how fast, to pivot. The shareholder vote at Conoco shows that the pendulum is shifting away from this approach, with shareholders calling for more direct actions from the companies. Collective Effort Energy Intelligence believes US investors won't necessarily expect large oil companies, in practice, to shoulder the entire burden of Scope 3 net-zero targets. What they are truly seeking are firm signals and collective efforts among producers, refiners and marketers to decarbonize the value chain. Indeed, the rise of investor groups like Climate Action 100+ show that major mainstream institutional shareholders are increasingly asking companies across all industries to develop plans to address emissions. That means sectors like auto manufacturers, airlines and heavy industry are also facing mounting calls to address their operational emissions -- which oftentimes are also classified as producers’ Scope 3. US producers could start chipping away at Scope 3 emissions without bearing the full cost or needing to predict consumer behaviors through partnerships down the value chain or with other corporations seeking to offset their carbon footprints. Oxy, for instance, courted United Airlines as an investor in its first commercial direct air capture (DAC) scheme, with the airline expressing wider interest in DAC moving forward to hit its emissions targets. Similarly, Exxon’s massive US Gulf Coast carbon capture and storage hub, if advanced, would likely find willing partners across multiple local refiners and chemicals companies who have adopted their own emissions goals (NE Apr.22'21). Casey Merriman, Phoenix Conoco's Emissions Reduction Goals Net-zero operational (Scope 1+2) emissions by 2050 Reduce operational GHG emissions intensity by 35%-45%

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