Majors Show Climate Progress, Face Bigger Tests Ahead

The Issue

The five leading Western majors are trying to balance a need to show credible decarbonization plans that are important to many long-term shareholders with the production strategies that are seen by some less carbon-conscious investors as key to underpinning returns. Companies have made steady progress in emissions reductions, but the most important work remains ahead of them as they try to reach interim targets that will legitimize much more ambitious long-term goals.

Win Some, Lag Some

In some cases, the majors have easily exceeded their climate goals years ahead of time. In 2021, Exxon Mobil unveiled a new set of targets for its 2030 emissions intensity reduction after hitting its 2025 goals early. Chevron hit its top-line corporate emissions intensity target for 2028 last year and many of its 2028 goals for the carbon intensity of its upstream and downstream operations look well within reach.

TotalEnergies is below its 2030 Scope 3 (end-use) emissions target already but has resisted calls to move the target down further because it wants room to increase its oil and gas production alongside its planned low-carbon growth. While companies may tout that as obvious progress, activists have said goals that are easy to accomplish lack ambition.

But other medium-term emissions targets will require much more work, particularly some of those around the carbon intensity of energy production. BP has a 2030 target to cut the carbon intensity of energy products sold by 15%-20%, but since 2019 it has reduced that intensity by just 2.5%. Shell has cut the carbon intensity of its energy sales by 3.8% from its 2016 baseline and that included the use of 4.1 million tons of carbon credits to offset emissions. Exxon, which does not include Scope 3 emissions in its corporate emissions intensity calculations, has been able to cut its emissions intensity by 12.5% from its 2016 baseline but will need to cut at least another 10% to reach its 2030 target.

Emissions vs. Production

All three European majors had originally planned to reach their carbon intensity goals through some combination of limiting hydrocarbon sales and increasing sales of low-carbon energy such as renewable power. Shell and BP had flagged plans for upstream production declines, while Total sought upstream growth but limits to its petroleum product sales.

The CEOs of Shell and BP have recently signaled to investors that they are more willing to produce more hydrocarbons than previously intended after reaching their reduction targets early — BP through its decision to derecognize its stake in Rosneft and Shell through the sale of its US Permian Basin assets. At the same time, they are refocusing transition investments in areas with the highest returns. Total CEO Patrick Pouyanne has stressed there will be no strategic “U-turns” in the French major's plans for oil, gas and renewables growth. For all three companies, oil and gas production will need to be balanced with even greater gains in renewable power to keep emissions intensity declining in line with 2030 goals.

Exxon and Chevron aren't under the same pressure to produce low-carbon electricity as their European peers — and lack the renewable power assets to dilute the intensity of their hydrocarbon output in their overall portfolios. Eventually, growth in areas like hydrogen, biofuels or renewable natural gas could help, but those fuels are likely to remain too marginal to have an impact this decade.

Instead, the US duo will need to ensure that each new barrel they bring on stream has a lower carbon intensity than the one it is replacing. Chevron was quick to highlight the low carbon intensity of the portfolio it is acquiring through its recent takeover of US independent PDC Energy. All the majors could gain some wiggle room by ramping up carbon capture activities to offset some of their emissions. But they face a critical few years to prove they can do that, given today's relatively miniscule capacities.

Sell or Wind Down?

One key question will be to what extent investors and activists allow companies to continue to rely on divestments to drive portfolio-level decarbonization. Divestments accounted for 57% of Shell’s Scope 1 and 2 (operational) emissions cuts from 2016-21 and roughly 75% of reductions from 2021-22.

Other companies have shown similar trends. Executives are able to push down both absolute emissions and emissions intensity by divesting low-margin, high-emissions legacy fields. They argue portfolio pruning is necessary, but investors like Adam Matthews, chief responsible investment officer of the Church of England Pensions Board, are pushing for companies to keep and wind down legacy assets rather than sell them off to entities that may not have the same environmental standards. Matthews likewise called for companies to wind down their oil and gas businesses altogether if they cannot find adequate returns in renewable energy.

Mixed Signals

Whether the current progress on emissions is enough for investors is not entirely clear, with European companies receiving mixed signals at their annual meetings. BP saw less than 10% of its shareholders join a proposed protest vote against chairman Helge Lund led by investors unhappy with its decision to scale back oil and gas production cuts by 2030 and relax its Scope 3 emissions cuts to 10%-15% from 20%.

Meanwhile, roughly 20% of Shell shareholders supported a call for more ambitious emissions reductions — flat on last year despite strong hints from CEO Wael Sawan that the company could reprioritize oil and gas production at its upcoming Capital Markets Day in June. Total, which announced an increase to its planned emissions cuts at a strategy day in March, saw support for a shareholder resolution seeking even more ambitious cuts almost double at its annual meeting to just over 30%. The jump came after influential proxy adviser ISS endorsed the proposal, despite opposing the same resolution at BP and Shell.

In the US, investors will vote on identical proposals at Exxon and Chevron meetings this week, calling on the pair to set targets to reduce their absolute Scope 3 emissions. This is something both companies have vehemently opposed. While support for Scope 3 accounting and reductions has cooled among some US investors, the bank that manages Norway's sovereign wealth fund — the sixth-largest shareholder in Exxon and the 10th-biggest in Chevron — said it would vote in favor of the proposals.