A new report from CDP, analyzing a US$1.2tn3 grouping of the world’s major publicly listed international oil and gas companies, reveals an unsurprising transatlantic divide as European companies outperform their U.S. peers in preparedness for a low-carbon future.
The oil and gas industry, and the use of its products, accounts for approximately 50 percent of global CO2 emissions1. Climate policies and disruptive technology affecting the use of hydrocarbon products in transport and utilities sectors will require the oil and gas industry to rapidly adapt in order to future-proof its business.
In the Pipeline finds that the industry needs “better capital discipline” to secure its place in a low-carbon future through lowering its cost base or returning capital to shareholders. The research also reveals that the absence of robust data on probable and possible fossil fuel reserves2 is a significant loss of valuable information to investors looking to compare asset portfolio risk across companies.
“On both sides of the Atlantic, international oil and gas majors need to look at how they fit into an energy system which achieves the climate goals laid out in the Paris Agreement,” said Tarek Soliman, Senior Analyst of Investor Research at CDP. “Our research shows that European companies have been more active in developing transition strategies for the coming decade - which is expected to feature peak oil demand - and are starting to implement these. But more needs to be done across the board by oil and gas companies in exploring their future options, and investors will want to monitor this through more thorough and consistent disclosure.”
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Meryam Omi, Head of Sustainability and Responsible Investment Strategy at global asset manager LGIM, said: “It is vital that the O&G sector aligns itself to the global goal of transitioning to a low-carbon economy. There is an inevitable divergence in their commitments and transparency, which this report demonstrates. LGIM will be using many of the findings to guide its overall engagement strategy with this sector."
The report benchmarks oil and gas company performance on climate issues and finds that Statoil, Eni and Total (all of which are members of the Oil and Gas Climate Initiative, which earlier this month committed to invest $1 billion in low-emissions technologies over the next 10 years) are the best-performing companies on carbon-related metrics relative to peers; while ExxonMobil and Chevron (both of which investors called out last year for resisting a transition to clean energy), and Canadian energy giant Suncor ranked lowest among companies disclosing to CDP.
See CDP’s summary League Table for oil and gas companies below:
- Uncertain future: oil and gas majors face key short- and long-term decisions to secure their future business models, including improving capital discipline and rebalancing portfolios in the coming years and considering wider diversification or managed decline over the next decades.
- Regulation: the oil and gas industry will be impacted by regulatory action affecting demand in the downstream sectors that it supplies. This includes automobile fleet emissions for oil and emission reduction targets and carbon pricing for gas use in electricity generation.
- Operational efficiency: this remains an issue in the industry with the eleven companies in the study losing on average 6 percent of their natural gas production through flaring and methane venting and leakages. Resource management will affect demand for the industry’s products in their downstream use, for example the lifecycle carbon emissions gains of natural gas over coal in electricity generation can be eroded as a result of methane leakage (during extraction and transportation).
- Executive remuneration packages: these are currently heavily weighted to reward company performance on hydrocarbon production levels and reserve replacement indicators (only five companies currently have detailed climate-linked performance metrics).
- Water: 40 percent of onshore oil and gas upstream production is currently located in areas of medium or high water stress yet company disclosure remains behind other sectors facing similar risks.
- Saudi Aramco, Rosneft and PetroChina: which collectively represent over US$240bn in market capitalization4, did not respond to CDP’s 2016 climate change questionnaire and are therefore not included in this report. Investors should ask these companies why they are not providing transparency on their carbon risks.
"The oil and gas sector and its products contribute to approximately half of the world's CO2 emissions; this is an industry for investors to watch carefully in terms of climate risk and technology change,” CDP CEO Paul Simpson said. “Mark Carney’s Taskforce on Climate-related Financial Disclosure (TCFD) is expected to release its findings in December, which will likely catalyze increased investor calls for full disclosures from oil and gas companies. There are reasons to be optimistic; some oil and gas majors have the balance sheets to transition to much lower-carbon business models and play a key role in implementing the goals of the Paris Agreement."
While the incoming administration may attempt to hold onto business as usual here in the U.S., investors are already calling for such disclosures, while the business case for eschewing fossil fuel investments altogether continues to present itself: A 2015 report from As You Sow revealed that clean energy companies delivered triple the returns of fossil fuel companies over the past decade, while the New Climate Economy reported clear economic and environmental benefits of phasing out fossil fuel subsidies.
Meanwhile, back in Europe, forward-thinking energy giants including DONG Energy and E.ON have embraced the opportunity to transition their business models to prioritize clean energy. And continued progress on this front arose from COP22 last week, as the Global Sustainable Electricity Partnership offered its expertise to development finance institutions and other international organizations to jointly identify electricity tech investments that can help countries reduce their carbon emissions on schedule in accordance with the Paris Agreement goals.
1Based on IEA and EDGAR estimates, and accounting for estimated downstream Scope 3 emissions from use of sold products
2Companies disclose reserves in accordance with strict criteria outlined by SEC
3Based on 2015 average market capitalization
4This figure applies to Rosneft and PetroChina, as Saudi Aramco is not publicly listed.