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The holders of the purse strings have it in their power to pivot to renewable energy and let it take the world in a new direction, this time on a sustainable course
FINANCIAL DIFFICULTIES
The covid-19 pandemic has brought forward the moment when oil production will peak and decline for ever, spooking some majors into looking for more sustainable business models OPPOSING OUTLOOKS
The future price of oil and gas is still up for debate, with some more optimistic producers sticking by their guns KEY QUOTE
The constant refrain in the oil and gas sector that “industry fundamentals are solid” is just wrong. Replacing oil and gas with cleaner alternatives is more complicated than replacing coal. They are cheap, remain widely used and are hard to substitute in industries such as petrochemicals, making their continued use likely. But as the energy transition gathers pace, investors are increasing the pressure on some oil and gas firms to adapt to the new world reality in order to survive. Climate change, and the efforts to mitigate it, are an existential threat for the oil and gas sector. Some oil companies such as BP appear to be starting to transform their business models because of the risk posed by the climate emergency and to future-proof themselves. Major oil companies, particularly in Europe, have been announcing decarbonisation plans over the past 18 months, says Mike Coffin at the UK’s Carbon Tracker think tank, which researches the impact of climate change on financial markets. Actual decarbonisation targets within those plans, however, are generally avoided. “You have aims, ambitions and pledges,” notes Kathy Mulvey from the Union of Concerned Scientists (UCS) in the US, indicating attempts to maintain wriggle room. Signs of the old ways still remain, with executive pay often linked to new oil finds, Mulvey adds. FINANCIAL DISARRAY
The oil and gas (O&G) industry has been ailing financially for some time. The coronavirus crisis has dented oil demand and in the view of many, has hastened peak oil production and a broader structural decline. The fossil fuel sector is last in the S&P 500 US stock market index over perspectives of one year, five years and ten years, says Tim Buckley at the Institute for Energy Economics and Financial Analysis (IEEFA). The sector was once the main contributor to corporate financial returns globally. Buckley says that O&G’s average return on equity has halved as a sector over the past decade as profitability has been “smashed” and write-offs become the norm, while investors factor in increased climate-related financial risks. It is a picture that reflects the combination of the oil and gas trade-war started by Russia and Saudi Arabia in early 2020, the covid-19 crisis, and headwinds generated by increased competition from low-emission alternatives, which are steadily improving their economic viability, he adds. Within days of revealing details of its climate plan in September 2020, BP saw its share price plummet to a 25-year low. In early November, the price was down 57% for the year and ExxonMobil’s was down 50% against the background of a 3% rise in US stock markets, notes Buckley. He stresses the markets are not yet distinguishing between BP—which has issued a climate plan—and a laggard like ExxonMobil, which gets 100% of its earnings from fossil fuels and has the weakest climate plans of the major oil companies. In contrast, Buckley notes that stock in US-based NextEra Energy, the world’s largest investor in renewable energy, was up 25% in the same period. EXXONMOBIL TUMBLES
ExxonMobil’s financial fall in 2020 has been the most remarkable, an indication of the changing fundamentals of the oil industry. In August, ExxonMobil was dropped from the high-profile Dow Jones Industrial Average. It had been the longest-tenured member of the Dow, often seen as shorthand for the United States’ stock market activity. In the first ten months of 2020, more than $150 billion or over 50% of ExxonMobil’s shareholder wealth was erased, marking acceleration of the trend that has seen its market capitalisation shrink by a staggering $350 billion since 2000, notes IEEFA. At the end of October 2020, ExxonMobil posted third quarter results that were significantly worse than those of its four peers, Shell, Total, BP and Chevron, said IEEFA. At the beginning of 2020, the company had projected it would spend $33 billion on capital projects during the year, but then trimmed that projection to $23 billion. It will cut its capital expenditure still further in 2021 by almost 50% compared with the beginning of 2020 to $16-19 billion. “ExxonMobil needs a business model that manages decline, generates stable profits and contributes to a solution to the world’s climate and energy challenges,” says IEEFA’s Tom Sanzillo. “The constant refrain that industry fundamentals are solid is just wrong.” Yet ExxonMobil is betting on an increase in global oil demand, reaching 111 million barrels per day in 2040, compared with about 100 million in 2019. It says that demand will then plateau. While others believe demand will drop because of climate change risk and the pandemic, ExxonMobil disagrees. “We conclude that the needs of society will drive more energy use in the years ahead—and an ongoing need for the products we produce,” ExxonMobil CEO Darren Woods told staff in October 2020. Coffin at Carbon Tracker says ExxonMobil’s portfolio is the most exposed to climate risk out of the major oil and gas companies. He also says that global peak oil demand may have already occurred in 2019, brought forward from 2022-2025 by the pandemic. According to Carbon Tracker, a dramatic 80% or more of ExxonMobil’s business-as-usual project portfolio would not be competitive if governments adjusted economies to limit global warming to 1.6°C above the level in pre-industrial times.
INVESTMENT COMMITMENTS
By autumn 2020, over 1200 institutional investors managing more than $14 trillion of assets globally committed to divestment of some or all of their fossil fuel holdings. IEEFA tracked more than 50 significant global financial institutions that have announced exit policies from their high risk investments in oil sands exploration in Canada or drilling for oil and gas in the Arctic—almost half or 23 of which have pledged to do so in 2020. Exploitation of oil sands and extraction from the Arctic are the riskiest oil and gas ventures environmentally. In October 2020, British bank HSBC joined fellow financial institutions Barclays, Morgan Stanley and JPMorgan in restricting their lending to meet net-zero carbon emission targets for their portfolios by 2050, which will require them to move out of oil and gas to align with the Paris Agreement, IEEFA’s Buckley told Australia’s ABC radio in October. “What we have seen in coal over the last three years is now starting to hit the oil and gas companies. Momentum is building much faster than anyone thought possible,” he concluded. Mike Coffin of Carbon Tracker agrees: “These oil companies think they are big, but if they fail to act [on climate] they will get left behind,” he says. UCS’s Mulvey adds that in order to prove their credentials to investors, the burden is on the oil companies to demonstrate they are serious in responding to climate change. She cites the numerous pending US lawsuits against oil companies for climate damages. “The industry has a decades-long history of deceiving the world [about climate]—there is public distrust,” she says. BP COMMITMENTS
BP, in a bid to remain attractive to investors and give its operations a green sheen, hit the headlines in February 2020 when it revealed plans to become a net-zero company by 2050. It intends to slash its fossil fuel production by some 40% by 2030 compared with pre-pandemic levels in 2019. BP’s announcement marked the first time an oil and gas major made such a short-term commitment. BP will also stop exploring for fossil fuels in new countries, in line with its assumption that peak oil demand will occur soon with global oil demand falling by almost half in the next three decades. A near-term goal is necessary for judging whether a company is on track for a more distant commitment, says Andrew Logan at Boston-based Ceres, a sustainability non-profit group that works with investors with a total of $30 trillion in assets under management. He says BP’s plan to reduce investment in oil and gas suggests it is not greenwashing but that the company is indeed making a strategic pivot. Within a decade, BP says it will also increase investment in low carbon activity to some $5 billion a year; plan for a 20-fold increase in the renewables generating capacity it owns, to 50 GW—highlighting how small its holdings have been—and increase its electric vehicle charging points to more than 70,000. The company says it will additionally invest more in hydrogen, biofuels, and carbon capture and storage technology. “The direction is set. We are heading to net zero. There is no turning back,” says BP’s CEO Bernard Looney.
INVESTORS SCEPTICAL
Still, the plans are not enough to convince investors BP’s green efforts are genuine. The IEEFA’s Buckley points out that despite BP’s climate plans, about 99% of the company’s earnings still come from fossil fuels and that 80% of its new capital expenditure is invested in fossil fuels. When the company provided more detail to shareholders in September 2020, Guilia Chierchia, BP executive vice president for strategy and sustainability, acknowledged that emissions associated with some of the company’s products will go on growing until 2030 because it will continue to buy oil and gas from other producers. UCS, which has been critical of the lack of detail in BP’s plans, also notes the oil company has not said it will reduce emissions from Rosneft, the Russian oil company in which it has a 20% stake. Mulvey says BP’s plan, despite the fanfare, cannot be considered a “solid initial step” to becoming an energy company of the 21st century. Coffin, who used to work for BP, is sceptical. “This is all relative—they are the relative leader of the pack. Will they transition fast enough? It remains to be seen.” Buckley is of similar mind about BP. “So while it is now talking the talk, it is time to shift the vast bulk of its businesses towards decarbonisation. That is almost all still to come,” he says. BP has set the pace for climate ambition, but some rivals are not far behind. At the start of November 2020, the boss at Norway’s Equinor, Anders Opedal said the company is aiming to be a net zero emitter by 2050, including emissions from its O&G production and those that are Scope 3, from the final consumption of its oil and gas. Despite also being an investor in offshore wind, Opedal said oil and gas output will continue to grow through 2026 and that it is too early to know if total emissions will be lower in 2030. Meanwhile, in spring 2020, fellow major Royal Dutch Shell reduced its dividend for the first time since the Second World War as oil prices dropped due to lower demand amid the covid-19 pandemic. Although by late October 2020 the Anglo-Dutch company said it would up its dividend to shareholders by about 4% in the third quarter and annually in the future. In October 2020, Shell’s CEO Ben van Beurden stressed the company must remain robust financially. “We must continue to strengthen the financial resilience of our portfolio as we make the transition to become a net-zero emissions energy business,” he said. The company has expressed an intention to become a net zero-carbon company by 2050 at the latest and will offset the carbon intensity of its activities and products by selling more green energy. Further detail is expected at an investor event in February 2021. According to Carbon Tracker, European oil and gas companies, including Italy’s Eni, France’s Total and Spanish Repsol, are starting to adapt their business strategies by improving climate targets and by investing in a less exposed portfolio. They also have a lower price outlook for a barrel of oil from 2020-2050 than their US counterparts. Asked whether the companies are launching climate plans only because their old fossil-fuel business model is failing, Logan of Ceres said: “There is certainly an element of necessity here—they have a limited period of time to pivot. But if they are making the switch because they have to, then I have confidence they will follow through on their commitments.” He notes that BP’s strategy is quite high-risk: it could be reducing its involvement in oil just as oil becomes profitable again. BP also needs the ability to bring core competency to renewable energy—is it skilled at such new ventures, he asks. “Financially, it is a pretty narrow path to success—they are relying on cash flow from oil and gas, then from 2030 they will make money from renewables.” WIDE OF THE MARK
No major European fossil fuel company, including BP, has aligned its emissions pathway with limiting global warming to no more than 2°C above pre-industrial levels, pointed out Transition Pathway Initiative (TPI), an asset owner led initiative, in research published in October 2020. TPI is backed by companies with a net worth of $22 trillion and is based in the UK. TPI assessed 59 O&G and coal mining companies on carbon performance, finding that just seven had set emissions targets in line with pledges less ambitious than the 2°C target that were made by national governments as part of the Paris Agreement in 2015. Fossil fuel companies included in the research question TPI’s methodology. Carbon Tracker contends that America’s Chevron, Exxon and ConocoPhillips have portfolios that are particularly exposed to climate risk; the companies lack climate targets and assume a price per barrel of crude oil high enough to provide an incentive to keep drilling. The analysis is reported in Fault Lines: How Diverging Oil and Gas Company Strategies Link to Stranded Asset Risk, released in October 2020. However, in November 2020, Houston-based Occidental Petroleum became the first major oil producer in the United States to aim for net zero emissions, including Scope 3, by mid-century. One reason for the different outlook of these companies compared with some of their peers is that the US political mood has more been one of climate scepticism. The country was taken out of the Paris Agreement at the start of November 2020 by climate-denying President Donald Trump. “It has been a green light to the fossil fuel industry to avoid meaningful action on climate change,” notes UCS’s Mulvey. “They have thrown a lot of weight to block climate action, publicly supporting a climate price but never finding a policy they like.” The ascension of Joe Biden to the White House in January 2021 is certain to enhance the focus on the energy transition, despite strong resistance from within the American legislature.
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Ros Davidson