In the first of a three-part series, S&P Global Market Intelligence looks at how, despite publicly acknowledging the scale of the challenge, most integrated oil majors continue to pursue their traditional business at all cost.
During the annual Oil & Money conference in London in October 2019, Ben van Beurden, who has been CEO of Royal Dutch Shell PLC since 2014, urged the oil and gas industry to step up and tackle climate change head-on. Shell and other oil and gas companies, van Beurden said, would need to help the transition to a lower-carbon world both to stay profitable and maintain their societal license to operate in the long run.
Herein lies the central conundrum for Shell and its peers, some of the biggest polluters in the world: As investors and regulators increasingly demand that they adapt to the scientific consensus on decarbonization, many of them have started to diversify and cut some of their emissions. But they are also holding on tight to their traditional business model. U.S. giants such as Exxon Mobil Corp. and Chevron Corp. still bet most heavily on oil, while Europe's supermajors are increasingly turning to natural gas and complementing their portfolios with low-carbon electricity.
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With concern over global warming intensifying both on the streets and in the boardroom, executives at large oil and gas companies are increasingly talking about how they can make greener investments, manage emissions cuts and otherwise stay relevant.
An analysis of quarterly investor calls shows those issues have risen on the agenda of the five biggest integrated oil majors — Royal Dutch Shell PLC, BP PLC and Total SA in Europe and, to a lesser extent, Exxon Mobil Corp. and Chevron Corp. in the U.S. — since the Paris Agreement on climate change was adopted at the end of 2015.
But a closer look at earnings transcripts reveals that, at a time when investor pressure is increasing at a steady clip, the task of greening their companies still regularly fades into the background.
- While the companies have started diversifying into cleaner alternatives, it made up less than 5% of total investment at the biggest oil and gas majors between 2008 and 2018, according to CDP, a nonprofit that works to increase environmental disclosures.
- Discussion of clean energy and climate change has tended to perk up during full-year results, when executives reflect on the performance of the prior 12 months and address big-picture topics.
- While Shell, BP and Total are talking more and more about alternative strategies, such issues get even shorter shrift across the Atlantic. Exxon and Chevron occasionally mention carbon capture technology or talk about buying electricity from wind farms to power their shale drilling operations. Otherwise, climate and renewables do not loom large.
While some industry experts believe BlackRock's directive to fossil fuel companies on environmental disclosures and sustainability should motivate energy pipeline firms to improve reporting, others are not sure that if it will move the needle at all.
In his annual letter, BlackRock Chairman and CEO Larry Fink urged chief executives to put climate consideration at the forefront of their operations ahead of a "fundamental reshaping of finance" spurred by climate risk, and the world's largest asset manager elected to make sustainability a "new standard" within its own approach to investing through a series of proposals it rolled out January 14.
Investors like BlackRock, which holds material positions in a slate of North American midstream C-corps and master limited partnerships, are increasingly reshaping the way the oil and gas industry talks about and mitigates its businesses' impacts on climate change. But that remodeling has largely stopped short of the North American pipeline sector, where standardized environmental data sharing has yet to become mainstream despite growing investor inquiries about environmental, social and governance issues.
- While midstream corporations like Williams, Kinder Morgan and Oneok have separated themselves from the pack by ramping up annual disclosures, BMO Capital Markets midstream analyst Danilo Juvane said the majority of the industry needs to catch up and that BlackRock's directive helps put that urgency "front and center."
- Credit Suisse midstream analyst Spiro Dounis added that while BlackRock's announcement is not an "inflection point" for midstream companies, he does expect more large institutional investors to issue similar messages this year.
- In addition to investing in the sector, BlackRock also includes several pipeline corporations such as Kinder Morgan and Oneok in multiple ESG-focused exchange-traded funds that it manages.
The UK oil and gas industry can play a key role in the development of the hydrogen and carbon capture, usage and storage sectors given its existing expertise in producing and transporting hydrocarbons, an official from industry association Oil & Gas UK said Wednesday.
OGUK energy policy manager Will Webster told an event in London the industry could help manage the energy transition in the UK as it looks to meet the legally binding 2050 net-zero carbon emissions target.
There are some synergies for our members in CCUS and hydrogen," Webster said at the launch of a new report by law firm CMS on the role of oil and gas companies in the energy transition.
OGUK has reshaped its vision for helping curb carbon emissions since the UK government made the net zero target legally binding in May last year, with part of its efforts to focus more on gas and on decarbonization measures, Webster said.
- Private equity firms are already implementing policies to require climate change considerations with capital likely to leave the oil and gas sector as a result.
- The oil and gas sector needs to understand that there is no one-size-fits-all strategy for contributing to the energy transition and that "it's going to be a bumpy ride."
- The CMS report concluded that the shift to renewables was "far less pronounced" when companies are less influenced by drivers such as limited investor pressure or if they have particularly large oil and gas reserves.
Oil and Gas
To calibrate the relative ranking of sectors, we use our environmental, social, and governance (ESG) Risk Atlas. The Risk Atlas provides a relative ranking of industries in terms of exposure to environmental and social risks (and opportunities). The sector risk atlas charts combine each sector's exposure to environmental and social risks, scoring it on a scale of 1 to 6. A score closer to 1 represents a relatively low exposure, while 6 indicates a high sectorwide exposure to environmental and social risk factors. This report card expands further on the Risk Atlas sector analysis by focusing on the credit-specific impacts, which in turn forms the basis for analyzing the exposures and opportunities of individual companies in the sector.
- As fossil fuel producers, oil and gas companies are among the most exposed to the energy transition. This could weigh on long-term average oil prices and refining margins.
- The speed of the transition away from carbon-based fuels is uncertain, but is beginning to accelerate and will be influenced by external factors such as government environmental policies and regulations on greenhouse gases, plastics, and vehicle electrification.
- Over the next decade, we see average oil demand growth remaining positive. Hence, we do not anticipate sectorwide material rating actions over the next five years directly triggered by environmental challenges faced by the industry.