The oil and gas sector is facing more pressure than ever to act on climate change. 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.
Part two analyzes the majors' quarterly investor calls, showing how rhetoric has shifted since 2015's Paris Agreement on climate change. Part three is an exclusive interview with Repsol CEO Josu Jon Imaz, who discusses the company's industry-leading commitment to become a net-zero carbon emitter by 2050.
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.
"We can, and must, evolve," van Beurden said. At the same time, however, he emphasized another point dear to his heart — and one frequently echoed by executives at BP PLC, Total SA and other integrated majors.
"First of all, the world needs oil — and gas, for that matter," he said. "And that will not change overnight. This is why Shell will continue to invest in oil and gas, even as we work to help speed progress to a lower-carbon future."
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.
Investors and activists say that half-baked attitude means oil and gas companies are still moving far too slowly to stop catastrophic global warming and, in the process, jeopardizing their own business model.
"The investment risks in that industry are significant now," said Natasha Landell-Mills, partner and head of stewardship at Sarasin & Partners LLP, a U.K.-based asset manager. "Decarbonization is an existential threat for these companies."
'A very strong signal'
Landell-Mills led Sarasin's engagement with Shell for two years before deciding to sell £42 million of the company's shares in 2019. The reason: Shell was not doing enough to align itself with the Paris Agreement on climate change, the 2015 accord under which most of the world committed to trying to contain global warming to well below 2 degrees C and, ideally, 1.5 degrees.
Sarasin was one of several investors who have been trying to convince Shell to commit to a net-zero emissions target, so far in vain. That would mean reducing its emissions intensity to zero, either by reducing outright CO2 production or by offsetting it with other sources like renewables.
So far, Shell only plans to cut its emissions intensity in half by 2050, although the company gets credit for including not only its own emissions and those created by the energy it uses — known as scope 1 and 2 — but also emissions from the fuels it sells to customers, known as scope 3.
The vast majority of emissions in the sector, which account for over half of energy-related greenhouse gas emissions, occur when oil and gas products are burned by motorists, industrial installations and airlines.
French oil major Total also has a scope 3 reduction target, aiming for a cut of up to 40% by 2040. Meanwhile, BP currently only has plans for reducing its scope 1 and 2 emissions. It agreed in a resolution adopted by shareholders to align its business with the Paris Agreement, but has yet to do so. Executives have said in the past that they cannot be held responsible for emissions by their customers.
BP did not respond to repeated requests for comment. Shell, Total, Exxon Mobil and Chevron did not make executives available for interviews for this story, but answered questions about their emissions and strategies.
All of the majors lag far behind Spain's Repsol SA, which said in December 2019 that it would become carbon neutral by 2050. Repsol is far smaller than many of its peers and the company's chief executive told S&P Global Market Intelligence others may find it harder to follow.
So far they have shown little intention of doing so, although some still see a sea change in the industry.
"In the last years we've seen fundamental changes taking place," said Carola van Lamoen, head of active ownership at Robeco Asset Management, who led the engagement with Shell that resulted in the company's first short-term emission targets.
Van Lamoen highlighted that more and more investors are now asking for scope 3 targets, for example, and broadly moving from demanding disclosure to actual action. They are also joining together through initiatives like Climate Action 100+, an influential group of investors that now counts BlackRock Inc., the world's largest asset manager, among its members.
"We're starting to see the needle very much move, certainly for the European oil and gas companies," said Luke Fletcher, a senior analyst at CDP, a nonprofit that advocates for companies to disclose climate metrics, although he added there was still "some greenwashing."
Bloomberg News reported that oil and gas CEOs meeting at the World Economic Forum in Davos last week, including from Shell, Total and BP, as well as Chevron, Equinor ASA and Saudi Arabian Oil Co., discussed upping their emission cuts. The Financial Times marveled that oil and gas executives at the gathering have gone from "furious denial" about climate change to "deeply private, heartfelt discussions" about their sector's future.
But for now, most have only modest targets for cutting emissions from their own operations.
"Repsol's announcement puts it out in front," said Landell-Mills, who also grants that mindsets are changing in the industry. "But it would be a different kettle of fish for a company like Shell to do something similar."
If the companies continue to drag their feet, more investors could be driven to divestment. In 2019, Legal & General Investment Management, Britain's largest asset manager, dumped Exxon from some of its funds because of its slow response to climate risks. Half the U.K.'s universities are also divesting from fossil fuels and the Church of England has threatened to ditch oil firms and others starting in 2023.
Some believe divestment is the only option and that investors are fooling themselves by engaging with fossil fuel companies. Engagement "might work if we had another 100 years or so," said Yossi Cadan, global campaign manager at 350.org, an environmental advocacy group. "But I don't think we have the time."
Sometimes, its proponents argue, engagement can be the best option to get results quickly. Follow This, a Dutch activist investor group, has repeatedly filed climate change resolutions at Shell, BP and Equinor to get them to align to the Paris targets. In 2017, Shell advised shareholders to vote against the resolution, but 6% decided to support it. Mark van Baal, the group's founder, said this "small but significant share" was one of the reasons Shell announced its first scope 3 reduction targets a few months later — even if he thinks the ambition only goes halfway.
"It's a very strong signal," said van Baal, who is also targeting Exxon and Chevron for the first time this year. "Investors really want oil majors to set Paris-aligned targets."
A drop in the bucket
In the meantime, the oil companies have not been shy about trumpeting their green credentials, arguing their growing investments in utilities, renewable energy and electric vehicles are proof that they are changing their ways.
An advertisement for BP's alternative energy business greets visitors at London's Heathrow airport.
Source: S&P Global Market Intelligence
Among other investments, Total has had a majority stake in U.S. solar panel producer SunPower Corp. since 2011 and BP now owns 50% of U.K.-based solar developer Lightsource BP Renewable Energy Investments Ltd. Shell has perhaps spread its bets most widely, from offshore wind to electric utilities to energy management, and Equinor, Eni SpA and Repsol all invest in renewables, as well.
But the clean image they promote is increasingly at odds with reality, according to critics, who say those investments are still only a drop in the bucket when measured against overall spending.
CDP calculated that the biggest oil and gas majors spent less than 5% of their total investment on low-carbon alternatives in the decade between 2008 and 2018, counting deals for which values were available. Chevron and Exxon lag far behind most of their European rivals.
"These companies are very good at trying to create a green image for themselves," said Laurie van der Burg, a senior campaigner at Oil Change International, a pressure group, who previously worked on a lawsuit against Shell for Friends of the Earth in the Netherlands.
Analysts point out that the share of clean investment has increased in the last few years, but even the most optimistic reckon it will not rival oil and gas anytime soon.
"If we were to zoom in on the last two years, the numbers [for clean energy investments] would be higher for everybody," said Pavel Molchanov, an analyst at Raymond James. "That is still small, more than 90% of what they invest in is oil and gas, but it's not nothing."
Molchanov estimates that those numbers will become financially "needle-moving, though still not game-changing" over the next five years. The most active players, he said, will then spend between 10% and 20% of their capital expenditure on clean technologies.
"Companies that have hundreds of billions of dollars of oil and gas assets are not going to turn into a solar company overnight — even if they wanted to," he said.
Shell has pledged to spend between $2 billion and $3 billion a year on power between 2021 and 2025, out of an annual investment budget of around $30 billion. That does not count other investment like electric vehicle charging, according to a spokesperson. As much as $14 billion every year would meanwhile go to production from conventional, deep water and shale projects.
Total says it now invests between $1.5 billion and $2 billion annually in low-carbon electricity, or more than 10% of its total capex — a figure unmatched by any other major, according to a spokesperson. That will mean low-carbon electricity projects could account for up to a fifth of Total's energy mix by 2040, they said.
By comparison, Repsol now expects to spend a quarter of total capital expenditure in the 2020-2025 period on low-carbon projects as part of its new carbon neutrality target.
Spokespeople for Chevron and Exxon, when asked about their comparatively low emission targets and clean investments, pointed to billions of dollars in investments into energy efficiency measures and for researching low-emission technologies such as carbon capture and biofuels.
Part of the reason the U.S. majors are moving more slowly, according to Molchanov, is stronger pressure from the environmental, social and governance community in Europe. "It's no secret in Europe there are more common fossil fuel divestments," he said. "Their U.S. peers are not seeing the same pressure."
'Not a good investment'
State-owned national oil companies, which produce most of the world's oil, face even less investor pressure. The International Energy Agency this month warned that they, in particular, are heading for an unsustainable future by keeping their focus on oil.
But even many of the integrated majors plan to pump more and more oil and gas, spurring warnings about the risk of financing stranded assets. Repsol already wrote off €4.8 billion in connection with its net-zero target.
Research commissioned by The Guardian from Rystad Energy, a Norwegian consultancy, showed that the top 50 oil and gas companies plan to increase their production by a cumulative 8% between 2018 and 2030.
The center of that boom will be the Permian Basin in the U.S., involving players like BP, Chevron and ConocoPhillips Co., while Shell and Exxon are also planning to pump more, according to Rystad. Those companies could still reach their carbon intensity targets, since any cleaner activities would lower the net footprint of the energy they produce.
A net footprint target "doesn't mean that I cannot sell or produce oil and gas anymore," Shell's van Beurden explained during an earnings presentation in January 2019. "It just means that the mix has to be lower carbon. And that is actually quite in line with what we want to do."
But according to research by Rystad and Carbon Tracker, a climate think tank, the seven largest listed oil and gas majors would need to cut their combined production by more than a third by 2040 in order to reach the Paris goals, which most of them say they support.
"It's no good if a company is saying, 'We'll build out renewables and we'll lower our average carbon intensity,' if they keep funding fossil fuel production and increase the overall volume," said Andrew Grant, a senior oil and gas analyst at Carbon Tracker. "Their investment behavior seems to suggest that they assume the Paris targets will fail."
Shell's future production plans were, in fact, the final straw that convinced Sarasin's Landell-Mills to divest 20% of the asset manager's stake in the company last year.
Back in June 2019, after speaking to management about emissions reductions for two years, she watched the company lay out its new investment strategy at a management day. It showed that Shell could be increasing its oil and gas production until at least 2030.
"In the end, what matters is bringing down absolute emissions. You can't get away from that," she said. "It allows further investments into assets that could well become stranded."
Setting absolute emission targets, on the other hand, would limit the growth prospects of the oil majors' traditional business and, the companies fear, could ultimately hit their bottom line. A spokesperson for Shell said the company wants to sustain production in the near term, since switching to a cleaner business will inevitably be a long-term process.
That strategy is inconsistent with the Paris pathway, according to Landell-Mills — a fact that led her to a damning conclusion about Shell. "In a Paris-aligned world," she said, "they are not going to be a good investment."