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Repsol's net-zero emissions goal could pressure other oil majors to follow suit

Spanish oil and gas company Repsol SA's ambitious plan to reduce carbon emissions to net zero by 2050 is attainable and is likely to prompt other oil majors to follow its lead, market sources said.

Targets like Repsol's "are feasible if there is a capital commitment to the transition, which pretty much implies the whole industry at some point will need to move in the same direction," S&P Global Ratings analyst Edouard Okasmaa said in a Dec. 5 email.

The largest integrated oil and gas companies are under growing pressure from activist investors and environmental groups to reduce emissions and move their business models into alignment with the goals of the Paris Agreement on climate change.

Several oil majors have outlined short-term emissions reductions goals, but Repsol is the first to set out long-term targets. From a 2016 baseline, Repsol is planning to reduce its carbon intensity by 10% by 2025, 20% by 2030, 40% by 2040 and net-zero emissions by 2050.

"It certainly separates them from peers, even those like Royal Dutch Shell PLC and TOTAL SA who have introduced intensity reduction targets," Morningstar analyst Allen Good said in a Dec. 5 email.

Shell, which could become the world's largest power company by the early 2030s as it increases its investments in non-oil businesses, outlined in March a three-year carbon emissions reduction target of 2% to 3% through 2021, from 2016 levels. The reduction in emissions will occur directly from Shell's operations and energy products known as Scope 3.

Like Shell, Repsol said it will work to achieve emissions reductions by hiking its interests in renewable energy. Repsol has increased its target for low-carbon generation capacity from 3,000 MW to 7,500 MW by 2025. The company currently has 5,600 MW of renewable generation capacity in its portfolio.

"While it's likely possible to achieve [the targets] through a mix of investment in renewable power and the purchase of carbon offsets, cost and the impact to returns and cash flow are a key concern. If in pursuit of the new target, [Repsol] overpays for renewable generation assets, or divests oil assets at low prices, which harms returns and cash flow, their valuation will likely suffer," Good said.

Repsol said it expects a €4.8 billion impairment charge this year as a result of its emissions reductions plan. The write-down will reduce Repsol's income this year, but will not affect cash flow nor the proposal to increase shareholder remuneration.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.