Industry

Carbon Tracker: Oil Majors Lacking “Credible” Transition Strategies

New report released amid climate votes at AGMs, finds overreliance on unproven technology and divestment risk.

Oil and gas firms’ energy transition plans are gambling on the unproven capabilities of technologies like carbon capture and hydrogen power, according to a report by climate and financial markets think tank Carbon Tracker.

The Absolute Impact 2022 report analyses the credibility of 15 major oil and gas companies’ plans for emissions reductions, and the extent to which their efforts genuinely reduce global CO2 emissions levels.

The release of the report, which notes an industry-wide failure to align emissions reduction pathways with the finite global carbon budget, coincides with a raft of annual general meetings (AGMs) for oil majors this week, including Eni, Equinor and BP.

Failing to follow science-based pathways

Carbon Tracker revealed that many company targets failed to align with science-based pathways for limiting global warming to 1.5°C.

Its analysis breaks firms down into three tiers, based on the strength of their current targets, with tier one status accorded only to companies with absolute reduction targets covering Scope 3 emissions. The four firms included are Eni, Repsol, Total and BP.

The think tank’s assessment covers companies’ short-term goals for which senior management are accountable and the prospects for genuine near-term emissions reductions, without which investors will be exposed to transition risk.

Its framework also covers full lifecycle emissions and end-use emissions, as well as interim milestones, and covers emissions from owned production and global product sales.

According to Carbon Tracker, it is vital that companies have targets that are framed appropriately around these ‘Hallmarks of Paris Compliance’, while ensuring their emissions reductions trajectories are also credible.

Reliance on divestment to achieve decarbonisation must be limited, according to the report, as exiting assets or business units may achieve stated company targets, but will likely have little impact on global climate levels, as new ownership may well result in worse outcomes.

It cited BP as an example of divestment risks, noting the UK-based oil major’s “resilient hydrocarbons” strategy divests from “upstream assets” but also newly invests in oil and gas infrastructure.

Carbon Tracker also warned of an overreliance on intended deployment of emissions mitigation technologies (EMTs), while continuing to establish new fossil fuel assets, citing that achievable reductions from such technologies remains uncertain, and their dissemination should be left for the most challenged sectors, as opposed to oil and gas production that can be substituted for renewables.

It similarly warned that purchasing carbon offsets, which it described as a variant of the technology approach, also raised significant credibility concerns.

The gradual winding down of existing fossil fuel production, without replacement, is prudent, according to the report.

Carbon Tracker’s head of oil, gas and mining, and report author, Mike Coffin, said: “Financial institutions must scrutinise companies’ emissions targets and whether their plans to achieve them are practical and credible in order to assess alignment with global climate goals.

“This is particularly so for companies which seek to “create space” for further fossil investment. The best way for companies to reduce both their climate impact and transition risk exposure for investors is to allow their existing production to decline without investing in new assets.”

Shareholder concern

A previous Carbon Tracker report published in September last year warned investors that companies have failed to recognise the International Energy Agency’s (IEA) Net Zero by 2050 roadmap which stated there must be no investment in new oil and gas production in order to limit global warming to 1.5°C.

The think tank warned at the time that the IAE scenario means firms would have to cut production by 50% or more, by the 2030s, as projects run down with no replacements.

Shocks to company valuations would ensue as project options are rendered worthless, increasing risk to capital and insolvency.

Shareholders have increasingly used AGMs to hold climate laggards to account. The 2022 AGM season is expected to trigger action from investors, including French oil major Total, whose AGM will be held later this month.

Total has been criticised extensively for its failure to align with global climate targets. In March it had a legal suit brought against it by climate groups in France who claim its “reinvention” marketing campaign broke European consumer law by inferring it could meet net-zero carbon emissions by 2050 whilst still producing more fossil fuels.

According to founder of climate pressure group Follow This Mark Van Baal: “Voting is the only way to make it clear to companies that inadequate plans will not go unnoticed. No oil and gas major is close to limiting global warming in line with Paris targets at this time.”

Van Baal has asked investors to consider voting down in-house climate resolutions this season, typically proposed by boards to secure support for their net zero strategies. Follow This is encouraging BP investors to vote against the oil giant’s in-house climate resolution at its AGM on 12 May, arguing it support would lead to failure by BP to decrease emissions to secure a 1.5 degrees pathway this decade.

 

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