ICYMI, Big Oil is Facing Some Big Questions

Major investors continue to step up their scrutiny of energy sector’s transition credentials.

If you’re struggling to work out whether big oil is serious about reducing carbon emissions in line with net zero 2050 targets, you’re in good company. Blackrock CEO Larry Fink recently convened an industry roundtable with CEOs of leading firms to try to get to grips with the industry’s transition to renewables.

As owner of around 6% of ExxonMobil’s shares, Fink could do worse than to read an analysis of the firm’s recent ‘Advancing Climate Solutions’ report by UK think-tank Carbon Tracker. ExxonMobil’s strategy has certainly evolved since last year’s AGM defeat, but still under-estimates disruption from new technologies, projecting 70% global reliance on fossil fuels for primary energy in 2050.

As Carbon Tracker notes, ExxonMobil doesn’t even include Scope 3 emissions in its projections. Scope 3 is set to be the big issue beyond the energy sector this year, as shareholders and regulators seek greater clarity along the corporate supply chain.

While arguing that investment in gas is still needed to ensure transition away from more polluting coal, Fink’s stated approach is to back firms committed to transition. But how can you be sure? Does this include BP, for example?

The UK firm’s updated net zero strategy was hailed by some as a blueprint for the industry, and was welcomed by major investors. But while BP’s actions and words on transition are streets ahead of most peers, it still envisages 50% of capex being focused on traditional operations by 2030.

Further along the energy supply chain, Fink’s favoured portfolio might include US-based Duke Energy, which this week accelerated its exit from coal and extended its 2050 net zero goals to Scope 2 and 3 emissions, earning plaudits from US NGO As You Sow as a “shift in industry ambition”.

But perhaps it should not include Total, which faces a rocky AGM in May, especially if it continues to struggle to find the finance to develop two Ugandan oil fields, in partnership with Chinese state-owned oil company CNOOC.

Fink may find useful the growing guidance available to investors on high emitting industries, such as the Transition Pathway Initiative’s recently published sectoral pathways. Some have already made up their minds, however.

The £7 billion AUM London Pensions Fund Authority announced this week that its equity portfolio no longer holds any extractive fossil fuel holdings, while New York’s state pension fund was  reported to be selling holdings in 21 shale oil and gas companies.

Many others are looking in both directions, including investors, albeit sometimes inadvertently. The Economist this week pointed out that some of the private equity firms buying up fossil fuel assets include pension funds, universities and foundations.

Governments are also sitting on the fence, with the UK both accelerating its pipeline of renewable energy projects and reportedly considering fast-track approval for six North Sea oil and gas projects.

This short-term “rush for brown” is perhaps inevitable as the potential upside from the post-pandemic gas price spike must be tempting to anyone looking to wring those last drops of revenue from existing assets and holdings before the hydrocarbon party really is over, even while recognising the losses that stranded assets and over-investment will eventually bring.

As such, it may not just be BlackRock wondering whether they can re-label their passive funds as sustainable while still profiting from the energy transition.

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