Industry

Short-Termism Reduces Oil Sector Transition Preparations – AP7 report

Active participation of climate laggards is crucial to accelerate progress and provide investors with transparency on long-term business models.

Climate laggards among oil and gas companies apply shorter future projections, which has a material impact on their medium-term global demand outlooks, according to a new report backed by Swedish pension fund AP7.

The report also asserted that shortcomings in scenario analysis and emissions disclosure by certain firms in the sector was impairing investment decisions by asset owners.

“International oil and gas companies (IOCs) with less ambitious climate strategies are more likely to base their strategies on an incomplete understanding of the scale and pace of the energy transition, or [are] at least less willing to disclose their views,” the report noted.

On behalf of AP7, UK-based Trove Research analysed the climate strategies and long-term scenarios of 14 major oil and gas companies, to identify robustness in scenario analysis in the oil and gas sector.

Guy Turner, CEO of Trove Research, said: “The report exposes the wide-ranging perspectives that companies take on examining how the energy transition will affect their core markets. This is crucial information for investors, who need to know how prepared companies are to tackle the challenges posed by climate change and the shift to low carbon sources of energy.”

Climate leading firms, e.g. Shell and BP, publish more complete scenarios than laggards, the report found.

Oil demand projections of laggards, such as Suncor, Rosneft and Lukoil, typically end by 2040 instead of 2050, and they can interpret compliance with the Paris Agreement in line with a less-ambitious 2 degree warming rather than a 1.5 degree goal specified by the Intergovernmental Panel on Climate Change in 2018.

“Climate leading IOCs adopt more rapid energy transition strategies because of their view of risks to the oil market, not because they have significantly different cost bases,” the report explained.

While climate leading IOCs have marginally higher extraction costs than the laggards, this is not sufficiently high to explain their greater pivot to low carbon energy technologies, the report added.

Climate leaders are also generally compliant with Task Force on Climate-related Disclosures (TCFD) recommendations compared to the laggards.

The report concluded that “the speed with which IOCs make this transition therefore depends not on whether climate change needs addressing, but on how they see the future of the energy system, and in particular the need for oil in that system, in the context of their existing assets and corporate culture”.

Richard Gröttheim, CEO of AP7, said: “Active participation from these firms will be crucial in accelerating this process, while passive resistance is a real problem. Alongside like-minded investors, we want to see oil and gas firms move to lower carbon business models to provide sustainable returns in the long term.”

AP7 also noted that investors want to see more complete and comparable scenario analysis from oil and gas firms and details on how they plan to maintain long-term returns.

Specifically, the report recommends that oil and gas firms disclose information on how they see the future of the energy market in regard to three areas.

The report called for all firms’ scenarios to extend up to at least 2050 and for projections to include a business-as-usual scenario, a central scenario on which the company’s strategy is based on, and a 1.5 degree warming scenario.

Third, it said oil and gas firms should also provide disclosures against 12 key metrics, which cover energy demand, renewable energy deployment, the costs of clean energy technologies and total carbon dioxide emissions.

 

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