As Climate Agenda And Green Investing Forces Big Oil To Commit To Decarbonisation Goals, National Oil Companies May Be Biggest Beneficiaries

The oil and gas industry is under relentless scrutiny from climate activists, environmentally-minded investors and policy makers to explain the progress they are making in reducing greenhouse gas (GHG) emissions and achieving the goals of the Paris Agreement.

Earlier this month, ExxonMobil, the largest U.S oil major that has often faced criticism for resisting commitment to decarbonisation goals, announced its ambition to reach net zero greenhouse (GHG) emissions for Scope 1 and 2 emissions (direct/indirect emissions from company owned or controlled sources) by 2050.

Exxon said that it will achieve 70to 80 percent reduction in methane intensity, 60 to 70 percent reduction in flaring intensity and 20-30 percent reduction in GHG emissions by 2030

This is the first company-wide net zero target the US oil supermajor has set since announcing plans to reach net zero emissions in the Permian basin by 2030. It has promised to allocate $15 billion towards low-emission investments in the next six years.

What is ExxonMobil’s new climate strategy?

Exxon plans to achieve most of that through the use of novel low-carbon technologies and improvements in its practices, from replacing leaky compressors and powering operations with green energy to carbon capture and storage (CCS). It is flaring less methane, a potent greenhouse gas, and working with third parties to monitor fugitive emissions using satellites, aerial reconnaissance and sensors. The firm insists it will rely on carbon offsets for at most “a few percentage points” of emissions cuts.

The coverage and timeframe of net zero pledge as well as decarbonization pathway declared by most companies varies widely.

For those with detailed plans, the main options include direct emissions reductions, use of CO₂ removal technologies, such as afforestation, CCUS, or direct air capture with CO₂ storage, and carbon offsets.

Around 60% of pledges aim to achieve net‐zero emissions by 2050, but several companies have set an earlier deadline of 2030 or 2040. European rivals of Exxon such as BP, Shell and Total Energies have announced their ambition to get to net-zero emissions by 2050.

Some cover only their own emissions, for example by shifting to the use of zero‐emissions electricity in offices and production facilities, and by eliminating the use of oil in transport or industrial operations, e.g. FedEx, ArcelorMittal and Maersk. Others also cover wider emissions from certain parts of their values chains, e.g. Renault in Europe, or all indirect emissions related to their activities, e.g. Daikin, Toyota, Shell, Eni and Heidelberg.

Many climate activists claim that the major problem with these pledges has been lack of a concrete plan. Not all of them lay out specific plans for how they will actually do this.

Often, companies rely heavily on carbon offsets, which could let them buy emissions credits of dubious quality cheaply. Darren Woods, the CEO and chairman of ExxonMobil has previously dismissed such proclamations as nothing more than a “beauty competition”.

The use of offsets could be a cost‐effective mechanism to eliminate emissions from parts of value chains where emissions reductions are most challenging, provided that schemes to generate emissions credits result in permanent, additional and verified emissions reductions. However, there is likely to be a limited supply of emissions credits consistent with net‐zero emissions globally. Such credits also divert investment from options that enable direct emissions reductions as it entails costly changes to their business.

Climate activists also point out that while many firms are restricting themselves to presenting a roadmap for reduction of Scope 1 and 2 emissions. While these are major source of GHG emissions, it is the scope 3 emissions (arising from the consumption of the oil and natural gas produced by the industry) that account for the largest share of total emissions. Globally, scope 3 emissions today are around 16 billion tonnes of CO2 equivalent, around three times the level of scope 1 and 2 emissions.

Most of the firms, especially the Big Oil have historically been less enthusiastic about taking climate change seriously. Amidst mounting pressure from investors, activists, consumers, governments and courts to de-carbonize their operations, there is a newfound willingness among the giants to commit to hard targets for cutting greenhouse-gas emissions.

Third Point, an activist hedge fund that build a $750m stake in Royal Dutch Shell, described oil major’s current strategy as “incoherent” and called for breaking it in to multiple companies: including one focussed on green energy and another “legacy” arm focussed on oil and gas business.

Previously, a civil court in Netherlands on 26 May, 2021 ordered Shell to cut emissions between 2019 and 2030 by 45%, in keeping with global climate accords; Shell is expected to appeal.

Third Point's focus on Shell comes amid broader investor scrutiny of Big Oil. Hedge fund Engine No. 1 took a $40 million position in ExxonMobil and won three seats on its board in May 2021. The result is thus an unprecedented attack on ExxonMobil’s carbon-addiction and has put pressure on the Texan company’s management to curb emissions with more ambition.

The shareholder revolt at ExxonMobil was seen as a sign that outside pressure for the big business to embrace the transition to a low-carbon future is mounting. Boardrooms are being asked not only for objectives, but also for strategies for climate transition.

ESG Considerations

Investors have also started to think green with most of them using environmental, social, and governance (ESG) considerations in their investment process. Climate change is the most important ESG issue considered by asset managers today.

2020 was a record year for ESG inflows, with global assets in sustainable funds ending the year at approximately US $1.7 trillion, up about 67 percent from nearly US $1.0 trillion at the end of 2019. According to Morningstar’s 2020 Annual Report, net inflows to sustainable funds increased rapidly sequentially in 2020. Europe leads in terms of growth in sustainable assets, followed by the US.

Investors are interested not only in previous emissions, but also in what the carbon footprints of companies will look like in the future. This is encouraging more businesses to develop emission-reduction strategies and hold themselves accountable for progress toward reaching them.

National Oil Companies

While oil majors (BP, Chevron, ExxonMobil, Shell, Total, ConocoPhillips and Eni) are being forced by climate activists and activist-investors to embrace decarbonisation goals, national oil companies (NOCs), which are significant both in terms of production and in terms of reserve size, are largely insulated from pressures of committing to energy transition

If oil majors are forced to cut production faster than previously anticipated to address net emission goals, real beneficiaries therefore be the likes of Aramco in Saudi Arabia and Gazprom in Russia, companies well beyond the reach of activist shareholders.