NEWS - Æquo in Calgary: Oil and Gas Companies and the Energy Transition

Published on January 13, 2020

Last fall, Æquo met with several oil and gas companies during our annual trip to Calgary to discuss carbon risk. One thing is clear: oil companies are competing to be the producer of the cleanest and greenest barrel of oil. One CEO told us he wants his company to be a world leader in low carbon oil: “I don’t wake up in the morning to average!,” he exclaimed. Words like carbon competitiveness and “net carbon” are increasingly mentioned. Industry, governments and some major financial sector companies actively promote Canadian oil as the most responsible, socially and environmentally, in the world. Though it should be said that it will be difficult for Ottawa to reach the stated goal of being zero net carbon by 2050 while allowing for growth in oil and gas production, as this already accounts for a quarter of national emissions and is responsible for the largest part of the increase in emissions over the last few years.

Some oil and gas companies are adopting voluntary reduction targets. CNRL, MEG and Cenovus recently announced aspirational goals of net zero carbon from oil sands by mid-century while others like Suncor have medium term goal of improving carbon intensity by 30% by 2030. Cenovus has set the same goal while Imperial Oil aims for 10% by 2023.

It should be noted that aiming for net zero carbon results in the reduction of absolute emissions (whether they are direct only or a mix of offsets remains to be seen). This target can generally be more closely aligned with the Paris agreement or Ottawa’s commitment than an intensity target, which can ultimately result in an increase in absolute emissions.

Discussing the more general issue of long term oil and gas demand destruction in an economy transitioning away from fossil fuels to low carbon remains challenging. The few companies that have produced climate scenario analysis reports generally conclude that their business models would be resilient under any scenario, even in one of rapid transition. Despite the limited details as to the assumptions used, these reports help companies engage internally and with their external stakeholders, including investors.

Companies that adopt reduction targets focus on their direct emissions (from production, transformation, distribution) but not their indirect emissions associated with the burning of the products they sell (which approximately represents 80% of total emissions, from a barrel to wheel perspective). Æquo encourages companies to take into account indirect emissions (scope 3 emissions) in risk management and strategic planning. While there are inherent challenges in doing so, we note Shell’s Net Carbon Footprint ambition aims to reduce the total life cycle emissions from its products.

We expect oil and gas companies to explain how new capital investments, particularly those in exploration or in building new reserves, are aligned with a 2 degree scenario. We would hope that companies diversify their business to benefit from low carbon opportunities (while creating shareholder value). In the absence of such diversification, we believe it is prudent for some companies to focus on dividends and share buyback instead of committing to large scale fossil fuel projects. This is certainly due to low prices, lack of pipelines and curtailment in Alberta, but a piece of the equation may also be the long term decline in oil demand in North America (and eventually the world).

As the Climate Action 100+ reaches the mid-term of its five year process, pressure by investors would be expected to increase. It will be increasingly difficult to justify investing in a targeted company that has not adopted a transition plan. Climate Action 100+ is the largest investor collaborative initiative in history. Blackrock with its 6 trillion $AUM has recently joined, increasing the initiative’s clout.

In the coming years, it will be crucial for our community to refine our analysis and send a clear signal as to what a low carbon strategy looks like for the oil and gas sector.

François Meloche, Head of Corporate Engagement

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