Philippe Roos - Aug 26,2021

With the Glasgow climate summit looming, net-zero emissions targets are all the rage. But defining and measuring net-zero can be complex. Investors are arguably more advanced than others when it comes to defining what exactly net-zero means, having evaluated plans laid out by publicly listed oil companies as well as debt issuers like national oil companies and producing nations. And what they want is mostly clear: net-zero greenhouse gas emissions by 2050 with interim targets to 2025 and 2030-35, including Scope 3 emissions from products sold; and an explicit strategy on how to achieve this, including a detailed capital expenditure plan. Such demands are making it increasingly difficult for oil companies to justify future growth in oil production.

According to the $39 trillion strong International Investors Group on Climate Change (IIGCC), the International Energy Agency's (IEA) Net-Zero by 2050 roadmap is becoming the "basis" for assessing net-zero alignment. That means oil companies will find it harder to convince investors that they can still increase or even maintain production volumes on their way to net-zero. "Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our [net-zero] pathway," the IEA stated in its May report (WEO Jun.4'21 ).

Oil and gas demand, however, is generally expected to keep growing through most of this decade (WEO Aug.6'21 ). As such, many investors have yet to realize how much oil majors need to shrink their core business, according to Kim Fustier, an oil and gas analyst at HSBC. While markets may still favor companies planning to grow their upstream production for a while before they step up decarbonization efforts to hit their 2030-35 targets, the Glasgow summit could change this mentality. 

Investors are also clear about what they don't like. They are reluctant to embrace nature-based solutions and other carbon offsets because these are socially and environmentally controversial, and often seen as a way for producers to buy time and delay action. Among European majors, Royal Dutch Shell and, to a lesser extent, TotalEnergies and Eni, are counting on substantial offsets to achieve net-zero by 2050. Caroline Le Meaux, head of ESG research, engagement and voting policy at French asset manager Amundi, says emitters should focus on reducing emissions instead of capturing or offsetting them, and carbon dioxide removal should remain "very marginal." Mark Lewis, head of climate research at Andurand Capital Management, sees offsets as a "last resort" if there is no immediate path to decarbonization, in line with IIGCC, which says offsets are only desirable "where there are no technologically or financially viable alternatives to eliminate emissions." Companies relying too heavily on these options risk "getting more and more marginalized" by investors, Lewis warns.

The jury is still out on carbon capture and storage (CCS) aimed at neutralizing difficult to avoid industrial emissions. It is a well-known and relatively easy-to-implement technology, and it is a legitimate solution for heavy industries such as steel-making where carbon plays a chemical role in addition to being an energy source, or to address Scope 1 emissions in the oil and gas value chain where electrification is difficult.
Some oil companies, particularly in the US, also intend to use CCS to tackle Scope 3 emissions, but this might prove more difficult for investors to swallow. It is often argued that only captured emissions from oil companies' own upstream and downstream activities should count as emissions reductions, HSBC notes in a recent report. "Emissions addressed by third parties such as cement or steel makers occur outside oil companies' boundaries before they are captured and stored, which raises the legitimate question of whether or not they should be deducted from oil companies' gross emissions," says HSBC.
This argument would not invalidate oil companies' effort to establish CCS as a new business line. CCS as a service could indeed become a large and profitable activity where the oil industry could gain competitive advantages with skills such as chemical engineering in capture and geosciences in storage. But CCS would not count against the industry's own direct and indirect emissions, and would not excuse it from reducing upstream production as fast as possible. Another issue with CCS is the scale it involves. Every ton of fossil fuel generates some three tons of CO2 when burnt. This means that a realistic CCS industry of just a few hundred million or a few billion tons of CO2 per year would require a dramatically smaller coal, oil and gas industry.

Philippe Roos is a senior reporter at Energy Intelligence based in Strasbourg, France. The original version of this article appeared in Petroleum Intelligence Weekly.

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