Climate activists largely focus on Royal Dutch Shell (RDSA), BP (BP.), ExxonMobil (US:XOM) and Chevron (US:CVX) in the push to cut global carbon emissions, but fellow vertically integrated oil and gas company Repsol (SPN:REP) has moved to the front of the pack by becoming the first major company in the sector to make the net zero carbon by 2050 pledge.
Mid-cap gas company Energean Oil and Gas (ENOG) also made the commitment, which aims to cancel out a company or country’s carbon emissions by pulling the same amount or more out of the atmosphere.
These announcements come as producers grapple with potential long-term oil and gas prices in differing regulatory or technological scenarios. To reach net zero carbon emissions by 2050, Repsol says it will make big changes to its upstream strategy and cut emissions from its downstream operations, although it can only reach 70 per cent of its current target using “technology that can currently be foreseen”.
Chief executive Josu Jon Imaz said committing to net zero emissions would turn “significant challenges that lie ahead” into opportunities. Included in the announcement was a €4.8bn (£4bn) impairment charge. Repsol said this was related to adjustments to “the accounting value of some assets”, but would not go into more detail before the December quarter results are released in the new year.
The Spanish company was not the only major to announce a sizeable impairment this month – Chevron said it would have a $10bn-$11bn (£7.6bn-£8.4bn) write-down on its December quarter results largely down to the glut of oil and gas supply in the US. The company said it had cut long-term price forecasts for oil and gas, with “more than half” of the impairment related to its Appalachian shale assets. US onshore supply has fundamentally changed the sector in recent years, turning the US into a net exporter in recent weeks. Majors have moved heavily into the shale space, where juniors and mid-cap companies have struggled to break even.
Transition time
Oil and gas companies are having to balance the possible move away from fossil fuels in the longer term with the potential of strong earnings in the next few years. Research company Rystad Energy said managing this transition zone was a key question for the industry and its shareholders as current reserves (including sanctioned projects) will fail to meet demand in less than a decade, pushing up prices. “From [2027] on, however, additional volumes from not-yet-discovered fields will be needed in order to meet total liquids demand,” Rystad said. “Global exploration efforts must, therefore, continue in order to discover those resources in the first place, even under a scenario whereby oil demand peaks in the late 2020s.”
As these companies grapple with capital expenditure decisions based on the litany of demand scenarios available, major investors are pushing for a swift change. In its net zero announcement, Repsol said it had worked with investors on its sustainability goals and boasted of praise from Climate Action 100+ in a recent report. The activist organisation is closely linked with the Institutional Investors Group on Climate Change (IIGCC) and its chief executive, Stephanie Pfeifer, is on the Climate Action 100+ steering committee. She told us the Repsol target was the “most significant” announcement on this topic from the oil and gas sector. “Net zero [carbon emissions] by 2050 would be consistent with a one-and-a-half degree temperature rise globally,” she said. “It is critical that we aim for that.”
As a representative of the groups pushing companies to pick long-term sustainability over short-term cash flow, Ms Pfeifer said a shift was happening in terms of pricing in a shift away from fossil fuels. “It's really interesting that you've got this impairment in the [Repsol] announcement now because it makes it financially real,” she said. “It's what we've been talking about for a long time.”
For oil and gas investors the risk is the assets that get stranded if oil prices fall drastically. BNP Paribas says oil will need to fall to $10-$20 a barrel to stay competitive in the mobility space. Even the company The Guardian has estimated is the most polluting in history, Saudi Aramco, is taking a massive demand decline seriously.
“In [a lower demand] scenario, the Kingdom’s share of global supply is also expected to increase through 2050, with the Kingdom’s daily crude oil, condensate and NGLs supply volumes expected to increase at a [compound annual growth rate] of 0.7 per cent between 2015 and 2050,” the company said in its IPO prospectus, released in November. That scenario has global supply peaking at just under 100m barrels of oil per day (bopd) in 2025 and then falling to around 70m bopd in 2050.
New production
While there are forecasts of demand peaking in a decade, companies have not stopped expanding production. Analysis by Carbon Tracker published in September found 18 projects worth $50bn (£40.5bn) in capital expenditure have been sanctioned since January 2018, and all would be uneconomic if temperatures were held to 1.7 to 1.8 degrees due to a forecast slump in oil and gas demand alongside the move to a less carbon-intensive global economy. Shell’s $6.5bn LNG Canada project and BP’s $1.3bn Zinia 2 (to be operated by Total) could end up as stranded assets, according to the report. The stranded asset theory is not limited to major new projects. In the International Energy Agency’s (IEA) more intense 1.6 degrees of warming scenario (‘beyond two degrees’), which assumes mass take-up of carbon capture and storage technology, oil would fall to $40 a barrel and therefore higher-cost projects would become unfeasible in the long term.
A longstanding argument of those against a rapid move away from fossil fuels is that renewable energy cannot take up the slack in terms of electricity production. Therefore, gas plants can provide a less carbon-intensive option than coal while storage technology is refined and drops in price. Gas producer Energean has a horse in this race, but has also made the net zero carbon pledge this month. Chief executive Mathios Rigas told us gas would have a role for many years to come, but companies had to shift their focus from solely short-term returns. “First, clearly, we have to deliver on results and our promises to our investors, because fund managers still expect a return from us,” he said. “But, most importantly, we need to be leading on the ESG front. And when I say leading, I'm not saying just making nice announcements or changing a website.”
Without an upstream business and what will soon be an 80 per cent gas company, Mr Rigas has a much easier journey to net zero in 2050. But Energean has also said it would cut its carbon intensity by 86 per cent between now and 2022-23, when its offshore Israel gas fields go into production. He says the current level of 60.5kg CO2 equivalent per kboepd is “significantly higher” than competitors’ intensity, but because of major incoming gas supply in the next few years through the offshore Israel gas projects the 8.5kg CO2 equivalent per thousand barrels of oil equivalent will happen without any major changes in strategy. Mr Rigas says the company will invest in efficient processing technology and use its own gas to power the extraction and the project’s floating production storage and offloading (FPSO) vessel.
Volatile gases
In November, the European Investment Bank (EIB) reversed its previous support for gas-fired plants as a bridge between coal and renewables: it included gas in a ban on fossil fuel project investment from 2021. The new view from the EIB is that LNG will be “progressively replaced by low-carbon gases such as e-gases, biogas or hydrogen” and that consumption will fall 20 per cent by 2030 and by up to 85 per cent by 2050. The bank also flagged more stranded projects as a result of these new projections. The changing approach in Europe is evident in Energean’s purchase this year of EDF Energy’s Edison oil and gas division. The mid-cap paid $750m for a portfolio of gas fields, with the majority of production in Egypt. The reaction was positive on both sides: Energean got a 10 per cent share price boost, which it has maintained, and EDF said it was pleased to be out of a “highly volatile and capital-intensive segment”. On top of that, Moody’s has said that it is likely to improve the oil and gas-less unit’s credit rating from Baa3 to Baa2 once the transaction completes, due to the exposure to Egypt and debt reduction from the sale.
Despite the intention of those at the top of the oil and gas sector to align with the Paris goals – BP and Shell have made this clear – it does not go far beyond marketing currently. Research and pressure group Carbon Tracker said in its 2019 review that the current pace of change was not enough to protect the environment or shareholder funds. “Our view is that capital markets are failing to align during the capital allocation process, exposing the owners of fossil fuel companies – their shareholders – to potential lost value, as has already occurred in the EU utilities and US coal mining sectors,” the organisation said.
If the whole industry, from juniors to Shell and BP at the top, committed to emitting net zero carbon by 2050, radical change would need to happen for this goal to be met. Rystad says the dearth of projects with break-even prices below $60 a barrel – a marker for projects still commercial beyond 2030 – meant the industry could soon have to make a choice. “If the global exploration and production industry were to fail to discover sufficient resources at such break-even prices, global demand would need to be satisfied by utilising otherwise uncommercial fields, or transition more quickly to a different power mix,” says Rystad oilfield services research chief Audun Martinsen.
