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The Chronicle

by Joel Kenrick

Oil and Gas majors and climate risk special edition

The last few weeks, with the US Election and the COP22 climate talks in Marrakesh, have sometimes felt like too much news. So today The Chronicle newsletter focuses on just one sector – oil and gas – and investor engagements on climate change with the sector over the last few weeks.

This morning two reports were published - investors announced their revised report on 1) investor expectations for oil and gas industry, and the CDP published their latest report on 2) Which oil and gas companies are preparing for the future. And ahead of COP22, the 10 companies in the 3) Oil and Gas Climate Initiative announced new fund promising $10m / year from each company for the next 10 years, 4) InfluenceMap looked at the oil majors and climate risk, 5) Wood Mac have said Oil groups ‘not investing enough’ in green energy and a French-led investor coalition announced 6) calls for a moratorium on drilling in the arctic. A look at these stories below. Normal service will resume with a round up of other COP22 activity and the FSB TCFD in my next email. 

1) INVESTOR EXPECTATIONS FOR OIL AND GAS INDUSTRY  

Today Investor Expectations for Oil and Gas Companies: Transition to a Lower Carbon Futurewas launched by the Global Investor Coalition representing over $24 trillion of assets (made up of IIGCC, Ceres INCR, IGCC & AIGCC). The press release and report (pdf) include a clear statement from mainstream investors to oil and gas companies that they must act to adapt their business strategies to a 2°C climate change pathway. The report sets out five asks:

  • Ensure the Board and management have well defined processes to ensure adequate oversight of climate-related risk and effective planning for a transition consistent with 2°C and efforts to pursue 1.5°C
  • Integrate management of climate-related risks and opportunities into business strategy to ensure business models will be robust, responsive and resilient in a range of energy transition scenarios.
  • Embed scenario analysis and ‘stress testing’ into key business planning processes and investment decisions
  • Have a view of, and response to, the material climate related risks and opportunities
  • Ensure broad oversight and transparency of the company’s public position, lobbying activity and political spending on climate-related regulatory issues  

Stephanie Maier, lead author of the revised guide and Head of Responsible Investment Strategy & Research for Aviva Investors said oil and gas companies have a duty to disclose how they are responding to climate change:

 

The oil and gas sector represents trillions of dollars in market capitalisation. Long-term investors therefore want to ensure that oil and gas companies have appropriate governance and capital discipline to respond to the changing market dynamics that are arising from the policies and actions put in place to limit global warming. Given the transition and physical risks these companies face from climate change, we believe that they have a duty to disclose how they are responding to these changes. We have seen some strategic announcements from oil and gas companies for more resilient low carbon business strategies. However, it is vital for everyone's long term prosperity that they do more in this respect and do not undermine robust policy action that drives a well-managed transition to a low carbon economy."

Today Investor Expectations for Oil and Gas Companies: Transition to a Lower Carbon Futurewas launched by the Global Investor Coalition representing over $24 trillion of assets (made up of IIGCC, Ceres INCR, IGCC & AIGCC). The press release and report (pdf) include a clear statement from mainstream investors to oil and gas companies that they must act to adapt their business strategies to a 2°C climate change pathway. The report sets out five asks:

  • Ensure the Board and management have well defined processes to ensure adequate oversight of climate-related risk and effective planning for a transition consistent with 2°C and efforts to pursue 1.5°C
  • Integrate management of climate-related risks and opportunities into business strategy to ensure business models will be robust, responsive and resilient in a range of energy transition scenarios.
  • Embed scenario analysis and ‘stress testing’ into key business planning processes and investment decisions
  • Have a view of, and response to, the material climate related risks and opportunities
  • Ensure broad oversight and transparency of the company’s public position, lobbying activity and political spending on climate-related regulatory issues  

Stephanie Maier, lead author of the revised guide and Head of Responsible Investment Strategy & Research for Aviva Investors said oil and gas companies have a duty to disclose how they are responding to climate change:

The oil and gas sector represents trillions of dollars in market capitalisation. Long-term investors therefore want to ensure that oil and gas companies have appropriate governance and capital discipline to respond to the changing market dynamics that are arising from the policies and actions put in place to limit global warming. Given the transition and physical risks these companies face from climate change, we believe that they have a duty to disclose how they are responding to these changes. We have seen some strategic announcements from oil and gas companies for more resilient low carbon business strategies. However, it is vital for everyone's long term prosperity that they do more in this respect and do not undermine robust policy action that drives a well-managed transition to a low carbon economy."

2) CDP: WHICH OIL AND GAS COMPANIES ARE PREPARING FOR THE FUTURE  

The CDP report ‘In the pipeline: Which oil and gas companies are preparing for the future?’ published today revealed 'European companies investing are more in low-carbon technologies and shifting towards gas, as US companies risk being left behind:

  • Emissions footprint of oil and gas industry and its products account for approximately 50% of global CO2 emissions;
  • European majors outperform their US peers in the shift to gas, investments in low-carbon technologies and on wider climate governance and strategy;
  • Current business models continue to rely heavily on finding and proving reserves. Traditional industry performance metrics (and their interpretations) potentially outdated with peak oil demand on horizon;
  • Investors may be at risk as companies are currently only obligated to report proved reserves2, with limited insight into how sensitive estimates are to oil price volatility;
  • StatoilEni and Total are best performing companies on carbon-related metrics relative to the peers; SuncorExxonMobil, and Chevron rank lowest of companies assessed.

The Guardian reported that 'ExxonMobil and Chevron of the US, alongside Canada’s Suncor, ranked lowest in a review conducted by the Carbon Disclosure Project (CDP) of 11 of the world’s biggest oil and gas companies. At the top of the table came Statoil of Norway, Italy’s Eni and the French company Total. … Three major companies – Saudi Aramco, Russia’s Rosneft and PetroChina – were unranked in the [report] because they refused to respond to the organisation’s questions.' (Oil and gas companies in North America less green than those in EUGuardian, 22 Nov). 

The Financial Times highlighted that ExxonMobil and Chevron 'sit near the bottom of a ranking of 11 large oil and gas companies compiled for big investors, including Norway’s oil fund and BlackRock, the world’s largest asset manager…. Norway’s Statoil was ranked first, in part because it had the highest share of gas in its stock of proven reserves. … Italy’s Eni scores second, because it has big gas projects in the pipeline, such as the Zohr field off the coast of Egypt, and plans to spend €1bn over the next three years on fossil fuel alternatives such as solar projects in Italy, Algeria and Pakistan. Total’s purchases of US solar panel producer SunPower and the Saft battery maker helped the French oil major achieve a third-place ranking in CDP’s scorecard, followed by Royal Dutch Shell and BP.' (ExxonMobil and Chevron near bottom of league on ‘green’ strategyFT ($), 22 Nov)

The FT reports that 'Some investors said oil and gas groups had to align themselves with the low carbon transition embodied in the Paris climate accord struck last December, and the difference between US and European companies was an important consideration for asset managers. “There is an inevitable divergence in their commitments and transparency, which this report demonstrates,” said Meryam Omi, head of sustainability at Legal & General Investment Management. "LGIM will be using many of the findings to guide its overall engagement strategy with this sector.” City A.M.Seeking Alpha and Fund Strategy also covered the story. 

3) OIL AND GAS CLIMATE INITIATIVE ANNOUNCE NEW $1BN FUND 

Some of the world's largest oil companies, including Saudi Aramco, Shell, and BP, have joined together to spend $1bn over the next 10 years to help fight climate change, the Financial Times writes. The money will be targeted at developing carbon capture technology, rather than invested in technologies that pose a direct competitive threat to their businesses, including renewable power or energy storage. The move underlines growing concerns in the energy industry that the Paris climate deal will spur governments to force the sector to capture or pay more for its carbon emissions. However the size of this investment was described as “a drop in the ocean”, by Jonathan Marshall of the Energy and Climate Intelligence Unit think-tank, who notes that "Shell’s capex budget for 2016 alone is $25bn-$29bn". The companies have been "pilloried" by campaigners for their "pathetic" investment fund, the Telegraph reports, who point out that their annual contributions would be less than BP chief Bob Dudley earned last year. Climate Home also has the story. (Leading oil groups focus climate change plan on carbon storageFinancial Times, 4 Nov). This write up via CarbonBrief excellent daily news summaries (sign up on homepage). 

Pre-briefing of the announcement to Reuters and The Telegraph suggested the 'investment fund to develop technologies to cut carbon emissions and promote renewable energy' (Exclusive - Oil CEOs to unveil renewable energy fund in new climate push, Reuters, 2 Nov). In the end the fund is focused on reducing methane gas, improving industrial and transport efficiency and accelerating deployment of carbon capture, use and storage, report ReCharge (Renewables frozen out of oil majors' $1bn climate innovation fund, 9 Nov). Leading carbon capture and storage expert Professor Stuart Haszeldine is less than impressed, writing: "When is $1 billion not a lot of money? Answer one, when you are trying to save the human species from global self-destruction. Answer two, when it is split 10 ways, and then again 10 ways.” (Oil Companies’ Climate Initiative Lacks Initiative, The Energy Collective, 11 Nov). Bloomberg highlight the size of the OGCI fund compared to OGCI annual spending figures. (Big Oil to Invest $1 Billion in Carbon-Capture Technology, Bloomberg, 4 Nov) The story was also covered by CNBC, WSJ and Guardian.

4) INFLUENCEMAP EXAMINE OIL MAJORS AND CLIMATE RISK

Earlier this month InfluenceMap published their latest report, Oil Majors and Climate Risk: What Investors Need to Know. The report 'examines the ten largest integrated oil and gas majors in North America and Europe and looks at how thoroughly they are disclosing on some key climate-related metrics likely to have a major impact on the future shape and value of their businesses. Exxon, Occidental and Chevron are at the bottom of the table, suggesting these three warrant particular investor scrutiny.’ The report finds that ’the key risk issue is the proliferation of zero emission vehicles (ZEV) and hybrids resulting in descreasing demand for petroleum products used in road vehicles, which on average provide at least 35% of gross revenue of the oil majors. The research found scant disclosure by the oil and gas majors on their precise projections for ZEV penetration and impact on gasoline/diesel sales.'

5) WOOD MAC: OIL GROUPS ‘NOT INVESTING ENOUGH’ IN GREEN ENERGY 

A new report by Wood Mac warns that 'Oil companies risk being left behind in the transition to low-carbon energy [and] the industry is not investing enough in green technology’ report the FT. While similar forecasts have been heard before 'this one will carry weight with oil companies because it comes from one of the industry’s leading research providers.’ Paul McConnell, Director of global trends for Wood Mac, called this the biggest strategic dilemma facing the industry: “It is clearly existential because you are talking about what happens to producers of hydrocarbons in a world where demand for hydrocarbons is slowing.” The FT report that the Wood Mac report says that, while there was “strong rhetoric” from oil companies on diversification into renewables, “a much greater proportion of [their] capital will be needed to deliver a material shift”. (Oil groups ‘not investing enough’ in green energyFinancial Times ($), 18 Nov).

'As much as up to 50 percent of the production of oil majors could be hit by carbon costs in the next ten years if legislators that currently price carbon extend the policy to the upstream sector’ Oil Price focus on in their coverage of the report. They quote Paul McConnell saying: "As carbon policy intensifies, the oil and gas Majors will face more regulatory burden and are likely to face increasing costs. Green financing could also mean higher cost of capital for more carbon-intensive oil assets such as oil sands, as investors shift to alternative fuels and lower-carbon technologies. Global carbon risks could depress oil prices for the long term with slowing demand and an increase in costs, making it crucial for the Majors to push break-evens down further.” (WoodMac Warns Half Of Big Oil Output May Be Hit By Carbon CostsOilPrice, 18 Nov). The full report 'Fossil fuels to low-carbon: The Majors' energy transition’ is paywalled, but press release is here.

6) CALLS FOR MORATORIUM ON DRILLING IN THE ARCTIC 

'French pension investors and asset managers are at the forefront of a call for an indefinite moratorium on oil and gas activity in the Arctic high seas from a international group of institutional investors’ reported I&PE. 'Nineteen investors with more than €5trn in combined assets under management are backing the initiative, led by French pension investors ERAFP, Ircantec and Préfon, as well as Natixis Asset Management and its responsible investment arm Mirova. The call is aimed at oil and gas companies that have been involved in oil exploration in the Arctic, as well as members of inter-governmental forum the Arctic Council (Canada, Denmark, Finland, Iceland, Norway, Russia, Sweden and the US).’ (French pension investors call for moratorium on Arctic oil, gas activityIPE, 4 Nov).

IPE report that the investors are seeking “an unlimited moratorium on oil and gas activity in the Arctic high seas” and demands that amount to a tightening of the operating environment for oil and gas companies active in, or targeting, the Arctic high seas – “the ultimate Arctic frontier that does not pertain to any single national sovereignty”, and call for companies to disclose publicly the licenses they hold in the region and how their plans to use these licences “fit with their broader climate-change mitigation commitments”.

That’s all for now folks! 

In my next newsletter I’ll do a proper round up of COP22 and post-U.S. election reports and analysis, but one final note: S&P will tomorrow morning host an event on Environmental finance and sustainable investment: momentum and new tools in London from 8:00-10:00 with breakfast and discussion at The Berkeley Hotel, Wilton Place, SW1X 7RL. Invite attached, or RSVP here. S&P new report is Green Finance: Scaling Up To Meet The Climate Challenge (132 page, pdf).

written by Joel Kenrick

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