#WhyESGMatters The path to ‘net-zero’ emissions | Article – HSBC VisionGo

In this issue of #WhyESGMatters, we look at how Big Oil companies’ climate ambitions are shifting in favour of net-zero emission strategies.

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The path to ‘net-zero’ emissions

In a year which has seen major disruption for global oil & gas markets due to COVID-19, the issue of the energy transition and climate has continued to rise up the agenda. Meanwhile, the consequences of global warming from increasing greenhouse gas (GHGs) emissions continue to be felt through extreme weather events such as floods, storms, droughts, and bushfires. Therefore, managing the transition to cleaner energy is likely to be the defining issue for the oil companies in the coming years.

In this issue of #WhyESGMatters, we look at how Big Oil companies’ climate ambitions are shifting in favour of net-zero emission strategies. We also discuss the progress of emerging market oil companies towards low-carbon energy production.

1. What is ‘net zero’ and why is it topical?

Moving to ‘net zero’

The latest climate science (from the UN’s climate science body) tells us that emissions need to be reduced significantly and eventually hit ‘net zero’ (see Box 1) if we are to limit global warming to within 1.5°C and stave off the most severe consequences of climate change. This requires a rapid shift of direction to that of a much lower carbon trajectory (Chart 1).

Net-zero pledges on the rise

This year, a number of countries/regions have announced plans to go net zero by mid-century including the European Union (by 2050), China (by 2060), South Korea (by 2050) and Japan, which in October 2020 brought forward its carbon-neutral pledge to 2050. In his climate plan (see Box 2), US president-elect Joe Biden pledged for the US to also be net zero by 2050, with power generation to be net zero by 2035. Current pledges mean that around two-thirds of global emissions and 75% of world GDP could be set for full decarbonisation by mid-century.

Businesses too are responding with their own climate pledges. One example is Microsoft, which is seeking to become carbon-neutral by removing its entire historical corporate emissions footprint through measures to reduce its carbon dioxide and remove additional atmospheric CO2. But with emissions from fossil fuel energy (oil, gas and coal) accounting for around two-thirds of the total globally, oil & gas companies are key to the energy transition. Some of these companies have made public long-term ambitions to drastically cut the carbon intensity of their energy supply or even to become net zero.

2. How is Big Oil responding?

A recent wave of Big Oil climate strategy announcements means ambitions are raised across the board to decarbonize in Europe, with US companies now further behind. We look at the nature of these long and short-term plans laid out by Big Oil companies to meet climate aims.

Long-term plans

The six European oil majors, for example (BP, Eni, Equinor, Shell, Repsol and Total), now all plan for their operations to be net zero by 2050 or earlier. These companies also have long-dated strategies that cover the total lifecycle of carbon emissions, including those from downstream customer activities (such as transportation) as well as their own production.

Strategies to reduce emissions include a range of approaches, such as lowering emissions from the energy supply, new absolute emission reductions targets, investment in new energies, actions on specific sources of GHG emissions (e.g. natural gas flaring or methane leaks), and deploying technologies at scale (carbon capture and storage, biofuels, and renewable energy).

Climate ambition for US oil majors currently lags behind that of their European counterparts, and despite Mr. Biden’s climate plans, we do not think overnight change is likely. However, two large US-based producers – ConocoPhillips and Occidental – recently announced ‘net zero’ emissions aims, firsts for US operators, indicating some level of change is underway.

Shorter-term milestones

Visible change in the energy mix will likely be gradual given the long-term nature of the strategies, and indeed, a majority of companies do not even have shorter-term (e.g. 2025/30) milestones against their 2050ambitions. But some institutional investor groups still are pushing to see long-term net-zero plans backed up by meaningful emissions reductions within five years.

However, some company ambitions are set to fundamentally change the shape of significant industry players within 10 years. BP, for example, has laid out 2025/30 markers towards its 2050 aims which entail a ~40% cut in oil & gas volumes and aggressive build-out of renewable energy (see Chart 4) – both of which imply an aggressive, and unprecedented, redeployment of capital.

3. The emerging market role in oil & climate

We now shift focus to emerging market (EM) oil and gas operators by looking at a sample of 13 companies (see Chart 5) that collectively account for ~30% of global oil & gas production. Our grouping of companies includes the world’s largest oil exporters and natural gas producers, among others:

CNOOC (China), Ecopetrol (Colombia), Gazprom (Russia), Lukoil (Russia), Novatek (Russia), ONGC (India), PetroChina (China), Petrobras (Brazil), PTTEP (Thailand), Reliance Industries (India), Rosneft (Russia), Saudi Aramco (Saudi Arabia), Sinopec (China)

Less transformational change

We found, in general, EM producers are planning for less transformational change in the coming decades than some of their developed market (particularly European) peers, with the most common approaches being a combination of upstream (i.e. exploration and production) emissions efficiency and increasing gas in the production mix. This is a set of measures favoured by European majors around five years ago and is the current strategy of some large US majors. However, disclosure on climate-related information topics is also improving in EM companies, but is not without gaps in places – such as downstream emissions reporting.

Broader implications

We also note that EM producers can, importantly, be accountable to differing stakeholders (shareholders or state ownership) or have more ingrained relationships with state objectives – e.g. directly contributing to national finances, energy policy goals or climate objectives. For example, as the world’s largest energy importer, China’s recent announcement of its intention to reach net carbon neutrality by 2060 could spell significant change for not only Chinese producers but also oil & gas exporters to the Chinese market.

4. Conclusion

The move towards net-zero emissions is gaining traction from shareholders, policy makers and civil society to combat the effects of global warming. More major oil and gas companies, particularly in Europe, have made public long-term ambitions to drastically cut the carbon intensity of their energy supply mix, or even become net zero – signalling the potential for significant future changes in their nature. The energy transition poses challenges, but also opportunities for those that can successfully transition while enhancing shareholder value.

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