A look under the bonnet of the Oil & Gas transition

What are Oil & Gas companies really promising investors when they commit to a low-carbon transition?

This article is part of the RI Engagement 2020 series, taking a look at the current state of play for shareholder engagement and ESG, and reflecting on its future. Click here to see all the articles published in the series so far.


If not for Covid19, 2020 may have been known as the year Big Oil faced up to the realities of a low-carbon future. As of May, each of the six largest European majors have announced plans they say will bring them to net zero carbon emissions by 2050, as per the terms of Paris.

Crucially, no company is unequivocally targeting net zero emissions in relation to both upstream operations (known as Scope 1 & 2 emissions) and emissions from the products they sell (Scope 3 emissions). But investors have hailed the moves as a promising start. Speaking to RI, Mark Lewis, sustainability research head at BNP Paribas says: “I think they're just going to wean themselves off oil. I think that is what is going to happen.”

For investors looking either to support industry leaders on climate change, or simply avoid transition risk, the devil is in the detail.

Spanish giant Repsol has committed to Scope 1, 2 and 3 net-zero emissions by 2050, with clear emissions reduction targets every five years. However, the target does not cover the third-party oil & gas products that Repsol sells – accountable for roughly half its Scope 3 emissions last year. Similarly, BP’s eye-catching Scope 1-3 net-zero target only applies to internally produced hydrocarbons, which made up less than half of total sales in 2018.

While Repsol and BP use absolute emissions targets, other plans are centred on reducing carbon intensity – an averaged measure of a fuel’s carbon emissions. Reducing overall intensity can be done by switching to cleaner burning fuels or introducing renewables into the product mix. But intensity-based reductions may not translate to a reduction in absolute emissions if sales of polluting fuels continue to rise. Total, for example, reduced its overall intensity by 5% between 2014 and 2018 through expansion into natural gas and biofuels, yet its emissions were estimated to have risen by 8% over the same period.

For oil companies, intensity targets provide the flexibility to tap into potentially huge demand for gas and cleaner fuels in the future, without committing to a hard cap on production volumes. Dan Gardiner, an analyst at the Transition Pathway Initiative, describes carbon intensity as “convenient for benchmarking purposes” but calls for it to be paired with absolute emissions reduction targets.

So far, only Italian energy company ENI has adopted both carbon intensity and absolute Scope 1 to 3 targets for all the products it sells. The state-controlled Italian producer is targeting a 55% reduction in carbon intensity and an 80% reduction in absolute emissions by 2050. This will be achieved by switching to gas – by 2030, ENI says gas will make up 60% of production, tapering off at 85% in 2050. Alone among peers, ENI has also signalled the year its oil production is expected to peak: 2025.

An immediate concern for investors is the sheer variation between transition strategies, which prevent them being meaningfully compared. Over the medium term, it is likely that strategies will converge as technology advances, regulatory scrutiny and social pressure increases. Until then, market-led efforts such as the Science Based Target initiative – due to release a framework for credible net-zero targets within the oil and gas sector in October – may provide the starting point for baseline assessments.

Natasha Landell-Mills, Head of Stewardship at Sarasin & Partners, says that aligning the accounts of oil companies with low-carbon scenarios consistent with the Paris Agreement will be key to provide investors a fair representation of long-term business fundamentals.

She warns that a business-as-usual approach to critical accounting judgements, such as future oil & gas price estimates, could result in overstatement of performance and capital. Inflated prices may also be used to justify continued exploration and extraction of hydrocarbons, which risk being stranded in a low-carbon future.

Since early 2019, Landell-Mills has led a coalition of investors lobbying both auditors and oil companies to incorporate climate risk considerations within audited accounts and annual reports. They have had some success. BP, an engagement target, recently announced a massive write-down of $17.4bn (€14bn) on its asset values after slashing long-term oil and gas price forecasts by 30% and 16%, respectively.

According to Landell-Mills, oil producers already face a requirement to disclose material information under existing accounting and reporting rules. She tells RI: 

“The materiality judgments under both the Financial Accounting Standards Board and International Financial Reporting Standards, in addition to SEC reporting requirements, are not based on what directors think alone, but also on whether it will impact investor decision-making.

“So you don't need new reporting requirements for climate risks; these are core assumptions in financial statements that underpin efficient financial markets. In other words, we're simply asking for existing rules to be properly followed and enforced. And that means we've had very immediate action.”

Investors should also be aware of unanswered questions around the lifecycle emissions associated with natural gas. When combusted, gas emits up to 50% less carbon emissions than coal, and 20-30% less than oil. But when vented directly to the atmosphere – usually through poorly conducted flaring or during transportation – natural gas is a potent greenhouse gas, around 120% worse than carbon dioxide, owing to its methane content.

The full extent of methane leakage is currently unknown due to a lack of coordinated measurement and reporting, but new data suggests it is being severely underestimated. Recent mapping of methane emissions by the Environmental Defence Fund found that 3.7% of the gas extracted in Texas’s Permian Basin was leaked, while in May, BP estimated an industry-wide emissions average of 3.2%. When used to fire power stations, lifecycle leakage rates above 2.7% are enough to make gas more polluting than coal.

BP has already announced plans to install methane measurement systems at all sites by 2023 and put forward intensity reduction targets. US giants Chevron and Exxon have announced similar targets, though markedly less ambitious. Still, if persistent methane leaks aren’t reined in, gas will lose all credibility as a transition fuel.

Presuming they mean to follow through with the transition, the scale of the challenge facing oil companies is monumental. According to research by HSBC, if an oil producer the size of BP wanted to offset 50% of its customer’s emissions, or its net Scope 3 emissions, it would have to reduce daily upstream production by 13%, leverage the world’s entire carbon capture capacity and carry out industry-leading reforestation programmes. For context, BP says it is aiming for a 100% reduction of its Scope 3 footprint.

This is to say nothing of longstanding technical constraints relating to low-carbon energy generation, such as finding ways to safely dispose of nuclear waste, managing the environmental and social impacts of rare earth mining to make batteries, and recycling wind turbine components.

Yet, since the Paris Agreement, oil & gas majors have allocated less than 2.5% of capex to non-oil & gas investments annually. This inertia makes the next few years a crucial litmus test if the sector is to avoid destruction of shareholder value as the world decarbonises.