RI Interview: Repsol says an oil and gas company can be Paris compliant

Despite controversy over Repsol’s first green bond, the Spanish oil major says pragmatism is needed.

Luis Cabra Dueñas, Executive Managing Director of Technology Development, Resources and Sustainability, and Member of Repsol’s Executive Committee, talks with Hugh Wheelan, Co-founder and Managing Director, Responsible Investor.

Responsible Investor (RI): How do you look at sustainability as a business driver at Repsol?
Repsol: It is an integral part of our management processes in terms of strategic and yearly planning. All our strategic decisions are made considering sustainability criteria and, among other aspects, Repsol’s commitment to the 2ºc scenario. Our sustainability policy focuses on key sustainability drivers: safe operations, environment, human rights, ethics and transparency, governance, people, innovation and climate change. For each of these we lay out specific short- and mid-term actions and goals and we monitor their progress. We communicate the progress towards those targets. That’s our core way of thinking in terms of sustainability. But we also use compensation as momentum and motivation to comply with these plans. This goes for Executive Directors at the board level, to the CEO (sustainability metrics represent 25% of variable remuneration), managers and all other employees: we put a weighting for our sustainability objectives into all bonuses. Overall, between 10-25% of variable remuneration of employees is linked to social, safety and environmental objectives.
RI: How easy or difficult is it to get buy in from staff on this?
Repsol: This is a top-down approach, from the board through the CEO down to the staff, so it is a very powerful tool. Giving visibility to the remuneration package means staff know this is really part of our objectives.RI: What do the Paris Agreement targets mean in reality for you as an oil company and how can you move towards them in a meaningful way?
Repsol: We are committed to the goals set forth in the Paris Agreement, and we have also firmly decided to be a key player within the Energy Transition necessary to achieve future emissions reductions. At Repsol, we are translating all this into action. Of course, we are an energy company and our commitment is to supply affordable and clean energy to society using the supply sources that we have available today. This includes significant portions of natural gas and oil, which, according to international demand scenario analysis, is still going to be part of the energy mix needed in the future. This energy mix may need to evolve in order to comply with Paris Agreement. Our position in this field is the following: to fight against climate change and provide the energy that society demands at the same time. Our ambition is to reduce carbon intensity by 40% by 2040 with respect to its value in 2016. To monitor how we are advancing in the achievement of our ambition, explain the process to all our stakeholders, and detect any possible deviation, we have developed a carbon intensity indicator in which we measure the CO2 emissions for each unit of energy produced and that we deliver to society (tonnes of CO2 per gigajoule, t CO2 / GJ). We have established a long-term ambition and a short-term commitment of reducing 3% our carbon intensity by 2020. Our roadmap towards energy transition is explained in our Climate Roadmap Book
RI: Are you in a slightly luckier position than other oil companies in that you have a significant portion of the business in natural gas so you can more easily make these commitments?
Repsol: I would say yes and no. Yes, because two thirds

of our production and three quarters of our reserves are in gas. However, no because we have to make cuts of 40 percent in carbon intensity from where we are today, and we can’t do that by shifting from oil to gas! We’ll have to be very tough, but as of today we are better prepared for the transition.
RI: In terms of actually making the 40 per cent reduction in carbon intensity, what does that mean in practice?
Repsol: We start by where we are today and say, OK, which are the short-term levers that we can pull; then the mid- and long-term. First, we have energy efficiency progress. We know that we can do much better, even if we have progressed a lot in energy efficiency in our refineries and chemical plants. We have set objectives for 2025 (to reduce 3 million tones CO2 eq) to make further increases in the energy efficiency of our operations. We are committed to the use of gas as the most cost-effective solution to promote a structured transition to a low-emissions future, so the second lever that is going to be important in downstream and upstream business, is methane emissions reduction and the elimination of routine flaring. This is going to be something that we can also quantify for the short- to mid-term.
Another major strategy is to increase investment in biofuels in our future energy mix. In addition, we want to use more oil for chemicals. This is partially decoupled from CO2 emissions and reduces our intensity. This will be done in the mid-term. By 2025 we should see more chemicals in our portfolio than in 2010. Our energy mix should also gravitate from two-thirds gas production to three quarters, depending on exploration. Another lever that is already a significant part of our future energy production is low carbon power generation: wind, solar and hydro renewable energy. We are already doing this, and we recently announced the development of two wind projects and a photovoltaic power plant with a total installed capacity of 800 megawatts, which will be built and operated by our electricity and gas unit. Through this acquisition, we consolidated our position as a major player in the generation of low-emissions electricity on the Iberian Peninsula, with a total installed capacity of 2,952 MW, and planned projects worth an additional 1,083 MW. Longer term though, if you look at the scenarios of the International Energy Agency, this is justpart of the commitment required. If you want to be Paris compliant then you need to think on carbon capture and storage (CCS) and natural climate solutions for CO2 reductions. I cannot tell you today whether we are going to go forward with more or less CCS. The technology is still immature and the costs are still high. For the time being, we are doing research and development and testing technologies and we hope that there will be significant advances here. We like to be specific and transparent. In terms of 2040 our ambition is to be Paris compliant, but we don’t know yet what is going to be the exact energy mix. By the end of next year we will have a new strategic plan looking to 2025 and beyond when we will know more.
RI: You’re an oil and gas company making these commitments while operating in demanding financial markets. Do you feel slightly disappointed by the commitments that governments have made so far?
Repsol: In the EU and Spain everyone is looking at the Paris Agreement. There are huge discussions about what will be the level of energy electrification and levels of nuclear energy for meeting Paris goals. We have a good sense on what we as a company are going to do in terms of committing to gigawatts of renewable energy and investing in particular projects that fulfill a defined rate of return that our company and CEO can commit to. We’ve done it with some success. And we have also taken decisions not to pursue certain opportunities that did not meet our investment return criteria. We’re always looking at where we can take more price or execution risk. We can demonstrate for the time being on paper that our target is an internal rate of return of about 10 percent. That’s what we need to see as a business for non-conventional energy projects.
RI: You’re one of the target companies for the Climate Action 100+ initiative. Can you talk about that engagement with investors? What are investors asking you for? And do you plan to meet those requests?
Repsol: We have a good dialogue with Climate Action 100+. We recognized very early the importance of this engagement. It is very constructive, based, we believe, on the specific targets we have outlined such as a 40 per cent reduction in our carbon intensity by 2040 and our objectives on CO2 reductions, methane and flaring. In this sense, our new Climate Roadmap Book is a very big step for us in terms of transparency and granularity.

RI: Looking at the oil exploration you’re doing now and what that means in terms of the Paris transition figures you were talking about earlier, how do you fit the fact that you’re still exploring for big oil projects into your carbon intensity reduction program?
Repsol: If we do not invest in exploration our total production will decrease. That’s something that is not in our plans. We plan to maintain relatively flat production capacity of oil and gas while we are exploring more efficient means of production, which we do factor into our plans and need to ensure compatibility with our climate commitments. It’s important to highlight that we as a company do not obsess about the life of our reserves. In this business this is a key KPI and in the past some companies liked to see in their books 10-15 years of reserves. We are more selective on that. Our live reserves on the books is 10 years average (given that gas reserves have longer duration than oil) for oil & gas. We can be more selective in exploration.
RI: Given that the largest part of your business is in natural gas, how do you look at the issue of hydraulic fracturing and what is your strategy in managing those risks?
Repsol: Firstly, we believe there are clear merits of hydraulic fracturing. The US has been able to reduce CO2 emissions substantially by substituting coal with natural gas produced by fracking techniques. Our US and Canadian natural gas business came via the acquisition of Talisman in Canada back in 2015. We wouldn’t be in this business if we didn’t believe we could do it safely and protect the environment by application of the best technology and standards. We have taken existing good practices and incorporated Repsol standards in order not to harm the environment. The application of Repsol’s water tool in the non-conventional assets in US, is a good example of this.
RI: Do you think that we have a problem then in Europe with not allowing fracking in a number of countries?
Repsol: It’s a policy decision. As a result we are not pushing to do fracking in Europe. Of course, if you are not doing a certain business activity that is being done properly elsewhere then you could consider that Europe is losing an opportunity. It’s an interesting debate in Europe about safety and security of supply and availability of resources.RI: There was an interesting comment from Brenda Kramer, Advisor, Responsible Investment at PGGM, the giant Dutch pension fund manager, at the RI Europe conference in London in June (See RI coverage) that they bought Repsol’s initial green bond issue for the credit rating but not for the greenness. There was controversy around your green bond. What kind of conversations are you having with investors now about that initial issuance and is anything changing as a result of those conversations?
Repsol: We are happy to engage in dialogue on this. We may be in agreement or disagreement about certain things, but our position has not changed. We believe that everything that is making a real contribution to reducing emissions and climate change mitigation should be considered as green for a green bond or sustainable finance product. The consequence of the green bond has been that in 2018, we have been able to achieve more than 60% of the CO2 emissions avoidance committed to. We will continue putting forward examples of things that can be done to move from the energy mix of today to the energy mix of tomorrow.
RI: Are you looking to issue more green bonds, and would they differ from the first?
Repsol: We want to be pragmatic when considering another green bond issue. It takes time and effort. We are happy how the first green bond worked out. The transaction was 5 times over-subscribed and circa 45% of the bonds were allocated to investors with Environmental, Social and Governance mandates. Since then, 55% of the funds have been allocated and 63% of the emissions avoidance goal has been achieved by the end of 2018. Issuing a green bond to fund our next wind or solar project could be a possibility in the short term. This use is very practical and not controversial I hope! But personally I would like also to have the chance to present other contributions to CO2 reductions from our refining business or methane reduction, both of which are hot issues today.
RI: How are companies exchanging information across the oil and gas industry to try and move forward more progressively as a sector?
Repsol: We are a mid-sized company so we have to be a little modest on our capacity of influence across the sector. But, there are some good examples of collaboration, and we are used to that in an industry with many joint operations. Back in 2014 we started the Oil and Gas Climate Initiative. We are probably the smallest energy company in it, but we were there from the very beginning. ExxonMobil and Chevron are now members. Collaboration is the right thing for leadership and mobilization.