Unexpectedly, the oil and gas love-in that is CERAWeek saw the latest round of climate risk disclosure emerging from the oil sector.
Alongside an update from Statoil, Chevron has attempted to give shareholders insight and understanding of how it manages climate change risks. The Chevron report states it will “provide the Company’s views on long-term fundamentals of the energy industry”. Spoiler alert: one is none the wiser as to the specifics on demand and price that the company uses on reading it, however.
No specific numbers are provided. Apparently the prices indicated in the IEA450 scenario are similar to the low price scenario used by Chevron, with reference and high price scenarios above this. Statoil have also published their latest climate roadmap – which indicates the IEA450 price deck is higher than Statoil’s price assumptions as it increases the NPV of their projects by 6%. One conclusion therefore is that Statoil’s planning assumptions are more conservative than Chevron’s. But the delta between them is unknown. Another is that Chevron’s reference case is betting on high prices – but how high, we just don’t know.
Chevron has the standard industry discussion of IEA scenarios and the usual rhetoric around population = energy = fossil fuels. This equation continues to break down as economies become less energy and carbon intensive. Statoil provides some welcome relief from this narrative, talking about the “decoupling of energy use from emissions”, and the fact that “not all oil and gas resources will be developed. Some resources will not have a place in our future strategy”.
Chevron also seems to recognize that in a carbon constrained scenario certain high-cost assets “would not find a place in our investment portfolio….” This is a welcome acknowledgement but is in contrast with Chevron’s claim in its 2016 proxy statement that its “production and resources will be needed to meet projected energy demand, even in a carbon-constrained future.” The question is: how much of that resource is unneeded? No details are forthcoming from Chevron.
We welcome the fact that Chevron distinguishes between 3 types of projects:
- Existing upstream production,
- Upstream resources not yet sanctioned, and
- Upstream resources not yet acquired.
This fits with what we have highlighted with our carbon supply cost curves – that there is still an opportunity for investors to influence the management’s decisions to take on “new” high cost projects in the latter two categories. Chevron continues to cite the IHS piece on valuing proven reserves which we address here. However, we would agree that the first category – producing assets – are lower risk, although would note Chevron did take a significant upstream impairment last year “where revenue from expected oil and gas production is expected to be insufficient to recover costs”.
Chevron then talks about its risk management process, which attributes probability to different scenarios. With $75-$85/bbl oil as its low case, it is evident that Chevron thinks a higher price, higher-demand scenario is likely. This suggests it is likely to press ahead with higher cost projects. Essentially the Chevron paper can be paraphrased as ‘trust us – we’ll see it coming.’ Shareholders are therefore asked to have faith that the company can see that scenario coming and its executives are suitably incentivized to curtail capex accordingly. This is presumably the same risk management system that positioned Chevron perfectly for the shale boom and the oil price drop.
Statoil have a few more figures in their report – with an ambition to direct 15%-20% of capex in 2030 into “new energy solutions”. One chart suggests a corresponding range of $750 – $1500 million potential annual capex in 2020-25. Refreshingly, Statoil also notes, that as covered in our recent research with Imperial College, it is very hard to predict with any certainty what their business may look like in 2030, due to both game-changing technologies and unexpected policy changes. But at least Statoil has quantified a target, and accepted the direction of travel and the likelihood of change. By contrast, Chevron does not entertain what its business could look like as a result of a rapid low-carbon transition.
Having heard most of the oil major CEOs interviewed at CERAWeek in Houston last week, do these documents reflect what was articulated at this industry forum?
As you might expect, the oil industry’s echo chamber amplified the business as usual approach. Climate change and peak oil demand were raised but quickly put to one side. The incumbents seem to think they can have their cake and eat it. This kind of delusion that continued growth is compatible with preventing dangerous levels of climate change should worry investors. How will the groupthink on boards be overcome so that they see this risk coming in time? This is why 41% of shareholders supported a resolution asking for 2°C scenario analysis last year, and why it has been refiled this year.
This show was in Houston, but it could have been the Oscars in Hollywood. It was definitely a nostalgic trip for the energy sector verging on La La Land. Shareholders are right to question whether management are backing the wrong winners. That is why the greater climate risk transparency in financial reporting recommended by the FSB taskforce is needed. The efforts to date have fallen short of what is required for investors to understand the quantum of risk.
James Leaton
Research Director
