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US oil majors unprepared for existential challenge of energy transition
European companies adapting strategy with more conservative portfolios, lower price forecasts, and tougher...Read More
Fault Lines: How diverging oil and gas company strategies link to stranded asset risk
This is the infographic for our 2020 report: Fault Lines: How diverging oil and gas company strategies link...Download Resource
“A growing number of oil and gas producers have recognised the fundamental impact the energy transition will have on their core business models and are setting climate targets, lowering price forecasts and writing down assets. However, there is a long way to go before they can be viewed as aligned with the Paris Agreement and the risk of stranded assets is still very real.” Said Mike Coffin, Senior Analyst and report co-author.
"Very few parts of fossil fuel producers’ business models will be left unshaken by the energy transition. European leaders like Eni and BP are responding with an increasingly joined-up approach but for Exxon and others the only consistency is how completely they shy away from decarbonisation.” Said Andrew Grant, Carbon Tracker Head of Climate, Energy & Industry Research and report co-author.
In a series of reports since 2011, Carbon Tracker has shown the financial and stranded asset risks to fossil fuel producers related to the shift to a lower carbon economy, in a world where stabilising global temperatures to any level puts a finite limit on the amount of CO2 that we can emit (“the carbon budget”).
Carbon Tracker has looked at the risk of investing in “stranded assets” – projects that fail to deliver adequate returns as conditions change.
In this report, we look at potential capital expenditure (“capex”) that might be spent on such stranded assets in the oil and gas industry using an economic framework, and focus on company and project level results. This report updates previous work on this theme, Carbon Tracker’s 2 Degrees of Separation series, including 2019’s Breaking the Habit.
The energy transition to a net zero carbon world is an existential challenge for oil and gas majors but US companies are lagging way behind their European rivals in adapting their businesses and minimising their stranded asset risk.
Far from simply an “ESG” issue (environmental, social and governance), for fossil fuel producers the energy transition represents an existential concern that goes right to the heart of strategy. It therefore requires an integrated approach that touches on different aspects of the business.
Oil and gas companies’ emissions ambitions, scale of capex at risk and internal oil price assumptions for impairment tests are all highly correlated. Companies are increasingly either approaching climate issues holistically or getting left behind on all three. These aspects may be seen as proxies for each other – setting conservative price assumptions or stronger emissions targets appears to link to portfolio management that is more resilient in the transition.
European producers clearly outperform their US counterparts on all three factors in the report. Equinor is a notable laggard.
US companies don’t disclose their impairment price assumptions. However, these strong relationships and poor performance on the other factors suggest that their assumptions of long term oil and gas prices are high, raising the risk of asset write-downs in future and possible continued investment in stranded assets.
Companies are taking diverging views of the future – this further exaggerates the gap between leaders and laggards. We explore using each company’s internal accounting price assumptions as an indicator of how conservative they will be in their future project sanction activity.
We highlight $60bn capex associated with the 15 largest projects sanctioned in 2019 that aren’t competitive on economics under the International Energy Agency’s 1.65-1.8˚C Sustainable Development Scenario (SDS). Most of the majors sanctioned assets that fell into this category. ConocoPhillips is the exception, only sanctioning assets that fall outside the lower-fossil fuel/higher-ambition 1.6˚C Beyond 2 Degrees Scenario.
All of the majors have assets available for sanction in 2020- 22 that fall outside the SDS. Timing of approval of these assets is extremely uncertain in the context of Covid-19. However, they may prove a key indicator of company commitment (or lack of) to resilience in the energy transition, or perhaps whether oil company long term demand expectations have been fundamentally shifted down by the crisis.