Emissions trajectories continue to bend lower
As before, Eni gives both absolute and intensity numbers – its absolute emissions target now reaches net zero in 2050, from 80% reduction previously. Shell, having started off in 2017 with a goal of -50% intensity for 2050 (in CO2 per unit of energy terms), edged this to -60% in 2019 and then -65% in 2020, now jumps to -100% (i.e. net zero) less than a year later.
The arms race for emissions credibility amongst European producers continues: to stay the same is to get left behind quickly.
Aggregate absolute emissions are the key
As we have noted repeatedly, ultimately it is the total amount of greenhouse gases in the atmosphere that determines the warming the planet will experience. This has important financial and strategic implications for carbon-entangled companies – if they assume they can keep growing emissions, or in this case fossil fuel production, then this raises the risk of overinvesting in assets that become stranded as the world decarbonises.
Hence, emissions goals that are based on average intensity don’t satisfy – the amount of CO2 per unit of energy produced can go down while total emissions go up, as long as sufficient low carbon energy is added to the denominator.
Further, this highlights the need for interim targets with the 2050 end-point long-distant, short-term targets both a) suggest that management will be acting with the requisite urgency and b) illustrate an understanding that it is the aggregate amount of emissions that is important. While setting a net zero end date does make even an intensity target the same as net zero in absolute terms at that point, the pathway to get there matters – moving quickly from the off or leaving the hard work to a couple of decades’ time will mean wildly different total amounts of emissions over the period.
Eni sets itself a carbon budget; Shell’s emissions are uncapped.
Eni’s use of absolute targets, with interim steps (-25% by 2030 and -65% by 2040) is positive in this regard. Interpolating between the points effectively yields a fixed carbon budget for the company’s future production. Further, as its carbon intensity targets (-15% by 2030 and -40% by 2040) are lower in percentage terms, this combination implies that the company must be reducing its fossil fuel activities over time.
Shell, not so much, however. Its targets on the way to 2050 are all in intensity terms, meaning that there is no hard cap on emissions or production. While the company has confirmed that 2019 will represent the high water mark for its oil production, declining at 1-2% a year from now on (including divestments), it has grand plans for gas expansion – adding more than 7 million tonnes annual LNG capacity by the mid-2020s to its current 33 mt. With the average CO2 intensity of natural gas only around 15% lower than oil on a lifecycle basis, and LNG likely to be at the top end of gas, this highlights the importance of an absolute emissions framework. By contrast, BP has vowed to cut its oil and gas production by 40% over the next decade, thereby achieving a comparable absolute reduction in CO2 emissions.
Testing the boundaries
A challenge with comparing the oil company emissions ambitions is that they are all defined differently, meaning that the numbers have inconsistent calculation methods and they cover different parts of the companies’ businesses. For example, BP’s net zero target only applies to its upstream operations and even then doesn’t include its 19.75% stake in Rosneft, which accounts for about a third of BP’s total equity oil and gas production.
Both Eni’s and Shell’s net zero targets are defined more widely – they include not only the hydrocarbons that the companies themselves produce, but also those produced by third parties that pass through their downstream networks. BP’s comparable aim is only a 50% reduction in carbon intensity by 2050. Shell has stated that by 2050 it simply won’t sell to customers that use fossil fuels on an unabated basis.
When is a target not a target?
Most companies (or rather their lawyers) have been very careful with the language they use to describe their plans. “Ambition”, “goal”, “aim”; all manage to avoid making any binding commitments. We will try to achieve what we set out, but you can’t complain if we don’t, pronouncements. Both Shell and Eni are at pains to highlight their use of the binding magic word “target”, to show that they are committed to the cause.
Shell will further put their plans up to shareholder vote every three years – but, as shown by the current pace of change highlighted above, three years ago might as well be ancient history. Three years ago Shell were the only company with a scope 3 target – by 2020 they had been left behind by peers.
One of the main criticisms of Shell’s approach has been their reliance on nature-based solutions (NBS) to suck carbon out of the atmosphere, making more space for fossil fuel production on the way to net zero. At the global level, Shell’s new low carbon scenario, Sky 1.5, is reliant on a new forest the size of Brazil being planted to reach the higher end of the Paris goals. This scenario – a subjective view of the world’s transition pathway – should be kept in mind as distinct from Shell’s own company specific targets, but it does shine a light onto the thinking behind the means by which the company is planning to hit its goals.
Oil and gas company targets have been criticised as being long on lofty ambition, short on detail of how the goals are actually going to be achieved. While the scale of Shell’s hopes for NBS have raised eyebrows, to their credit Shell and Eni do give datapoints on the extent of negative emissions in their own individual plans to hit net zero. Most don’t.
Shell’s own plan is to offset 120 mt p.a. CO2 by 2030 using NBS. For Eni, forestry absorbs 20 mt p.a. in 2030 and c.40 mt p.a. in 2050. Adding together just Shell’s and Eni’s NBS plans for the early 2030s, to capture that 140 mtCO2 p.a. would require 8 million hectares using Shell’s own average sequestration of around 17 tCO2/ha/y. Commentators have argued that this factor is extremely optimistic, and that the more likely maximum potentials are more like 13 and practical estimates are in the range 2-4. If we say 3 tCO2/ha/y for the sake of argument, that makes it 47 million hectares of forest in the next decade (Spain’s land area is about 50m ha) or 11 million if sequestration efficiency is at the very top end (about a Bulgaria). Either way, that’s a lot of forest, and that’s just two companies. Who are the tree-huggers now?
Shell and Eni aren’t alone leaning on challenged sources of net negative emissions to square the circle. Repsol and BP will also make use of NBS, for example, but haven’t given the numbers. In the United States, Occidental’s new net zero target appears to be almost entirely driven by direct air capture (DAC) and carbon capture, utilisation and storage (CCUS) with applications in enhanced oil recovery.
Carbon dioxide removal measures are no doubt going to be required to reach net zero. However, there have long been questions about the risk and moral hazard of delaying action on CO2 now with the hope of undoing the damage with negative emissions in later decades, particularly when they are assumed at great scale. Given further concerns around land-use and the permanence of the sequestration, we doubt this debate will go away soon.
To what extent are fundamental assumptions of such plans consistent, or realistic?
Although practice amongst the European oil and gas producers has clearly progressed, and continues to do so, the industry’s poor track record on engagement on environmental issues and the process of gradually closing loopholes along the way makes it hard not to look at such plans with a cynical eye. We wonder what else might be out there as an issue that hasn’t received much attention yet.
We have a hunch though. To what extent do the emissions targets bake in the assumption that other parts of the value chain will carry the load? It is impossible to tell how much this might be an issue, as there is no disclosure on detail where this might be manifested – perhaps steep declines in the assumed scope 3 emissions factors applicable to their production, or low low costs for negative emissions technologies. But there are hints.
Ever since it originally published its first scope 3 targets in 2017, Shell has repeated that its intensities post-2035 are “in step with society”. Equinor is explicit in its ambition that “success will depend on society moving towards net zero in 2050”. Until some indication is given of what is really meant by these statements, we are left guessing as to how much of the iceberg is hidden below the waterline.
It’s not unreasonable, of course, to point out that getting to net zero is going to be a society-wide endeavour, and the oil companies aren’t just going it alone. The companies themselves are probably feeling aggrieved, as the more statements they make on climate – and we have no doubt that there is good intent – the more aspects there are for others to poke holes in. But as with any maturing discussion, the detail gets more important. When it comes to trying to see which companies are the most serious, and to do this on a reasonably consistent basis, as in any model the underlying assumptions are often the biggest part of the story.
 These figures are separate from carbon capture and storage (CCS) – this amounts to a further 25 mtCO2 p.a. by 2035 in Shell’s thinking, and 7 mt by 2030/50mt p.a. by 2050 in Eni’s.
 In Shell’s Sky 1.5 scenario, 700 mha is required to absorb roughly 12,000 mtCO2.