BP and Glencore announce plans to link fossil fuel investments to Paris Agreement goals

2019 is shaping up to be the year in which fossil fuel capital planning finally hinted at incorporating climate reality.

There have been two significant announcements in the last month, in which BP and Glencore each stated that they would begin to disclose how every material capex investment is aligned with the Paris goals.

Climate change goals imply a hard cap on fossil fuel emissions

Carbon Tracker has long argued that the capital allocation plans of fossil fuel producers should reflect the finite limits imposed by the physics of our planetary system and codified in our international commitments, both from the points of view of preserving shareholder value and contributing towards a relatively favourable climate outcome.

Just reducing emissions intensity while planning to perpetually increase output isn’t enough – a company can’t consider itself compliant with Paris if it is banking on its failure[1].

Furthermore, it is vindication for our thesis that it is in the power of investors to guide fossil fuel producers according to their wishes. Both of these announcements have come about from engagement between companies and the CA100+, an investor initiative with over $32tr under management[2], to which Carbon Tracker is a data provider.

Announcements must be backed up with action

As ever though, the devil will be in the detail, and the extent to which these developments will actually drive changes in business models is yet to be seen. Writing 50+ page glossy brochures, extolling corporate concern for the environment and packed with pictures of hard-hatted engineers looking at moose, while ignoring plans to increase fossil fuel production forever more, has become something of an art form. “Fine words butter no parsnips”, but the references to capex dollars in the announcement are encouraging. We await further announcements from the companies on how this analysis will work in a properly stringent way, and how the results will be disclosed meaningfully.

There is still some way to go before companies will actually acknowledge the need to get smaller in terms of fossil fuel output. Glencore has said it will cap coal production at levels near planned 2019 output. BP still plans to increase oil and gas production, at 5% per annum through to 2021[3], and the focus “Evolving Transition” scenario in its recent Energy Outlook assumes that aggregate oil and gas demand will be nearly a quarter higher in 2040 than it is now[4].

It is true that some producers may be able to keep production flat or even increase it against demand falling in absolute terms. However, this is likely to be a limited group with the lowest-cost assets, and will have to be compensated for by even sharper falls by other producers. At the moment, every company seems to think it will be one of the special ones – our recent analysis shows that the vast majority of major listed oil and gas producers incentivise executives to increase production, reserves/resources volumes, or both[5]. The onus is on the companies to prove that their investments make sense in a more constrained environment.

The importance of supply side action

Of course, the test of alignment with a low carbon outcome will only relate to future investment, and for coal in particular it will not be enough in climate terms to simply keep existing production flat. It is the most carbon intensive of the fossil fuels, and needs to be eliminated from the energy system as quickly as possible if we are to have a chance of mitigating global warming to “well below 2ºC” as agreed at Paris.

Demand/supply of coal falls by 3.8% p.a. over the period 2019-2040 in the CCS-reliant IEA Sustainable Development Scenario (considered consistent with a 1.7-1.8ºC outcome over that period), and 7.3% p.a. in the median of the low CCS 1.5ºC scenarios used in a recent IPCC report. It is difficult to see producers closing profitable operating mines, so demand is going to need to start dropping to make this happen, presumably through a combination of government policy and competition from increasingly cheaper renewables.

This illustrates the importance of effort on both the demand and supply side for fossil fuels – “cutting with both arms of the scissors” [6]. Most companies so far have just passed the buck, portraying themselves as purely passive agents responding to demand, and it isn’t their fault if their production ends up blowing our climate targets. However, if we only push down on demand and leave supply alone, excess production will undermine those demand-side efforts – particularly given differences in approach between countries. Oversupply from one country lowers prices and reduces the effect of carbon prices in another. Conversely, if we only push down on supply but demand is unabated, this may lead to shortages and price spikes.

We are pleased to see investors taking matters into their own hands, and fossil fuel producers beginning to respond. The challenge of mitigating global warming to relatively benign levels remains daunting, and every part of the economy will need to contribute. The private sector cannot just sit on its hands and hope that governments pull a rabbit out of a hat. There are signs that coordinated efforts may yet drive tangible change.

Andrew Grant, Senior Analyst at Carbon Tracker

[1] See for example:

Carbon Tracker, “Explain to comply – how can oil and gas companies show alignment with climate-change goals?”, September 2018.  Available at https://carbontransfer.wpengine.com/explain-to-comply-how-can-oil-and-gas-companies-show-alignment-with-climate-change-goals/

Carbon Tracker, “Scope for Improvement”, January 2019. Available at https://carbontransfer.wpengine.com/scope-for-improvement/

[2] http://www.climateaction100.org/

[3] BP, “Strategic Update 2018”, February 2018

Available at https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/investors/bp-fourth-quarter-2017-results-presentation-slides-and-script.pdf

[4] BP, “2019 Energy Outlook”, February 2019

Available at https://www.bp.com/en/global/corporate/energy-economics/energy-outlook.html

[5] Carbon Tracker, “Paying With Fire: How oil and gas executives are rewarded for chasing growth and why shareholders could get burned”, February 2019

Available at https://carbontransfer.wpengine.com/reports/paying-with-fire/

[6] Fergus Green and Richard Dennis, “Cutting with both arms of the scissors: the economic and political case for restrictive supply-side climate policies”, September 2018. Available at https://link.springer.com/article/10.1007/s10584-018-2162-x