Ed Crooks – Vice-Chair, Americas at Wood Mackenzie
The events of 26 May 2021 look like a defining moment for the oil and gas industry. In the space of a few hours, three decisions crystallised trends that had been building for years at the large international oil companies, showing the pressure they are under to address climate change and the energy transition.
In the US, 61% of the votes at Chevron’s annual meeting were cast in favour of a proposal that the company should “substantially reduce” the greenhouse gas emissions created by its products (Scope 3) in the medium to long term. Shortly afterwards, shareholders at ExxonMobil elected three directors nominated by the activist hedge fund Engine No. 1, despite opposition from the company’s board. And meanwhile in the Netherlands, environmental campaigners won a court battle against Royal Dutch Shell, which was ordered to cut its worldwide carbon emissions by 45% by 2030.
On June 3, we ran a rapid response webinar to present some of our views on the implications of these events for our clients. Read on for a quick overview of the key takeaways from that discussion.
- The nature of stakeholder pressure is fundamentally changing
Shareholder resolutions and legal challenges at big oil companies relating to climate change are nothing new. The difference with the latest round of challenges is that they were successful.
The votes at Chevron and ExxonMobil reflected a significant increase in support for climate-focused shareholder proposals and board composition proxy fights. This change is largely being driven by major institutional investors, which have increasingly embraced climate-related investment criteria in recent years. These new stances are not about environmental activism per se but reflects their assessment of investment risk in the energy transition.
Similarly, the successful case against Shell reflected a new approach to litigation. The campaign group made their case on the basis of human rights law and succeeded where shareholder resolution in 2018 had failed.
- The bar is being raised for decarbonisation
It is worth noting that all three companies already had targets in place for cutting carbon emissions, but shareholders and campaign groups judged these to be insufficient. For Shell, the 45% reduction in absolute emissions ordered by the court is considerably deeper than the 20% the company previously had in place. Chevron shareholders voted for the company to commit to substantial reductions in its Scope 3 emissions. That is a clear signal that the bar is being raised for all publicly traded companies in terms of their decarbonisation strategies.
- The impact will be felt throughout the industry
At the moment, stakeholder pressure is mainly focused on Big Oil. For the independents, there is more likely to be a steady ratcheting up of pressure than a step change. However, regulatory changes driven by social and political pressure will affect the whole industry. National oil companies do not generally face the same pressures from shareholders and governments, but still need to be commercially competitive. Carbon border adjustment mechanisms that tax imports according to their associated emissions — already under discussion in the EU, Canada and the US — could leave state-owned oil and gas companies locked out of key markets if they fail to address decarbonisation.
- Decarbonisation creates higher risks for supply and prices
In Wood Mackenzie’s base case demand forecast, as much oil will be needed in 2050 as 2020, about 96 million barrels per day, after peaking at 108Mbd in 2034. Uncertainty over the pace of decarbonisation creates the possibility of unintended consequences for prices. If stakeholder pressure has the effect of constraining investment and restricting exploration, and demand remains high, the result could be tight markets and rising prices over the medium term.
- Addressing Scope 3 emissions is a huge challenge for the industry
In the near term, most oil and gas companies are focused on Scope 1 and 2 emissions, created by their own operations and purchases of energy. Significant reductions in Scope 3 emissions are likely to require fundamental structural changes to business models, major portfolio reconfigurations, with companies moving from Big Oil to Big Energy. The alternative, cutting emissions while remaining focused on hydrocarbons, relies heavily on carbon capture, utilisation and storage (CCUS), for both producers and their customers. However, there are significant barriers: the costs for CCUS are still high relative to prevailing carbon prices in most parts of the world and reaching the necessary scale could take a long time.
