With the rise of ESG (Environmental, Social and Governance) investing and the broad-based transition toward clean energy, a number of oil/gas companies have decided voluntarily to become carbon neutral over the next three decades.
The Net-Zero Scenario
Carbon neutrality, also termed as net zero, refers to a situation wherein all carbon (and other greenhouse gas, or GHG) emissions are offset by absorbing the same from the atmosphere. It is considered an important yardstick by climate scientists to ensure that global warming is limited to 1.5°C above pre-industrial levels by 2050, in sync with the Paris Climate Agreement.
Of late, the concept has gained traction operationally, with companies across a diverse spectrum laying out concrete strategies about their future sustainability endeavors. For the energy operators in particular, the pressure to decarbonize has been intensified by institutional investors and major clients committing to an ESG agenda and consequently snubbing carbon emitters. As the focus on energy transition accelerates, let’s look at some of the oil and gas companies outlining net-zero commitments by 2050. It all started with Repsol, which in December 2019, announced its non-binding plan of reducing net carbon emissions to zero by 2050. The move by the Spanish firm, which complies with the Paris Agreement climate goals, marked the first such initiative in the oil and gas industry. The company is expected to use its 2016 carbon intensity level as the baseline. It plans to reduce 10% intensity by 2025 and 20% in the next five years. It expects carbon intensity to fall 40% by 2040 and reach 100% by 2050. In February 2020, BP plc ( BP Quick Quote BP - Free Report) announced a plan of reducing net carbon emissions to zero by 2050 or sooner. This London-based energy behemoth plans to sell assets worth some $25 billion to finance its green energy push. As part of its net-zero ambition, this Zacks Rank #1 (Strong Buy) company has vowed to cut fossil fuel production by 40% from 2019 levels. You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Last year, Norway’s Equinor ( EQNR Quick Quote EQNR - Free Report) also set out its strategy to enhance its transformation into a net-zero carbon emitter. The company plans to reduce net carbon intensity by 20% by 2030 and 40% by 2035 while investing more in renewables and low-carbon solutions. Suncor Energy ( SU Quick Quote SU - Free Report) committed to slash overall emissions across its operations by 10 million tons per year by 2030. Notably, this would imply a nearly 30% reduction in GHG emissions, which amounted to 29 million tons in 2019. The second-largest oil producer in Canada said in May that it intends to be net zero by 2050. Suncor is also one of the founding signatories of a coalition of leading Canadian oil sands producers recently announcing a collaboration to achieve net-zero GHG emissions from their operations by 2050. Royal Dutch Shell ( RDS.A Quick Quote RDS.A - Free Report) gave a climate strategy update earlier this year, establishing its short- and medium-term goals for reducing its carbon footprint. The Anglo-Dutch company, which assumes to have peaked its total carbon emissions in 2018, is aiming to slash its net carbon intensity by 6-8% in 2023 from the 2016 baseline and further 20% by 2030. Additionally, the decrease will expand to 45% in 2035 before achieving its goal of zero emission by 2050. In June, EQT Corporation brought forward a comprehensive plan to achieve net-zero GHG emissions across its operations by 2025. This leading natural gas producer pledged to slash GHG emission intensity by 70% in just four years. Moreover, it set a climate target to reduce 65% of the company’s methane emission intensity below the 2018 levels by 2025. Schlumberger ( SLB Quick Quote SLB - Free Report) is the latest energy major that is targeting net-zero GHG emissions by 2050. The leading oilfield service player is planning a 30% cut in direct and indirect emissions by as early as 2025. Importantly, the company expects to reach the short-term target ahead of schedule. By 2030, the company is eyeing to cut emissions by 50%. By this timeframe, the company is also planning to reduce Scope 3 (or indirect) emissions by 30%. Schlumberger boasted about becoming the first company in the energy service industry to add Scope 3 emissions ambition in net-zero emission target. Other oil and gas firms committed to net-zero emissions strategy include TotalEnergies, Devon Energy, Occidental Energy etc. Wrapping Up
As one can see, a significant number of major oil companies have publicly set net-zero environmental pledges by 2050, many within the last few months. A big reason for such a rallying call is the market’s growing recognition of corporate ESG credentials.
Against this backdrop, it appears that the emissions reduction theme is particularly vibrant in Europe where most of the oil supermajors have invested heavily in renewable energy, apart from having clear decarbonization plans. On the other hand, U.S. biggies like ExxonMobil ( XOM Quick Quote XOM - Free Report) and Chevron ( CVX Quick Quote CVX - Free Report) are yet to come up with any credible long-term GHG regulation targets like their European counterparts though there are rumblings that ExxonMobil is considering going net zero by 2050. There is no doubt that the Oil/Energy space has stepped up efforts toward a decarbonization goal. At the same time, the pathway to balance the amount of harmful emissions is not without its share of challenges. First and foremost, the companies need to earmark large amounts of capital on ESG initiatives (research and development, utilization of new technology etc.) that might hurt future returns and lower equity value. There are also significant technology and execution risks. As of now, it is difficult to ascertain how much of this is hype and how much actual change will occur as this complex evolution involves a monumental shift in the energy sector’s business model by effectively moving away from their primary operations of oil and gas development. While some of the transition strategies are very ambitious indeed, what’s clear is that companies with a strong ESG bent are held in high regard by the public that might ultimately boost the stock price.