We have heard a lot about corporations committing to net zero by 2050. But the reality is that actions in the coming decade will be decisive for both the planet’s warming trajectory and energy firms’ viability in the energy transition. That is why one year ago the Environmental Defence Fund teamed up with Columbia University to define five key climate metrics for the next five years of oil and gas. With urgency building at COP 26, we revisit the metrics here.
Methane: Leaders emerge as the global community wakes up to the challenge
This was the year that the international community woke up to the magnitude of the methane challenge and opportunity – a vital first step in the energy transition. The IPCC spotlighted the urgency of methane reductions in its Sixth Assessment Report, as the International Energy Agency emphasized the cost effectiveness of solutions, and dozens of countries pledged to reduce methane emissions from oil and gas and other sectors in advance of COP 26. The US’s largest natural gas producer EQT, the UAE’s national oil company ADNOC, and China Gas, joined scores of mostly European counterparts in the Oil and Gas Methane Partnership, the gold standard for industry efforts to credibly reduce and report methane emissions.
As the methane satellite age promises a new era of transparency and accountability, investors and lenders should expect upstream actors to commit to verifiable 0.20 percent methane intensity by 2025, paying heightened attention to joint ventures across the value chain.
Flaring: urgency increases unevenly, as leaders and laggards become apparent
Scientific research has revealed that natural gas flaring is even more detrimental than previously understood, because unlit or malfunctioning flares in regions like the US Permian Basin exponentially increase the amount of methane emitted, alongside flaring’s resource waste and CO2 emissions. British Petroleum raised the bar for large companies by committing to zero routine flaring in onshore US by 2025, while Apache Corporation moved even faster, reporting it had eliminated US routine flaring. However, many more companies simply maintained business as usual, recycling dated and incomplete promises for 2030 rather than appreciating the urgency of eliminating all sources of flaring.
We look for companies to expand the scope and tighten the timeline of their flaring targets, and to demonstrate meaningful reductions on a year-over-year basis through enhanced planning, value chain coordination, and links to executive compensation.
Capital allocation: the divide between Europe and the rest of the world grows, with interesting exceptions
Nothing speaks louder than investment, and 2021 saw diverging viewpoints in the financial community on the prudence of oil and gas companies branching into clean energy. Sceptics worry about the ability of old dogs to learn new tricks, while optimists see opportunity in the industry using its scale, technology, and expertise to develop areas like offshore wind, electric mobility, and hydrogen development.
Meanwhile, European companies made incremental strides, in North Sea wind, French renewable hydrogen, and continued scaling of solar, to name a few. Americans lagged, though Chevron invested in offshore wind, and others took baby steps of incorporating renewables in upstream operations to reduce costs and limit operational CO2 emissions. Meanwhile, some national oil companies got moving, including Ecopetrol’s bid for electric transmission, and PTT’s solar and wind projects in India and Taiwan.
We think it is too early to tell which energy transition strategies will be most productive, but we believe investors should expect management teams to take a hard look at how they can use their strengths in new ways and risk-proof their business models for the energy transition. In the meantime, every oil and gas company should align its capital expenditure planning and disclosure with a science-based net zero scenario. It will be essential to move past a short-term mentality and look at long-term value creation. The most successful firms will balance the return of cash flow to shareholders with appropriate investments in the energy transition.
Responsible lobbying: a global coalition takes shape to clean up natural gas
Oil and gas trade associations continued to play a principally negative role in US climate politics, to the frustration of more progressive industry members facing ever-increasing stakeholder questions about why they remain at the table. But, alternatives emerged: a coalition including Shell and other European energy companies, Qatar Petroleum, Russian independent Novatek, and other stakeholders supported policy recommendations to European Union officials to clamp down on methane emissions from all gas consumed in the Union, including imported gas from around the world. Meanwhile, in the United States, companies like Devon Energy and Cheniere found their voice in supporting an act of Congress to undo Trump-era methane deregulation at the Environmental Protection Agency.
Astute investors will look for constructive industry participation in next-generation methane rulemaking from the Environmental Protection Agency, and in delivery of cleaner gas to Europe in anticipation of forthcoming emission standards.
Strengthened climate governance: investors plant seeds of transformation
The biggest climate governance story of the year was upstart hedge fund Engine No. 1 placing three new board members at ExxonMobil, over the objection of management and with the aim to help the company better incorporate climate risk and opportunity into its business model and strategic planning. Critically, BlackRock, Vanguard, State Street and other titans of Wall Street joined the resolution, a potential inflection point for some of the world’s largest investment houses to put climate over complacency in questions of governance.
Going forward, we look for growing pressure from increasingly empowered asset owners to help make climate-aligned shareholder voting the new business-as-usual. And we look for asset managers to monitor and enhance climate IQ in the boardroom, while consistently urging improved climate-aligned disclosure, planning, investment, and lobbying.
The year ahead
Investors are raising their ambition on climate and becoming more sophisticated on how to benchmark performance and allocate capital. The burgeoning Environmental, Social and Governance arena is too noisy and fragmented to deliver quick clarity, but we will be looking for clues on how the financial sector accelerates action in the oil and gas sector. At a minimum, investors should expect to see companies:
- Join the Oil and Gas Methane Partnership;
- Aim for 2025 for the elimination of flaring;
- Provide science-based roadmaps on decarbonizing investments, with the understanding that one size does not fit all;
- Break ranks from trade associations that obstruct climate policy (or leave them outright); and
- Strengthen board competency for climate oversight.
Here’s to a productive year ahead of achieving tangible actions on the five key metrics that the oil and gas sector can implement without delay.