Golden Chance – E24

International oil companies have received a clear message from investors, banks and the United Nations climate committee that they need to cut emissions, mean Wood Mackenzie Consulting firm.

The company notes that the industry is now receiving very significant revenue from high oil and gas prices, and therefore has a golden opportunity to do something about emissions.

It’s very rare for an industry decades in advance to be notified that business is under threat, says director of company analysis Tom Elcott at Wood Mackenzie in Message.

“Not only does the oil and gas industry have the luxury of receiving a clear warning, but it also has significant cash flow due to higher prices,” he says.

In a report entitled “CO₂mmit and CO₂llaborate » Wood Mackenzie refers to the additional income from the oil and gas business as a ‘wall of cash’. The company recommends that a large proportion of this money be used for restructuring, so that the industry has a credible plan for how it can contribute to climate goals.

The rise in commodity prices provides a golden opportunity to accelerate emissions reductions, says Ellacott.

Wood Mackenzie believes that many investors are now setting targets for their portfolios to be zero emissions by 2050, and this will increase pressure on oil companies.

The company notes that an increasing number of investors are part of the UN support Net Zero Asset Owners Alliance, It is therefore committed to working towards zero emissions in its portfolio. So far, 53 banks from 27 countries with a quarter of global bank stocks are also in a similar alliance, Net Zero Banking Alliance.

This week, a committee proposed that the Norwegian Petroleum Fund have a long-term goal of zero emissions at the companies it owns.

– Definitely a little too

The oil majors are beginning to restructure, and will spend about 15 percent of this year’s investment budget on investments or acquisitions in renewable energy, Wood Mackenzie estimates. This equates to $15 billion.

It’s the beginning, but it’s clearly too little, says Ellacott.

Wood Mackenzie’s 45 international oil companies will be able to raise an estimated $1,000 billion more than planned if the price of oil remains at $50-70 by 2030, the company estimates.

Under certain conditions, IOCs may have about $660 billion available for renewable energy and other low-carbon solutions this decade, Wood Mackenzie estimates.

This corresponds to NOK 5942 billion, or about half of the Norwegian Petroleum Fund.

Investments in this form from the sector will be able to finance more than 10 percent of global low-carbon investments by 2030, from less than 2 percent today. Ellacott says such a major effort can contribute to big changes.

Anders Torgrim Holt, a Kepler Chevreau analyst, has made similar considerations previously. He believes that oil companies will likely spend their increased income on payments to owners and green investments.

– Holt recently said that higher oil prices are in this sense the best friend of a green transition, as it enables major oil companies to invest heavily in renewable energy. to E24.

– It’s time to secure

Director David Clark of Wood Mackenzie says higher prices and returns enable oil companies to secure payments to shareholders, repay debt, and speed up restructuring.

Many oil and gas companies are willing to accept the cost of locking in their prices (hedging, daily diaries) to reduce cash flow risk. It’s time to hedge long-term carbon risks by increasing investments in low-carbon solutions, Clark says.

To build credibility, companies must establish a clear financial framework for restructuring. It should show the distribution of capital between dividends, financing and investments in the oil and gas business and the low-carbon business, he says.

One company that has attempted to provide a framework for its restructuring is Norway’s Equinor. At a capital market day in June, the company announced that the share of total investments in renewable energy and low-carbon solutions would increase from four percent in 2020 to more than 50 percent by 2030.

However, Equinor has been criticized for not setting targets for absolute emissions reductions in the short term. Instead, the company promised to reduce carbon dioxide emissions per unit of energy produced, from 68 grams per megajoule today to 40 grams per megajoule in 2035.

Expect more stringent requirements

Wood Mackenzie notes that reporting requirements are constantly tightening, and that will have far-reaching consequences for the oil and gas industry as well.

Reporting of private emissions (Scope 1 and 2) is becoming common, and the next step may be requirements that also apply to customer emissions (Scope 3).

Shell was recently sentenced in a Dutch court to reduce its Scope 3 emissions by 45 percent by 2030, compared to the 2019 level. This includes not only private emissions, but also customer emissions.

“Even if Shell appeals the ruling, the Dutch decision may serve as a warning of what will happen to other companies in other jurisdictions,” Wood Mackenzie wrote in his report.

The consulting firm points out that the only way a company like Shell can manage this is by selling assets. However, this does not reduce emissions, it merely transfers them to new owners who may have weaker ambitions than Shell, Wood Mackenzie points out.

“Forced sales are not the answer to reducing emissions after Scope 3, but the penalty for doing nothing can be severe. Financial institutions will demand reductions in Scope 3 emissions over time,” Wood Mackenzie wrote.

The dilemma must be acknowledged

Instead, Wood Mackenzie calls for closer cooperation between oil producers, governments and consumers, to ensure a reliable transition to a low-carbon society.

Stakeholders should be aware of the dilemma faced by oil and gas companies. Ellacott says rapid sales on a large scale to reduce Scope 3 emissions are counter-folly.

But in order to be able to argue that business restructuring is better than selling assets, oil companies must be able to point to a credible plan for how they will contribute to reducing emissions, he points out. Among other things, Ellacott highlights the focus on capturing and storing carbon dioxide and hydrogen.

A divided and disgusting industry will risk downsizing and downsizing even faster long before the demand for oil and gas disappears. On the other hand, a comprehensive and joint response will be able to make IOCs a reliable part of the solution, says Ellacott.