Q&A: Net-Zero Commitments in the Fossil Fuel Industry Key Points

· Poor financial performance coupled with growing investor and regulatory pressure have pushed European oil majors to adopt more ambitious net-zero targets.

· These newly released targets do reflect a growing ambition on the part of oil majors to achieve 'net-zero' by 2050, but the pledges do not provide an adequate roadmap to achieving net-zero, and are not ambitious enough to align with the Paris Agreement.

· The business of the oil majors remains carbon intensive and their clean energy investment remains low. Between 2010 and 2018 no oil major invested more than 5% of its total investments into clean energy.

· To align with global climate goals, oil majors need to centre their investment decisions around a carbon budget, requiring a shift away from fossil fuel investments.

What does net-zero mean for oil majors?

Despite growing popularity within policy circles, the term ‘net-zero’ is a little opaque. A state of net-zero emissions is one where all carbon emissions are offset by removing an equal amount of carbon from the atmosphere, such that they cancel out. Importantly, it does not mean zero emissions - net-zero targets allow polluters to continue emitting, as long as they remove as much carbon as they add. Nevertheless, an effective net-zero target implies a reduction in greenhouse gas emissions, as carbon extraction has limited and unproven potential.

For an oil major, these targets require two components. First, targets need to commit to lowering absolute emissions.[footnoteRef:0] An absolute target sets a hard limit to emissions, which is vital to achieving net-zero. Such targets contrast with targets for improving 'emissions intensity', which may expand an oil major’s low-carbon portfolio, but not cut its fossil fuel operations, and so may not reduce emissions overall. [0: An absolute target translates into a reduction in overall emissions, whereas an intensity target leads to a reduction in emissions per unit of energy produced. ]

Second, reduction targets need to cover an oil company's operations - scope 1 and 2 emissions - and the use of their products - scope 3 emissions (see Appendix II for formal definitions). They should also include products obtained from third parties. Scope 3 emissions commitments are particularly important as these account for an overwhelming majority of the emissions associated with the oil and gas industry. For example, among the European oil majors, an average of 87% of emissions are scope 3 (see Figure 1).[footnoteRef:1] Any target that does not engage with these is partial at best and misleading at worst. [1: Scope 1, 2, and 3 emissions make up what is known as an oil major’s emissions profile, an overview of its total emissions.]

The six largest European oil majors - Shell, BP, Total, Equinor, Eni, and Repsol - have publicly announced revised or new emissions reduction targets in the first half of 2020 (see Appendix I). Though the ambition of each plan differs, they all at first glance reflect a pivot to a low-carbon world.

Eni, most ambitiously, targets an 80% cut in its greenhouse gas emissions across its entire business by 2050. BP wants its operations and sales to be carbon neutral (i.e. net-zero) by that same year, while Shell has committed to a 65% reduction of its emissions intensity in operations and sales. Shell also wants to help its customers to decarbonise their respective sectors.

Figure 1: Total Emissions of European Oil Majors

Sources: Bloomberg Terminal (accessed on 24 June 2020), Company Sustainability Reports

What has motivated European oil and gas majors to adopt net-zero targets?

Growing investor scrutiny, poor financial performance and tightening environmental regulation have been the three driving factors. Shell, BP, Total, and Equinor have each experienced shareholder activism to set more ambitious emissions reduction targets, manage climate risks and invest in clean energy. These are not isolated incidents and climate-minded investors are getting more organised. The Climate Action 100+ Initiative (CA 100+), representing investors with USD 34 trillion in assets under management, explicitly aims to push the largest emitters to decarbonise.

Additionally, investors have noticed that oil and gas stocks have underperformed in the Standard & Poor's 500 Index over the last decade. As renewable energy sources have become cheaper than fossil fuels in two-thirds of the world, clean energy stocks have performed well.[footnoteRef:2] Investment houses have thus been drawn to new wind and solar markets to boost returns. [2: BNEF. New Energy Outlook 2019, June 2019. Accessed via Bloomberg Network. ]

The COVID-19 crisis has further exposed the financial fragility of the oil industry: demand evaporated, prices collapsed and stocks slumped, leading to major write-offs in fossil fuel assets.[footnoteRef:3] Shell plans to write-off up to USD 22 billion and BP will write down up to USD 17.5 billion in assets due to a bleak post-pandemic market outlook. Having embraced wind, Ørsted has become the largest Nordic energy company. Oil executives have taken note. BP’s CEO, Bernard Looney, said that peak oil demand may already be behind us, while Shell’s CEO, Ben van Beurden, echoed this statement and emphasised that oil majors had an instrumental role to play in the energy transition. [3: BNEF. After the Price Shock: Oil Majors’ Low-Carbon Strategies, May 7, 2020. Accessed via the Bloomberg Network.]

Several European countries have adopted long-term, net-zero emissions targets, pushing the most polluting industries to decarbonise. The European Green Deal signals to the oil majors that a low carbon future is inevitable. Rising regulatory pressure and public calls for green recovery will weaken the resistance from fossil fuel incumbents post-COVID-19.[footnoteRef:4] [4: Carbon Tracker and IRENA Webinar. The Impact of Covid-19 on the energy transition: accelerator or retardant?, July 6, 2020. ]

How robust is the net-zero pledge of each oil major?

Table 1: Net-Zero Targets

Oil Major

2050

Absolute/Intensity

Scope 3

Third-Party Products

Eni

· 80% reduction in GHG emissions

Absolute

Yes

Yes

Shell

· 65% reduction in Carbon footprint

Intensity

Yes

Yes

BP

· Net-zero

Absolute

Yes

No

Repsol

· Net-zero

Absolute

Yes

No

Total

· Net-zero in Europe

· 60% reduction globally

Intensity

Yes

Yes

Equinor

· Near-zero in Norway

· 50% reduction globally

Intensity

Yes

Yes

Sources: BloombergNEF via Bloomberg Platform, CTI, TPI

Shell’s and Eni’s targets apply to their own operations and sales, including those from third parties. Thus, their targets cover the widest scope of their emissions, making them the most ambitious in the eyes of the Transition Pathway Initiative, an asset-owner run group that assesses the preparedness of companies to a clean energy future. Shell’s targets are intensity-focused, stating that it wants a 65% reduction in its intensity by 2050. Eni’s targets, on the other hand, pair intensity reductions with an ultimate goal of reducing its emissions by 80% by 2050, which make its net-zero strategy one of the most ambitious, according to Carbon Tracker.

BP and Repsol have adopted absolute targets, which aim to turn them into net-zero businesses by 2050. This represents a paradigm shift for these companies, especially for an oil major the size of BP. For these reasons, Bloomberg[footnoteRef:5] and Carbon Tracker have labelled BP and Repsol as the most ambitious of the oil majors. However, their targets do not cover sales from third parties, which significantly reduces the scope of these targets, covering only 51% of Repsol’s and 41% of BP’s energy sales. That being said, in light of BP’s reported USD 6.7 billion second quarter loss in 2020, it announced more ambitious net-zero pledges. Notably, it will cut its upstream emissions by up to 40% and reduce its carbon intensity by over 15% by 2030. All while massively stepping up its clean energy investments and renewable generating capacity. The oil major intends to invest USD 5 billion a year on clean energy from 2030 onwards. [5: BNEF. Is Big Oil Serious About Low Carbon?, June 9, 2020. Accessed via the Bloomberg Network.]

Total and Equinor have exhibited less ambition. Their respective targets differ depending on their geography. In Total’s case, it wants its European operations to be net-zero by 2050, but it only seeks a 60% intensity reduction in its global operations. Similarly, Equinor only targets a 50% intensity reduction of its global operations, while aspiring to “near-zero” emissions for its operations within Norway.[footnoteRef:6] [6: BNEF. Is Big Oil Serious About Low Carbon?, June 9, 2020. Accessed via the Bloomberg Network.]

Although each oil major has made moves in this space, current ambitions still fall short of what would be required to align with climate targets (see table 1). The fact that three of these oil majors have only set intensity reduction targets for their scope 3 emissions raises questions about how they will reach net-zero. Additionally, BP’s and Repsol’s targets do not adequately cover third party products leaving loopholes in their strategies. Finally, carbon offsetting remains a central component to net-zero targets, underscoring the continued importance of each oil major’s fossil fuel business. This is highlighted by their clean energy investments.

How much do oil majors invest in low-carbon energy?

Despite the commitments outlined above, oil majors have invested comparatively little in clean energy. Between 2010 and 2018, European oil majors directed less than 5% of their total investments to low-carbon sectors (Figure 2). In 2018, only an average of 1.84% of their revenue came from their zero-emission businesses.[footnoteRef:7] [7: MSCI Webinar. The Covid-19 Crisis and the Stranded Asset Decade, July 1, 2020.]

Of the majors, Total was the largest investor in clean energy technologies, devoting 4.3% of its capex to low-carbon technologies over this period. Most of that went into solar, including the notable acquisition of SunPower in 2011. Repsol was the second largest in solar, to which it allocated 0.8% of its overall investment. Equinor and BP were the biggest players in wind, with 1.73% and 0.8% of their respective investments going into that sector. Equinor has recently broadened its clean energy portfolio, through offshore wind projects like Dogger Bank in the UK’s North Sea.

Carbon capture and storage (CCS) is central to the plans of the oil majors. Over this period, Shell poured 26% of its low-carbon capex into CCS. In 2020, Equinor invested millions into the CCS company, Carbon Clean Solutions. Equinor, Shell, and BP have also been involved in Norway’s Northern Lights project.

There are reasons to be skeptical about CCS. Currently, 88% of captured CO2 is used for enhancing the oil production volumes instead of capturing emissions. CCS has also long proven difficult and expensive to scale, which has been compounded by today’s low oil prices. Despite the financial infeasibility of CCS, oil majors will pursue it as part of their net-zero goals to be able to maintain their traditional fossil fuel business.

European oil majors need to significantly step up their clean energy investments if they wish to succeed in meeting their decarbonisation targets. BloombergNEF calculated that an oil major would need to construct either 200-350 GW of wind or 500-1,000 GW of solar to replace 1 million barrels of oil equivalent a day.[footnoteRef:8] To put this into perspective, BP is currently targeting a renewable energy portfolio of 50 GW by 2030. Thus, the investment needed is at least an order of magnitude larger than what it currently is. [8: BNEF. Oil Majors’ CO2 Goals Signal Massive Clean Energy Growth. June 25, 2020. Accessed via the Bloomberg Network. ]

Figure 2: Low Carbon Investment as a Share of Total Capex, 2010-2018

Source: SP Global, Bloomberg Terminal (accessed on 26 June 2020), CDP

How can oil majors align with the Paris Agreement?

For oil majors’ plans to align with the Paris Agreement their investment decisions need to take carbon budgets into account. These budgets conceptually represent the limit of CO2 emissions to keep the earth’s warming within a certain temperature. The implication for oil majors curbing fossil fuel production volumes and scaling back investments in future assets.

The risk is that in the coming years European oil majors might devote too much capital to their fossil fuel business. Over 25% of each oil major’s potential investment into fossil fuel assets by 2025 could exceed their respective carbon budgets to keep the earth’s warming within 1.75ºC (Figure 3), Carbon Tracker estimates.[footnoteRef:9] Consequently, there is a possibility that each European oil major may invest in assets that would not only become stranded in the near future, thus putting themselves in a financially precarious position, but also undermine efforts to tackle climate change. [9: This figure is based on Carbon Tracker’s models using projected energy demand under the International Energy Agency’s Beyond 2 Degree Scenario. This scenario assumes the implementation of more ambitious climate goals. ]

Figure 3: Percentage of Potential Oil and Gas Capex that Falls Outside the Carbon Budget

Source: CTI and Rystad Energy, Bloomberg Terminal (accessed on 23 June 2020)

Appendices Appendix I: Oil Majors’ Net-Zero Targets

Net-Zero Announcements

Company

Ambition

Deadline

Announcement Date

Royal Dutch Shell

3% carbon footprint reduction

2022

17 Apr 2020

30% carbon footprint reduction (relative to 2016)

2035

Net-zero across all controlled operations (scope 1, 2)

2050

Promote sectoral decarbonisation across customers' industries

2050

65% reduction in carbon footprint of products sold to customers (to around 27.65 gCO2/MJ)* (scope 3)

2050

British Petroleum

Cut methane intensity of BP operations by 50%

2023

12 Feb 2020

35-40% emissions reduction of upstream operations

2030

40% reduction in production of upstream oil and gas

2030

30-35% emissions reduction from all operations

2030

15% emissions intensity reduction of products that BP sells

2030

50% emissions intensity reduction of third party products

2050

Net-zero across all operations and BP produced product sales

2050

Total

15% emissions intensity reduction

2030

5 May 2020

35% emissions intensity reduction

2040

60% emissions intensity reduction

2050

Europe (EU, Norway, UK): net-zero emissions for products sold to customers

2050

Europe: net-zero (scope 1, 2, 3)

2050

Global: 60% emissions intensity reduction of products sold (approx. 27.5 gCO2/MJ)

2050

Global: net-zero global operations (scope 1, 2)

2050

Equinor

16% emissions intensity reduction to 8kg CO2/BOE (from 9.5 in 2019) for upstream operations

2025

6 Feb 2020

Tenfold increase in renewable energy capacity

2026

Net-zero global operations (scope 1 and 2)

2030

Near zero methane emissions

2030

Norway: 40% absolute reduction in GHG emissions from offshore fields and onshore plants by 40%

2030

Norway: 70% absolute reduction in GHG emissions from offshore fields and onshore plants by 70%

2040

Norway: near zero GHG emissions from offshore fields and onshore plants

2050

50% emissions intensity reduction of energy production, including third-party operations

2050

Eni

Net-zero across upstream operations (scope 1, 2)

2030

28 Feb 2020

Net-zero across all operations (scope 1, 2)

2040

55% emissions intensity reduction of products Eni sells including those obtained from third parties

2050

80% absolute reduction in GHG emissions (scope 1, 2, 3)

2050

Repsol**

10% emissions intensity reduction of Repsol products, excluding third party sales

2025

2 December 2019

25% methane emissions reduction

2025

3 million tonnes reduction in absolute GHG emissions

2025

20% emissions intensity reduction

2030

40% emissions intensity reduction

2040

Net-zero emissions (scope 1, 2, 3)

2050

Sources: BloombergNEF via Bloomberg Platform, CTI, TPI

Notes

* Shell defines this as the weighted average of lifecycle CO2 intensities of different products that Shells sells. The calculation covers scope 1, 2, and 3 emissions.

** Repsol explicitly states that these targets only apply to its own production, which only accounts for 51% of its energy sales.

Appendix II: Key Components of a Decarbonisation Strategy

Component

Description

Net-zero Emissions Targets

Absolute and Intensity targets: there need to be both absolute reduction targets and intensity reduction targets. Intensity reduction targets help to spur on innovation in low-carbon technologies, whereas absolute targets set a limit to the amount of carbon that an oil major can emit, thus connecting an oil major’s operations to the carbon budget.

Scope: these targets need to apply to scope 1, 2 and 3 emissions.*

Investment Strategies

Fossil Fuel Investment: investments in future fossil assets need to be weighed against an oil major’s carbon budget. Investments that exceed the budget are likely to end up stranded in the future.

Clean Energy Investment: an oil major needs a clearly defined strategy for its clean energy investments, which would entail which technology the oil major seeks to prioritise and targets to measure the progress in its strategy. These targets could come in the form of a capacity target, a portfolio-share target, or the company could earmark a share of capital expenditure exclusively for low-carbon technologies each year.

Clear Disclosure

Emissions: oil majors should clearly disclose their respective scope 1, 2 and 3 emissions profiles.

Technology: linking into a clearly specified clean energy investment strategy, oil majors should clearly report how much investment is going into each low-carbon technology.

Sources: CTI, TPI, BloombergNEF via Bloomberg Platform

Notes

* Each scope is defined as follows:

· Scope 1: direct emissions associated with owned or controlled activities.

· Scope 2: indirect emissions associated with the company’s electricity generation to power its activities.

· Scope 3: indirect emissions that result from customers using the products produced by an oil and gas company.

Appendix III: List of Past and Planned Investments

Company

Investment

Shell

· USD 2-USD 3 billion in planned investment in clean energy over 2021-2025 through Shell New Energies

BP

· Increase investments into low carbon energy from USD 500 million to USD 5 billion a year by 2030.

· Boost renewable generating capacity from 2.5 GW in 2019 to 50 GW in 2030.

· USD 100 million 'Upstream Carbon Fund' that will aim to reduce GHG emissions from upstream oil and gas operations (exploration and production)

· Acquisition of 50% of UK solar developer, Lightsource BP Renewable Energy Investments, for an undisclosed sum

Total

· Currently allocated 10% of capex to low-carbon electricity. By 2030, it wants to increase this to 20%

· Will also focus on CCS

· Portfolio target:

· Low-carbon assets will account for 20% of the asset base, from 5% today (Green Biz, Reuters)

· Capacity additions: 25 GW of RE by 2025 from 3 GW today

· Acquisitions:

· SunPower Corp, a US solar power manufacturer, for an undisclosed amount

· DirectEnergie, a utility in Belgium and France, for USD 1.7 billion and 95.37% of shares

· Majority stake in the Seagreen offshore wind farm in Scotland that the utility, SSE Plc, is developing

Equinor

· Direct 25% of R&D budget into new energies

· 15-20% of total capex to be spent on energy transition by 2030

Eni

· 50% of R&D to low-carbon technologies

· Capacity goals

· 5 GW of RE by 2025

· 10 GW of RE by 2030

Repsol

· EUR 2.5 billion over 2018-2020 to invest in renewable energy and low-emissions technology

· Capacity goal: 4.5GW installed capacity by 2025

· 2020-2025: 25% of capex will go into low-carbon projects

Source: SP Global, Bloomberg Intelligence via Terminal, BloombergNEF via Bloomberg Platform