Production cuts stranded assets? The dilemma facing oil majors under net zero targets

In late May, oil giant ExxonMobil underwent a board reshuffle in which Engine No. One, a minority activist shareholder, won three seats on the board. Exxonmobil, one of the world's larger oil companies, has been criticized for being slow to move to net zero. The board shake-up, led by activist investors, is a new chapter in its transition to a low-carbon future.

In Europe, big oil companies are taking a more aggressive approach to their low-green transformation. In 2019, Spain's Repsol became the oil gas company to commit to net zero carbon emissions by 2050, using the Paris agreement commitments as its roadmap. Bp quickly followed suit, announcing in February 2020 specific measures to reduce methane emissions in the short term. In its net-zero 2050 plan, announced in 2021, Shell outlined plans to further reduce oil production through aggressive development of sustainable energy carbon capture. Total also unveiled plans to generate 25 gigawatts of electricity renewable sources by 2025.

However, oil gas majors need to prepare for a "significant decline in production" in 2030 if they want to stay in line with the Paris targets, according to a new report by financial think tank Carbon Tracker. Under the net zero target, oil companies would need to cut production by 50 percent more by 2030, according to Carbon Tracker.

Production cuts stranded assets

Carbon Tracker, a financial think-tank, said that, for now, the world's larger listed oil gas companies "cannot be seen as aligned with global climate targets". To reverse that, they need to prepare for a sharp decline in production, with half facing cuts of 50 percent more by 2030.

The report says oil gas majors are still spending billions of dollars on oil gas production new projects. However, these investments are inconsistent with the 1.5C scenario outlined in the Paris Agreement. In addition, the report's authors say that even big oil companies with net zero emissions commitments are investing in new production. So they risk the future of these programs.

"Oil gas companies are betting that global efforts to tackle climate change will succeed," said Mike Coffin, director of Carbon Tracker oil, gas Mining one of the report's authors.

"If they continue to invest as usual, they could waste over $1 trillion on projects that are competitive in a low-carbon world," Mr Coffin says. If the world is to avoid climate catastrophe, demand for fossil fuels must fall sharply. "Companies investors must prepare for a long-term world of lower fossil fuel prices a smaller oil gas industry, recognise the resulting risk of stranded assets."

In May, the INTERNATIONAL Energy Agency called for a moratorium on all new oil gas exploration by the end of this year if the world is to succeed in its energy transition. But it was long before the agency called on Opec to pump more oil as demand rebounded strongly prices soared.

According to most projections, this is only temporary, with an inevitable long-term decline in oil demand as the world shifts to a low-carbon energy system.

So, according to Carbon Tracker, the oil industry needs to choose between running the risk of stranding a lot of its assets, voluntarily reducing production to avoid that risk.

The shale industry is in jeopardy

According to Carbon Tracker, in order to meet climate targets, 20 of the world's 40 largest publicly traded oil gas companies will need to reduce production by at least 50 per cent by the 2030s as existing projects run out without "alternatives". Most of the big shale companies will see their production decline by more than 80%.

Us oil giant Conocophillips was one of the riskier companies, with production down 69%. Chevron followed, down 52 percent. They were followed by Eni (49%), Shell (44%), BP (33%), ExxonMobil (33%) Total (30%).

Indeed, BP announced plans last year to cut oil gas production by 40 per cent by 2030, eni, TotalEnergies shell have also pledged to reduce their output in the coming years.

Axel Dalman, associate analyst at Carbon Tracker co-author of the report, said: "Overall, the lack of new projects rapid production declines are less likely to have a serious impact on company valuations. Lower valuations, in turn, increase the cost of capital the risk of bankruptcy. "It is critical for the company to return capital to shareholders with a strong transformation plan, an orderly reduction of oil gas activities diversification into low-carbon businesses."

Moreover, the report says: "The current situation is particularly dangerous." OPEC continues to keep a tight grip on supply as the global economy recovers COVID-19, with oil prices currently around $70 a barrel "very attractive compared to last year". It warned that this could encourage oil companies to approve new projects in the hope of capitalising on the new commodities "supercycle".

Shell, TotalEnergies, Eni Equinor have all secured new exploration licences in border areas such as suriname Norway's Barents sea, despite their high costs. BP plans to develop new "edge" assets. "The commitment of these initiatives to the energy transformation of these companies is in question," the report said.

The report analysed the conventional project portfolios of 60 of the world's larger listed oil gas companies to assess their ability to adapt in a low-carbon world. Even on the slower decarbonisation path that would limit global warming to 1.65°C, most companies would see more than half of their project portfolios at risk of being stranded, the report found.

More than $1 trillion of conventional investments are at risk, $480 billion in shale/tight oil projects, followed by $240 billion in deepwater projects. Us shale giant Conocophillips is the riskier oil major, with 88% of its conventional portfolio potentially uncompetitive, followed by ExxonMobil with 80%; Chevron is 60%; Shell 53%; BP 40%; Total 39%.

According to the report, 80% of shale/tight oil, 60% of Arctic drilling 50% of deepwater projects will be uncompetitive on the 1.65°C path. Few oil sands projects are economic.

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Source: China Energy Net