Transparency is needed to burst the carbon bubble

The world’s largest Oil and Gas companies must reduce their production by 35% by 2040 if international climate targets are to be met. But with major players reluctant to budge quickly, it’s likely to be a case of ‘who-blinks-first’ before significant change is seen. Investor pressure has so far led to a spread of misinformation between the industry and the public. Enforcing transparency and progress towards climate goals is likely to require legal action to be initiated by policy makers.

Using a project level methodology, thinktank Carbon Tracker, released the “Balancing the Budget” report last Friday, analyzing the “carbon bubble” and how both shareholder value and climate targets depends on large companies such as ExxonMobil and Shell to aim for vastly improved climate targets than those currently on offer.

The report highlights that, at current rates, a carbon bubble remains, where global reserves of fossil fuels exceed the volume which can be acceptably burned to stay inside limits specified under the Paris Agreement.

Carrying on with business-as-usual would result in one of two outcomes: Either climate targets are not met, and global warming continues to rise to unprecedented levels; or fossil-fuel assets will be left stranded, destroying shareholder value at the associated company. At the same time as soon as oil assets are no extracted, the share price fall is already guaranteed.

While acknowledging that emission reductions are inevitable to a certain extent, Carbon Tracker’s research indicates that currently none of the seven companies investigated may currently be considered “Paris compliant.” It is common that these companies often only consider scope 1-2 emissions (excluding scope 3), which only accounts for around 15% of lifecycle emissions for fossil fuels. Other targets are also based on emission intensity, rather than absolute levels, and only cover operated assets.

Shell is apparently the most compliant with Carbon Tracker’s proposed framework for reduction, but targets across the industry all fall short of what may be considered acceptable. With plans to exploit the remaining proved reserves “Companies cannot be Paris compliant if they sanction assets that take the world past Paris limits” the report states.

ExxonMobil and ConocoPhillips were among the worst performers noted, with the former only targeting a 10% reduction in production levels between 2016 and 2023. It is estimated that ExxonMobil will need to reduce emissions by over 55% by 2040 to stay within carbon budgets for the IEA’s Beyond 2 Degrees Scenario (B2DS).

This reduction may also be considered as an average 40% decrease in current emissions across the 6 companies: Shell, ExxonMobil, BP, Chevron, Total, Eni and Conoco Phillips.

While highlighting the performance of these companies provides good exposure and will add some additional investor pressure to decrease emissions, oil and gas companies will want to capitalize on fossil-fuel reserves which they can easily access, to turn a greater profit for investors. As many are in direct competition with each other, none are likely to want to take the first dramatic step in ‘going green’, with little chance of any sanctions if they maintain their current position.

But with investor pressure mounting, appearing green is becoming more and more of a priority. This has been demonstrated by ExxonMobil’s recent dealings with the US supreme court, for misleading investors by obscuring costs the company will incur as a result of government emission regulations.

Reports have also been released suggesting that ExxonMobil has “deliberately misled Americans about climate change”. Which follows years of investor pressure to prioritize climate change in business decisions.

This is just the second time in the history of the US court, that a company has faced trial over a climate-related issue, but the ExxonMobil case may provide a direction for the US government to influence the industry.

As ambitious movement on climate change has so far been limited, the transition of these companies to renewables will inevitably follow the route via natural gas, with carbon capture, and any other excuse possible to keep fossil fuel dreams alive. It is likely that these court cases may provide a catalyst in forcing greater transparency on these firms, and that in turn will provide the public with less misinformation on fossil-fuels.

Reducing current production levels will have to occur alongside the rapid phasing out of existing production facilities, rather than exploiting all possible reserves. Replacing existing fossil-fuel sites with renewable technology will minimize the losses from stranded assets as well as reducing carbon emissions. By using the same locations for renewables, and often these locations already have appropriate infrastructure, project costs can also be reduced. It is likely that a funding or policy mechanism will be required from governments to facilitate the redevelopment of existing fossil fuel facilities, with specified conditions to ensure that large corporations reinvest funding in renewable technology.

Below is a graph from the Climate Tracker report indicating the necessary production reductions for the seven companies investigated.