Major trend emerges for net-zero targets
Several oil and gas companies including BP and Equinor have adopted long-term net-zero emissions targets and it seems inevitable that more will follow
Global major BP and US-based independent Dominion Energy announced in February they have joined the ranks of energy companies adopting a long-term net-zero emissions target. The differing scope and size of these two players illustrates the breadth of a trend that has started to become established in the sector over the past few months.
A net-zero target is particularly challenging for energy producers and for BP it will require a dramatic overhaul of its operations. But decarbonisation is increasingly being prioritised by businesses and governments, and more energy firms are very likely to follow suit. The two latest announcements may well accelerate the pace of net-zero goals being adopted by others in the industry.
Other companies to have announced net-zero, or near net-zero, goals include Spain’s Repsol, Norway’s Equinor, Sweden’s Lundin Petroleum and London-listed Energean Oil & Gas. All have set their target for 2050 apart from Lundin, which is outdoing them all by aiming for carbon neutrality by 2030.
Dominion’s participation shows that the trend is not limited to European E&P firms—the Virginia-based company operates in 18 US states and provides midstream natural gas services as well as electricity generation, transmission and distribution.
The slew of announcements illustrates how the goalposts are shifting for energy companies. Many firms were already targeting various levels of reductions in their greenhouse gas (GHG) emissions. Setting net-zero targets is a new development that will require more drastic steps to be taken. For the E&P and integrated companies, adopting net-zero goals will mean broadening their focus.
BP’s and Repsol’s announcements go furthest by including emissions from the consumption of the products they sell, known as scope 3 emissions. These can be around six times larger in volume than Scope 1 and 2 emissions—those stemming directly from the companies’ own operations and indirectly from the generation of purchased power respectively—combined. BP says emissions from its global operations are currently around 55mn t/yr of CO2 equivalent, while it estimates that its Scope 3 emissions are c.360mn t/yr of CO2 equivalent.
The slew of announcements illustrates how the goalposts are shifting for energy companies
Measurement and judging adherence to targets is complicated by variations in how companies classify emissions. BP’s definition of scope 3 is “akin to the ‘use of products’ category under the GHG Protocol framework (Category 11)”, investment bank Credit Suisse says in a research note.
“While this is not fully comparable to a definition of scope 3 incorporating all 15 sub-categories specified by the [World Bank created] GHG Protocol, we note that for other companies category 11 is a significant proportion. For example, 86pc of Shell’s 2018 scope 3 emissions were from ‘use of products’,” it adds.
As well as BP targeting net-zero scope 3 emissions from the oil and gas it produces itself, the major is aiming to cut the carbon intensity of the products it markets (but not sourced from its own upstream operations) by 50pc by 2050. This puts BP ahead of Shell’s goal to reduce scope 3 emissions by 50pc by 2050, but short of Repsol’s target of becoming fully net zero by that year, according to Credit Suisse.
Equinor’s ambitions of cutting emissions to “near zero” by 2050 only include scope 1 and 2 emissions. However, the company subsequently published a climate roadmap in February, which contains a goal to reduce net carbon intensity by at least 50pc by 2050, including scope 1, 2 and 3 emissions.
BP acknowledges that its announcement is sparse on detail. It says many aspects are yet to be worked out and it will provide more information in September, which will at least cover its short-term strategy. This will then evolve over the coming years.
The UK-listed company has disclosed that it will “fundamentally reorganise” in order to achieve its goal, which will involve dismantling the company’s largely autonomous upstream and downstream business segments. Instead, four divisions will be set up: production and operations; customers and products; gas and low-carbon energy; and innovation and engineering. This is aimed at reconfiguring BP’s main areas of focus, as well as making sure that certain segments of the company will not compete with each other for capital.
“For me, it is quite significant that the big ‘announcement within the big announcement’ was a structural one,” says David Elmes, professor of practice at Warwick University’s Business School and head of its global energy research network. He describes the company’s planned transformation as “a step down the path of changing things” but warns that the company’s destination structure is yet to emerge.
Measurement and judging adherence to targets is complicated by variations in how companies classify emissions
The company also acknowledges that there will be unforeseen problems to be worked out along the way, including things as fundamental as the nature of its four new business groupings.
“Over time, the relative size and significance of those groups will change,” says a BP spokesperson. This expectation is based on innovations entering the market, the company’s low-carbon business growing, customer interests changing and perhaps the operations business shrinking as BP produces less oil and gas. Indeed, BP’s CEO, Bernard Looney, said in a recent speech that while he considered it very likely that the company would still be producing and refining hydrocarbons in 2050, he expected less oil and gas output by that point.
Investment bank RBC Capital Markets says this assumption means BP will need to answer questions on its expected oil and gas mix over time, the absolute level of production that will be targeted and the role of exploration in a Paris Agreement-compliant business.
A further unknown is the level of investment that will be funnelled into various groups within BP’s restructured business. The company is hesitant to commit to specific levels of investment, saying it has learned lessons from the alternative energy business it launched in 2005 and spent $8bn on over the subsequent 10 years. “The large businesses that still exist out of that are our wind business and our biofuels business, but they are worth about $3bn together,” a BP spokesperson says. The company wants to assess low-carbon investments opportunities more carefully before committing to them.
But BP is not alone in saying that pursuing net-zero ambitions will require a major overhaul of the way it operates.
Spanish independent Repsol also understands the magnitude of the task it faces. The company is yet to describe its strategy in detail—but expects to do so in the first half of 2020. For now, Repsol sets out a two-fold approach—keep running traditional businesses in a more efficient and sustainable way, while simultaneously building a position in a new low-carbon business.
“For Repsol, the main challenge will be to adapt the whole company to this new scenario. We have to redefine our business,” says a spokesperson for the firm.
Some of its plans include ramping up biofuel production, integrating renewables into its refining operations and raising its target for low-carbon electricity generation from renewable sources to 7,500MW by 2025.
Dominion will be taking a similar path to Repsol on the way to net zero. The US company’s strategy for its electricity business involves continuing to reduce its reliance on coal, including by shutting higher-emitting power plants.
Dominion has also spelled out a two-pronged strategy for reaching its net-zero goal. In the short term, it is adding more solar and wind capacity to its portfolio, and it is working to build a grid that accepts renewables without compromising reliability. For the longer term, the company is investing in emerging technologies such as battery storage.
There is consensus that net zero cannot be reached with current technology alone, so all companies making this commitment are seeking to innovate
There is consensus that net zero cannot be reached with current technology alone, so all companies making this commitment are seeking to innovate. Their focuses may diverge over time. Repsol believes carbon capture and storage (CCS) will play an important role, especially in energy-intensive industry applications.
BP agrees, but notes that technological advances need to be balanced with economics. It says work needs to be done to make CCS economically viable so it also advocates carbon pricing. It also anticipates technology-driven innovations for how energy is consumed, managed and distributed.
Joining the club
The push to set net-zero targets is already gaining momentum, and more energy companies will follow in the footsteps of the early adopters.
“Many peers have set out short-term targets that could develop to net-zero scope 1+2 emissions in the long term,” says Credit Suisse, noting Total’s 15pc reduction target for 2025 and Eni’s aim of net-zero scope 1 emissions by 2030.
Indeed, for the companies that have adopted net-zero targets it is often the final step in a decarbonisation effort that had already been underway. For example, Dominion has reduced carbon emissions from its electric fleet by over 50pc since 2005, and methane emissions from its natural gas infrastructure by 25pc since 2010.
However, this bigger step may put pressure on other companies to step up rather than making limited attempts than have been dismissed as greenwashing. “When the discussion moved from 80pc to net zero, the whole idea of just carrying on by being a bit better disappeared,” says Warwick Business School’s Elmes.
3pc - BP’s share of capex spent on low-carbon businesses
RBC says BP’s aim to stop “corporate reputation advertising” is a meaningful step that should be welcomed by all.
Elmes says BP’s low-carbon investments will be measured in the context of how much the firm spends overall, and this can also be applied to other energy companies. BP was previously spending around 3pc of its annual capex on low-carbon businesses, or $0.5bn out of $15-17bn, according to Credit Suisse. This put it behind some of its peers, which are already directing 8-20pc of their capex towards low-carbon ventures.
BP’s next capex announcements will be closely watched. The company acknowledges the desire for more information on how it will proceed, but says it is important to have set out a clear destination before figuring out how to reach it.
Investors will be concerned about over how energy companies will balance profitability with net-zero aims, however. Elmes warns that BP will have to proceed carefully with its transformation in order to maintain enough profitability to keep shareholders happy.
Dominion, meanwhile, says it recognises that there is a cost involved in decarbonising, but believes this cost to be outweighed by the “extraordinary benefits” for its customers of a smaller carbon footprint.
Repsol is taking a €4.8bn ($5.1bn) impairment charge after adjusting the value of its assets based on pricing in line with the Paris Agreement’s climate goals, but this has not deterred it. It does not see the net-zero commitment in terms of minimising costs, but rather in terms of taking advantage of an opportunity. It believes companies should be making “a strong commitment to sustainability that goes beyond financial results”. The coming months will reveal which other energy companies agree.