The Fuse

Major Oil Companies Need To Wind Down Oil Production or Face Stranded Asset Risk

by Nick Cunningham | September 13, 2021

New oil and gas projects are incompatible with a future in which the world stays on track with its climate targets. Needless to say, that has enormous implications for the oil and gas industry.

A new report quantifies what that would mean for individual companies. While the impact varies, the oil majors would all see dramatic reductions in their production in the coming years as existing output erodes. However, as of now, those companies largely have no plans to keep growth in check, which means they are betting against climate success.

“Adapt to Survive”

Global climate targets strive to keep warming below 1.5 degrees Celsius (or “well below 2 degrees” as framed in the Paris Climate agreement). A slew of studies has detailed the degree to which future oil and gas production growth is incompatible with that trajectory.

For several years, the United Nations Production Gap report has tried to quantify this, concluding that global fossil fuel production needs to wind down at a rate of around 6 percent per year between 2020 and 2030 to keep the 1.5-degree target on track.

The International Energy Agency published its “net-zero” by 2050 report earlier this year, where it emphatically stated that no new oil and gas projects are needed, and the agency called for a phaseout.

A more recent study finds that the vast majority of existing fossil fuel reserves need to be left in the ground – 90 percent of coal reserves, and 60 percent of oil and gas reserves. Those conclusions obviously depend on the starting assumptions for what counts as reserves, but overall, the takeaway is pretty clear.

All of those studies look at the same problem in slightly different ways. But yet another recent report fine tunes this concept at the company level.

Carbon Tracker published a lengthy report entitled “Adapt to Survive,” detailing the risks that individual oil companies face. Either they phase out their production to keep the world on track, or they continue to grow production, risking both global climate targets and increasing their own stranded asset risk.

“For virtually all of the world’s 40 largest listed companies, no further project sanctions results in rapidly declining production; for half of these companies, output from sanctioned assets falls at least 50% by the 2030s compared to today’s levels,” the report stated.

Production declines

Under a least-cost concept in which the cheapest forms of oil and gas production survive longer as the world transitions away from fossil fuels, and high-cost output steadily goes offline, Saudi Aramco is a clear winner. In fact, Aramco’s production survives into the 2030s mostly unscathed, and the company could even grow its output, according to Carbon Tracker.

But others are not so lucky. U.S. shale companies see over 80 percent of their production go offline. Devon Energy, Marathon Oil, Diamondback Energy, Continental Resources, and Pioneer Natural Resources are hardest hit. Deepwater “specialists,” such as Petrobras also lose out, as do oil sands companies Suncor Energy and Imperial Oil.

The oil majors are not spared. In a scenario in which no new oil and gas projects go forward – again, a scenario aligned with the science –ConocoPhillips stands out as the integrated oil major with most of its production at risk. Roughly 69 percent of Conoco’s output would decline. That is followed by Chevron (52 percent of production would decline), Eni (49 percent), Shell (44 percent), BP (33 percent) ExxonMobil (33 percent) and TotalEnergies (30 percent).

A majority of the companies analyzed would see at least half of their “business-as-usual investments on currently unsanctioned assets at risk of stranding” in a low-carbon scenario.

This is not just a commentary on the necessity to hit emissions reductions goals. Carbon Tracker says the oil companies’ “transition risk aligns with their climate ambitions,” a succinct way of describing the fact increasing exploration, capex, and production is not only unaligned with climate targets, but also a financial risk.

“There is a strong correlation between the quality of companies’ emissions goals – e.g. whether they cover scope 3 emissions and have interim targets – and their portfolio risk,” Carbon Tracker said. Scope 3 refers to the emissions from end users when they burn oil and gas, which is increasingly of pollution

That echoes the campaign by Engine No. 1 to displace board members at ExxonMobil, and the shareholder votes at Chevron to require some Scope 3 emissions targets earlier this year.

The problem is, of course, oil companies have no plans on winding down their operations. They are actively betting that the world blows past climate goals. Carbon Tracker finds that some companies are on track to greenlight projects that are even inconsistent in a 2.7-degree warming scenario, including Woodside’s Pluto LNG train 2 in Western Australia, for instance.

Projects unaligned even with those much higher temperatures scenarios face “more severe stranding risks.”

Even more glaringly, while some existing or planned projects lie outside of the climate window, the oil and gas industry continues exploration activities in an effort to score new discoveries. “This goes against any notion of the need for a managed wind-down of production and reduced exposure” to oil and gas that are at risk during the energy transition, Carbon Tracker said.

A growing number of oil and gas companies have pledged to seek net-zero emissions by mid-century and many more offer support for the Paris Climate agreement. But company actions fly in the face of those commitments. Carbon Tracker concluded: “If companies are serious about aligning with the Paris goals and reaching net zero globally by mid-century, they need to be prepared for a rapid wind-down of their traditional business segments.”