A case study on the trouble with greening oil and gas companies

Perhaps no nation illustrates the competing priorities around the energy transition more vividly than Norway. With an electric grid almost entirely powered by renewable sources, and the world’s highest penetration of electric vehicles, the country is a prime case study of the large-scale rollout of low-carbon energy.

But Norway’s economic miracle over the past century has been based to a very large extent on oil and gas — and national energy company Equinor wants to increase production further in the years ahead, while still vowing to reach net zero emissions by 2050. As I outline below, this highlights important questions around corporate climate plans across the energy sector, and beyond.

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Energy transition

Investors challenge Equinor’s climate rhetoric

It’s been six years since Statoil, Norway’s national oil and gas champion, changed its name to Equinor, reflecting its strategy to diversify into new forms of energy.

In 2020 it reaffirmed that message as it announced a pledge to achieve net zero emissions, in support of the Paris agreement goal of limiting global warming to 1.5C above pre-industrial levels.

But Equinor is still first and foremost an oil and gas company. This week, a small group of institutional investors has sought to highlight the tension between Equinor’s climate rhetoric and its intention to keep increasing its fossil fuel production.

The investors, led by UK-based Sarasin & Partners, have filed a resolution that will be voted on at Equinor’s annual shareholder meeting on May 14, asking the board to “update its strategy and capital expenditure plan” in light of its pledge to support the Paris goals. As part of this update, they add, the company should “specify how any plans for new oil and gas reserve development are consistent with the Paris agreement goals”.

Equinor’s oil and gas business accounted for roughly 80 per cent of its capital expenditure last year, and it aims to increase fossil fuel production more than 5 per cent by 2026. In February, the company outlined to investors its plans for ambitious new offshore oil projects from Shetland to Newfoundland to Brazil.

The resolution and the board’s response to it — both made public on Monday — highlight some of the toughest questions around the energy transition for companies across the oil and gas sector, and beyond it.

“This is a bit of a litmus test,” said Natasha Landell-Mills, head of stewardship at Sarasin.

One burning issue is about what exactly it means for a company — and in particular, an oil and gas company — to say that its strategy is aligned with the goals of the Paris agreement. There is, to put it mildly, no universally accepted definition here.

For an indication of just how tricky it is to come up with one, look to the Science Based Targets initiative, the most influential standard setter for voluntary corporate climate targets (despite recent controversy around its approach to carbon offsets). Back in 2020, the SBTi launched a public consultation on standards for climate targets in the oil and gas sector. Four years on, those standards are still a work in progress.

So investors like Sarasin have turned to recent reports published by the International Energy Agency, which map out a global “pathway” to net zero emissions from the energy sector by 2050. That objective wasn’t explicitly stated in the Paris agreement, but the IEA says its scenario translates the Paris temperature goal into “practical milestones” for the energy sector.

Equinor, however, has not purported to be aligned with the IEA’s net zero pathway. Under the forecasts in its corporate transition plan, its emissions decline much more slowly over the next decade than the oil and gas sector’s trajectory under the IEA scenario — but then accelerate towards net zero as 2050 approaches. (Of course, if the whole industry backloaded emission cuts like this, cumulative energy emissions over the next two decades would be much higher than under the IEA scenario — even if everyone then somehow managed to hit net zero by 2050.)

In its latest annual report, Equinor stated the long-term oil price assumptions that it was using in its strategic planning. Equinor’s management expects the Brent crude price to decline gently from today’s level of $87 per barrel to $68 in 2050. The 2050 price under the IEA’s net zero pathway, which assumes a dramatic decline in oil demand, is just $28.

The IEA also outlines a less ambitious scenario in which governments achieve all the firm climate pledges made to date, without going any further. In this “announced pledges scenario”, the 2050 crude oil price is $65, below Equinor’s assumed level.

Looked at through this lens, Equinor’s strategy looks like a bet that not only will governments fail to achieve the Paris goals (as interpreted by the IEA), but they won’t even manage to keep the national pledges they’ve already made.

This is not, of course, how Equinor presents it. In its response to the shareholder resolution on Monday, it reaffirmed its commitment to achieving net zero emissions by 2050 in support of the Paris accord. It noted that it has moved further and faster than many rivals in tackling its operational carbon emissions, which have fallen 30 per cent since 2015. While renewables and low-carbon energy received only a fifth of its capital investment last year, they’ll account for more than half of it by 2030, Equinor reiterated.

All this means, Equinor argues, that it is already moving “at a faster pace than society” — and further progress is “dependent on governments, customers and other key stakeholders accelerating their response to the transition”.

Sarasin and its co-filers assert that Equinor must move more quickly away from oil and gas, to protect shareholder value in the face of an accelerating energy transition. An interesting recent study by the Australasian Centre for Corporate Responsibility finds that Equinor’s new international oil projects look financially imprudent, even leaving aside its climate pledges.

But Equinor’s board has a point on the need for serious government action to drive change in the energy sector. That’s especially true for Equinor, where the Norwegian government holds 67 per cent of the shares. Through the broader policies it pursues, as a prominent, prosperous oil producer, this small country could play a disproportionately influential role in the global energy transition.

“Norway has an opportunity to pivot and show how it can be done,” Landell-Mills said. “If Norway can’t do it, who can?”

Smart read

Developing nation governments have criticised rich-world counterparts for advocating free trade while pursuing protectionist policies, often under a green banner. They have a point, writes Rana Foroohar.