Companies evolving positions on the energy transition

We first undertook this analysis of the oil and gas majors relative to the energy transition using financial reporting for 2018. At that time, there was less of a global consensus on how to tackle climate change. Many countries did not have clear commitments or strategies in place. Companies took different approaches depending on their home jurisdiction and their own activities and spanned the gamut of fully embracing the Paris climate agenda to asserting the need for oil and gas companies to continue on as they were.

Five years have passed and much has changed. The goal in terms of climate change has largely coalesced around reaching a net zero condition on GHG emissions by 2050. The UAE will host COP28 in November 2023, at which time the world will take stock as to where things stand in creating a lower carbon future. Although the COVID-19 pandemic demonstrated the extent to which limiting daily economic activity could reduce carbon emissions, the war in Ukraine reminded the world just how necessary oil and natural gas is to the global economy and reinforced the need for energy security, access and affordability as it transitioned to a lower carbon future.

In reviewing company reports and websites in the first half of 2023, while it is clear that the companies have embraced, to an extent, the energy transition as part of their corporate identity, at the same time there has been some retrenching and communications from some European oil and gas companies around slowing down the drive to transition partly as a result of profitability versus peers. This now seems to be reversing as profits realised from high commodity prices due to the war in Ukraine recede. In the table below, we have compiled the companies’ own statements about their strategy, mission and purpose.

Figure 2-1: Company statements on their mission and purpose

Sources: Capital Economics, company reports and websites

It is worth stating that these 15 companies do not just extract fossil fuels from beneath the earth’s surface. To varying degrees they also consume energy, produce industrial and retail products, and participate in the energy transition both within and outside their commercial activities. These are large corporations generating a significant level of revenue for either shareholders or their countries. As a result, they face a variety of factors related to the energy transition, many outside their control, to which they must respond and adapt.

First, their “home” jurisdiction will have a policy related to climate change. However, that policy could be very well articulated – as in the case of the EU – or it may still be in the formation stages – as in the case of the US and China, for example. Thus, the regulatory environment and incentives are subject to change in ways in which they might not yet expect.

Second, the business of some companies may be more exposed to global developments which align with or contradict what their home country is doing. Thus, depending on their asset base, companies may be caught between contradictory expectations as the energy transition evolves.

Third, their core activities may bring them into contact with countries whose development goals are not in sync with either global or national views on climate change. Yet, these companies still need to produce oil and natural gas and are under some pressure to do so depending on where they are operating.

Finally, companies have different ownership structures which are adapting and responding to the three conditions noted above. A company with a single national stakeholder or certain private equity investors will be faced with different accountabilities when compared with companies that are held by institutional investors or some other type of agenda.

Given this complex web of interactions that companies are trying to navigate, we can identify three distinct trajectories along which the companies are evolving. Each of these routes is simply a different way to get to the same place, rather than a progression that each one needs traverse in order to reach that endpoint.

The three trajectories are:

“Diverse portfolio” companies have intentionally expanded, and continue to expand, their asset base to include cleaner power generation activities that are utilised beyond powering their own operations.

“National champions” are companies which are key players in promoting their own country’s broader ESG agenda. Government policy is a fundamental driver of their strategy and investment choices. We note that ADNOC and Saudi Aramco are both more global facing than the others in this group given that their resources far exceed the demand for fuel in their own home markets.

“Core focus” companies are those which are concentrating on displacing their current portfolio of products with the low carbon and clean energy solutions which their customers will need in a net zero future. It is not surprising that these three companies are domiciled in the US, where (despite the Inflation Reduction Act) a national climate strategy is not wholly formed. These companies have been subject to competing shareholder pressures to, on one hand, align with global climate ambitions and, on the other hand, to generate profits for their shareholders through their core fossil fuel activities.

In the coming sections of this report, we will refer to these trajectories as a way to compare how companies are allocating capital and prioritising their energy transition activities.

The table below sets out the company targets, as per their own sustainability reports, annual reports, strategic plans and websites.  

Figure 2-2: Company targets for GHG emissions

When we last undertook this analysis of the companies’ activities, ten of the companies had a net zero emissions ambition. Currently, 13 have made that pledge, with ADNOC and Pemex progressing a lower carbon future on a different timeline. In those cases, ADNOC has published a Sustainability Strategy to 2030 on its website, and states it supports the UAE’s net zero by 2050 commitment. In terms of Pemex, the Mexican government agreed a national net zero target by 2050 in a meeting with U.S. Special Presidential Envoy John Kerry during COP27 in November 2022. The country’s pledge occurred a few months after the country had revised its General Law of Climate Change in August 2022 which stated the country planned to generate at least 35% of power with clean technologies by 2024 and reduce emissions by 50% by 2050, compared to 2000. Pemex’s Strategic Plan for 2023-2027 sets out carbon intensity targets for its operations through 2027 and these will likely be the foundation of the longer-term targets of the company that are developed as the country solidifies its net zero pathway.

Despite the differing trajectories of the companies, there is now much more similarity in the GHG targets to which the companies are now committed. All have some target for either carbon intensity or at least Scope 1 and 2 emissions. Most are working on Scope 3 emissions and with their other business partners to decarbonise their value chains.

Again, regardless of any company’s particular trajectory in the energy transition, company reporting is also becoming more standardised in terms of the way ESG is treated. The UN’s Sustainable Development Goals now feature prominently in many companies’ reports. Several European companies – Eni, Equinor, Repsol and TotalEnergies – produce an integrated financial and sustainability report, which is reflective of their “diverse portfolio strategy” towards their activities. These companies are also quite far along in terms of integrating the SDGs into their company strategies and operations as well.

ADNOC, ConocoPhillips and ExxonMobil did not adopt the style of ESG reporting of their peers in their 2022 public documents. That said, all three do comment on their own ESG activities, just not along the lines of the standardised format seen in the other companies.