The strong and growing pressure on oil and gas companies to dramatically reconfigure their core businesses to accept a lower-carbon agenda could soon lead to irreversible changes in the energy commodity markets.
Investors and policymakers worldwide are rapidly increasing their focus on environmental, social and governance, or ESG, factors. Oil and gas companies risk losing billions of dollars in investor capital if they do not adapt.
The stakes are high, especially in the U.S., because any cuts in investor capital could materially impact the supply of oil and gas.
The European Commission passed a law aiming for net-zero emissions across the region by 2050, and shareholders of many European companies have approved legally binding resolutions demanding decarbonization.
‘If you build it, they will come’
European integrated oil majors have led the charge, acknowledging the inevitability of the transition, as well as the scale of the challenge, as they face the possibility that petroleum demand could peak in the next decade. However, the majors are all moving at different paces in their efforts to reduce their carbon footprints.
“A lot of European companies had already begun to take steps to elevate ESG investor concerns into their own investment portfolios. And … I think a lot of that is reflective of where those companies’ assets are,” said Ken Medlock, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy. “Government policy and policy intent is a major influencer.”
Royal Dutch Shell PLC, BP PLC, Eni SpA, Repsol SA, Equinor ASA and TOTAL SE are working to diversify and decarbonize their portfolios by turning to natural gas, electricity and renewables to meet self-imposed emissions reduction goals.
“Repsol and some other EU majors deserve high praise for setting goals, but when you look at them, there is a little bit of, ‘If you build it, they will come.’ You set an ambitious goal and figure out how to get there,” Margaret Peloso, an environmental-focused partner at law firm Vinson & Elkins, said during a July 9 webinar hosted by S&P Global Ratings.
“If your strategy involves investing a lot of money into lower-margin, lower-carbon segments and you think it will be supported by income coming in from more conventional activities, this pricing environment blows that thesis out of the water,” she said.
The European Commission in December 2019 laid out its European Green Deal, an economy-wide strategy to reach net-zero emissions by 2050. Net-zero emissions means that all carbon would have to either be…