By Dana Drugmand
As oil and gas companies continue to expand petroleum production despite increasingly dire climate warnings, new research shows these companies must slash output by more than a third over the next 20 years if the world is to meet its target to limit global warming under the Paris Agreement.
The new report by Carbon Tracker, a financial think tank that analyzes the impact on capital markets of transitioning to clean energy, shows that none of the oil and gas majors’ business plans are currently aligned with the Paris Agreement. Failure to rein in carbon-intensive production risks stranded assets and shareholder losses, according to the report.
The research, called “Balancing the Budget: Why deflating the carbon bubble requires oil & gas companies to shrink,” finds that major oil and gas companies must cut production by a combined 35 percent by 2040 to maintain emissions within international climate targets and protect shareholder value. The analysis breaks down the global carbon budget—the amount of carbon that can be burned under defined targets to limit warming—by individual companies to determine how much certain companies must cut production.
Individual companies’ carbon budgets vary depending on the diversity of their portfolios. According to the analysis, ConocoPhillips must make the biggest production cuts (85 percent), followed by ExxonMobil (55 percent). Chevron and Total both face production cuts of 35 percent, with cuts required by BP at 25 percent. Shell was found to have the closest thing to a Paris-aligned portfolio but would still require a 10 percent production decline.
Should these majors refuse to reduce their oil and gas production, particularly the highest-carbon projects, Carbon Tracker warns they will effectively steer the world off the climate cliff, as total carbon in proved reserves exceeds current carbon budgets. Warming could exceed 1.5 degrees C in 13 years and exceed 1.75 degrees C in 24 years at current emissions rates and production levels. Under the 2015 Paris Agreement, 185 nations agreed to limit global temperature increase to well below 2 degrees C.
“If companies and governments attempt to develop all their oil and gas reserves, either the world will miss its climate targets or assets will become ‘stranded’ in the energy transition, or both,” said Mike Coffin, oil & gas analyst at Carbon Tracker and co-author of the report. “The industry is trying to have its cake and eat it — reassuring shareholders and appearing supportive of Paris, while still producing more fossil fuels. This analysis shows that if companies really want to both mitigate financial risk and be part of the climate solution, they must shrink production.”
Oil and gas companies are facing increasing pressure from investors demanding transparency on climate risks and explanations on how their portfolios and assets align with Paris climate targets. ExxonMobil is currently on trial in New York in a lawsuit brought by the attorney general alleging the oil giant misled investors in accounting for climate risk. Exxon and other companies have set various emission reduction targets in response to shareholder pressure, but most have disregarded emissions they do not directly control, and no company has committed to curtail production.
“Only Shell, Total and Repsol have targets which include the ‘Scope 3’ emissions created by burning their products, which account for the vast majority of CO2 related to fossil fuel use. While an improvement on many peers, they have only pledged to reduce the carbon intensity of the energy they produce, which means they can continue to grow fossil fuel production — increasing CO2 emissions overall and leaving open the risk of stranded assets. Our climate system works on finite limits, so strategies that allow infinite growth are a square peg in a round hole,” said Andrew Grant, senior oil and gas analyst at Carbon Tracker and co-author of the report
The bottom line, according to Carbon Tracker, is that unlimited fossil fuel expansion is incompatible with the world’s goal to stave off climate catastrophe.
“Carbon Tracker has been consistent in finding most fossil fuels must remain in the ground,” the organization’s founder and executive Mark Campanale said. “Yet as this new report highlights, companies and the governments that grant them their licenses are still intent on expansion. It is now more urgent than ever that shareholders promote, then support, plans for the oil and gas sector to manage rapid decline in production.”
Danielle Fugere, president of shareholder advocacy group As You Sow, said it is clear that business-as-usual investing in fossil fuel expansion cannot continue.
“This report underscores what we already know: Oil and gas companies’ investments are taking the world down a catastrophic pathway that threatens the planet and the global economy,” she said “To right the ship and set us on a sustainable course, investors must demand that these companies set Paris-aligned targets and begin strategically reducing investments in oil and gas projects. This is a necessary step on the pathway toward preserving a livable planet.”