Oil Majors Face a Shifting Landscape

In the first of a three-part series, S&P Global Market Intelligence looks at how, despite publicly acknowledging the scale of the challenge, most integrated oil majors continue to pursue their traditional business at all cost.

During the annual Oil & Money conference in London in October 2019, Ben van Beurden, who has been CEO of Royal Dutch Shell PLC since 2014, urged the oil and gas industry to step up and tackle climate change head-on. Shell and other oil and gas companies, van Beurden said, would need to help the transition to a lower-carbon world both to stay profitable and maintain their societal license to operate in the long run.

Herein lies the central conundrum for Shell and its peers, some of the biggest polluters in the world: As investors and regulators increasingly demand that they adapt to the scientific consensus on decarbonization, many of them have started to diversify and cut some of their emissions. But they are also holding on tight to their traditional business model. U.S. giants such as Exxon Mobil Corp. and Chevron Corp. still bet most heavily on oil, while Europe's supermajors are increasingly turning to natural gas and complementing their portfolios with low-carbon electricity.

With concern over global warming intensifying both on the streets and in the boardroom, executives at large oil and gas companies are increasingly talking about how they can make greener investments, manage emissions cuts and otherwise stay relevant.

An analysis of quarterly investor calls shows those issues have risen on the agenda of the five biggest integrated oil majors — Royal Dutch Shell PLC, BP PLC and Total SA in Europe and, to a lesser extent, Exxon Mobil Corp. and Chevron Corp. in the U.S. — since the Paris Agreement on climate change was adopted at the end of 2015.

But a closer look at earnings transcripts reveals that, at a time when investor pressure is increasing at a steady clip, the task of greening their companies still regularly fades into the background.

While some industry experts believe BlackRock's directive to fossil fuel companies on environmental disclosures and sustainability should motivate energy pipeline firms to improve reporting, others are not sure that if it will move the needle at all.

In his annual letter, BlackRock Chairman and CEO Larry Fink urged chief executives to put climate consideration at the forefront of their operations ahead of a "fundamental reshaping of finance" spurred by climate risk, and the world's largest asset manager elected to make sustainability a "new standard" within its own approach to investing through a series of proposals it rolled out January 14.

Investors like BlackRock, which holds material positions in a slate of North American midstream C-corps and master limited partnerships, are increasingly reshaping the way the oil and gas industry talks about and mitigates its businesses' impacts on climate change. But that remodeling has largely stopped short of the North American pipeline sector, where standardized environmental data sharing has yet to become mainstream despite growing investor inquiries about environmental, social and governance issues.

The UK oil and gas industry can play a key role in the development of the hydrogen and carbon capture, usage and storage sectors given its existing expertise in producing and transporting hydrocarbons, an official from industry association Oil & Gas UK said Wednesday.

OGUK energy policy manager Will Webster told an event in London the industry could help manage the energy transition in the UK as it looks to meet the legally binding 2050 net-zero carbon emissions target.

There are some synergies for our members in CCUS and hydrogen," Webster said at the launch of a new report by law firm CMS on the role of oil and gas companies in the energy transition.

OGUK has reshaped its vision for helping curb carbon emissions since the UK government made the net zero target legally binding in May last year, with part of its efforts to focus more on gas and on decarbonization measures, Webster said.

To calibrate the relative ranking of sectors, we use our environmental, social, and governance (ESG) Risk Atlas. The Risk Atlas provides a relative ranking of industries in terms of exposure to environmental and social risks (and opportunities). The sector risk atlas charts combine each sector's exposure to environmental and social risks, scoring it on a scale of 1 to 6. A score closer to 1 represents a relatively low exposure, while 6 indicates a high sectorwide exposure to environmental and social risk factors. This report card expands further on the Risk Atlas sector analysis by focusing on the credit-specific impacts, which in turn forms the basis for analyzing the exposures and opportunities of individual companies in the sector.