HSBC-全球石油與天然氣行業(yè)：如何與石油巨頭就氣候問題進(jìn)行建設(shè)性合作-2021.5.19-28正式版

19May2021

BigOilsandClimate

Equities

Oil&Gas

Howtoengageconstructivelywithoilmajorsonclimate

Wediscusshowinvestorscouldengageconstructivelywithoilcompaniesonclimateandenergytransitionissues

ClimateisinfocusduringcompanyAGMseasonasshareholdersareaskedtovoteonclimateresolutions

Welisteightareasoftargetinganddisclosurewheretheoilmajorscouldreasonablyimproveovertime

Inthisreport,wediscusshowshareholderscouldengageconstructivelywithoilcompaniesonclimateandenergytransitionissues,focusingonEuropeanoilmajors.Althoughtheirclimateambitionshavedramaticallyleaptforwardinthelast18months,thegoalpostsintermsofinvestorexpectationsarecontinuingtoshift–asevidencedbyrisingshareholdersupportforresolutionsfiledbyactivistgroupsinthisyear’sAGMseason.AtBPandShell’sAGMs,theFollowThisresolutionstosettougherclimatetargetsweresupportedby21%and>30%ofshareholders,respectively.

KimFustier*

Analyst,Oil&Gas

HSBCBankplc

kim.fustier@

+442033592136

GordonGray*

GlobalHeadofOilandGasEquityResearch

HSBCBankplc

gordon.gray@

+442079916787

WehaveidentifiedeightareasregardingtargetsanddisclosurewherewebelieveinvestorscouldreasonablyaskEuropeanoilcompaniestoimproveovertime.Inafewcases,thesepointsconsistofaskingcompaniestoalignthemselveswithbest-in-classpracticesalreadyusedbyoneoftheirpeers,suchas:

Settingintermediatetargetsforabsoluteemissions:theirabsencegivescompaniesleewaytogrowemissionsinthemediumterm.ShellandEquinorlagonthisfront

Wideningemissionsboundariestoincludeallenergysalesworldwide:arelevantissueforBPandRepsolinparticular

Otherissuesaremoreattheleadingedgeofthedebate,butcouldwellbecomemainstreaminthefuture.Inourview,companiesshouldaimtodothefollowing:

Discloseemissionsreductionsfromdivestments:shiftingemissionstoother

entitiesdoesn’tsolveCO2levelsonaglobalscale.Anewusefulmetricmightbe

“underlyingGHGemissions”exdivestments.

Quantifycapexandproductionflexibilityinupstream:oilmajors’near-termoil&gasoutputislargelylockedin.Butwithalmost50%ofE&Pspenduncommittedby2023,companieshavemoreflexibilitytosteerproductionlevelsfrom2025onwards

Discloseandminimiseemissionsfromfutureoil&gasassetsthatareyettobeapproved.Approvingnewprojectscouldappearatoddswithclimategoalsasitwouldaddsignificantlytoemissions(notablyforEquinor,Total,Repsol,andENI)

Disclosethecontributionofassumedcarbonoffsetstoemissionreductiongoals,withasplitbetweennature-basedsolutions,CCS,andcustomermitigationefforts

Assesslow-carbonactivities’“real-world”impact,i.e.howmuchofoilmajors’renewablegrowthisincremental,vscannibalisedfromothercompanies

Improvedisclosureonlow-carbonactivities,notablyoninvestmentsandprofits

TarekSoliman*,CFA

Analyst

HSBCBankplc

tarek.soliman@

+442032685528

Disclosures&Disclaimer

ThisreportmustbereadwiththedisclosuresandtheanalystcertificationsintheDisclosureappendix,andwiththeDisclaimer,whichformspartofit.

Issuerofreport:HSBCBankplc

ViewHSBCGlobalResearchat:

Equities●Oil&Gas

19May2021

Climateengagement

Wediscusshowinstitutionalinvestorscouldengageconstructivelywithoilcompaniesonclimateandenergytransitionissues

ClimateisinfocusduringcompanyAGMseasonasshareholdersareaskedtovoteonclimateresolutions

Welisteightareasoftargetinganddisclosurewheretheoilmajorscouldreasonablyimproveovertime

Howtoengageconstructivelywithoilcompaniesonclimate

Inthisreport,wediscusshowshareholderscouldengageconstructivelywithoilcompaniesonclimateandenergytransitionissues.OurprimaryfocushereisonEuropeanoilmajors,whicharemuchmoreadvancedthantheirUScounterpartsonenergytransitionissuesandhaveallset“netzero”targetsby2050coveringScope1-3emissions(i.e.includingemissionsarisingfromcustomers’useofhydrocarbons).WeincorporateinvestorfeedbackaftermarketingourrecentreportBigOilsandClimate:Thejourneyto"netzero"by2050inpictures(20April2021).

AfteradramaticleapforwardinalloftheEuropeanoilmajors’climateambitionsthrough2020,thecompanies’decarbonisationgoalsarecontinuingtoevolveasinvestorexpectationsrise.Thegoalpostsarecontinuingtoshift.Companies’climateambitionsandenergytransitionstrategiesareunlikelytoremainstaticoverthenext12months.Thisreportaimstoanticipatewherethedebateonclimatemightbegoingnext.

WehopetopresentausefulsetoftalkingpointsandissuesthatinvestorscanuseintheirinteractionswithEuropeanoilcompanymanagements.Someofthesearewell-troddenareas,suchastheneedfor(i)absoluteintermediateemissionstargetsand(ii)wideremissionsboundaries,twopointswealreadycoveredinBigOilsandClimate:Decarbonisationtargets–readingthefineprint(27January2021).Otherareasarearguablyattheleadingedgeofthedebate,butcouldbecomemore“mainstream”inthenextfewyears–justasoilcompaniestargetingScope3emissionswentfromheresytomainstreaminthespaceofafewyears.Manyquestionsareunlikelytogetaclearanswer,butwebelievetheyarestillworthraising.

Thecontext:AGMseasonisinfullswing,withclimateinfocus

FiveofthesixbiggestEuropeanoilcompaniesholdtheirAnnualGeneralMeetingsinMay:Equinor,BP,andENIwerelastweek(11and12May),Shellwason18May,andTotalison28May.IntheUS,ConocoPhillipswaslastweek(11May)andExxonandChevronarebothon26May.AGMsusedtobefairlyroutineaffairs,butthisyear’smeetingsarealreadygeneratingheadlines,andarelikelytocontinuetodoso.Inparticular,ShellandTotalaresubmittingtheirenergytransitionandclimatestrategiesforadvisoryvotetoshareholdersattheirrespectiveAGMsthisyearforthefirsttime,whileEquinorwilldothesamefrom2022onwards.ShellandEquinor’senergytransitionplanswillbereviewedandsubmittedforadvisoryvoteeverythreeyears.

Climatechangeactivists,suchasDutchshareholdergroupFollowThisandFrenchNGOReclaimFinance,arecallingforcompaniestoadoptevenmoreambitiousclimategoals.They

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havefiledresolutionsaskingformoredrasticemissionscutsinthemediumtermthanwhatthecompaniescurrentlyaimfor.Inturn,companiesincludingBP,Shell,andEquinorhaveaskedtheirshareholderstorejecttheseresolutions.Moreover,activistshavealsocalledonshareholderstovoteagainstShellandTotal’senergytransitionstrategies,whichtheydeemtobeinsufficient,andhavesaidtheywill“closely[monitor]howthedifferentshareholderspositionthemselvesatthe[AGMs]”(ReclaimFinancestatement,28April2021).

Actionsbyclimateactivistgroupspresenttrickydecisionsforinstitutionalinvestors,particularlythosethataremembersofClimateAction100+(aninitiativethatbringstogether575investorsrepresentingUSD54trninAUM),theNetZeroAssetManagersInitiative(87members,USD37trnofAUM)and/ortheNetZeroAssetOwnerAlliance(USD5.7trnofAUM).Institutionalinvestorshaveafiduciarydutytoenhancethevalueoftheirinvestments,whichinrecentyearshasextendedtoincludeclimatechangeconsiderationsandalignmenttoglobalambitionssuchastheParisAgreement.

SupportforclimateresolutionsfiledbyFollowThishasrisenoverthepastcoupleofyears.TakingBPforinstance,shareholdersupportrosefrom8%in2019to21%atBP’srecentAGMon12May.AtShell’sAGMon18May,morethan30%ofshareholdersvotedinfavouroftheFollowThisresolution,upfrom14%in2020.Perhapsmoresurprisingly,58%ofshareholdersvotedinfavouroftheclimateresolutionproposedbyFollowThisatConocoPhillips’sAGMon11May,callingforthecompanytoreduceitsScope3emissions(NB:ConococurrentlyonlyhastargetsonScope1-2emissions,butunlikesomeofitsUSpeersextendsthisambitionto2050).

Doesanyofthismattertoinvestorsthatarenotparticularly“climate-conscious”?Yes:climategoalshavebecomecentraltotheEuropeanoilcompanies’corporatestrategiesandaredrivingchangesinbusinessmodelsandcapitalallocation.

Eightareasofimprovementsontargetsanddisclosure

WehaveidentifiedeightareasregardingtargetsanddisclosurewherewebelieveinvestorscouldreasonablyaskEuropeanoilcompaniestoimproveovertime(thekeywordherebeing“reasonably”).Inafewcases,thesepointsconsistofaskingcompaniestoalignthemselveswithbest-in-classpracticesalreadyusedbyoneoftheirpeers,suchasonpoints1,2,and6.

Setintermediatetargetsforabsoluteemissions

Closeloopholesinemissionsboundaries

Discloseemissionsreductionsfromdivestments

Quantifythedegreeofcapitalinvestmentandproductionflexibilityinupstream

Discloseandminimiseemissionsfromfutureoil&gasassets

Disclosethecontributionofassumedcarbonoffsetstoemissionreductiongoals

Assesslow-carbonactivities’“real-world”impact

Improvedisclosureonlow-carbonactivities

Thereispartial,butnotfulloverlapbetweentheseeightareasandthoselistedbyClimateAction100+,whichusesanalysisfromtheTransitionPathwayInitiative(TPI)andCarbonTrackeramongothers.Specifically,points1,2,6,and8arecoveredbyClimateAction100+,buttheothersarenot1.

ClimateAction100+NetZeroCompanyBenchmark./wp-content/uploads/2021/03/Climate-Action-100-Benchmark-Indicators-FINAL-3.12.pdf

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We,ofcourse,donotexpectcompaniestotakeactionovernight.Butjudgingfromhowquicklythemindsetsofcompaniesandinvestorshaveshiftedsince2019,webelievegoodprogresscanrealisticallybemadeoverthenext12-18months.

1.Setintermediatetargetsforabsoluteemissions

Long-datedemissionreductiontargets(e.g.2050)withoutintermediatesteps–especiallyabsolutetargets–givecompaniesroomtocontinuetogrowhydrocarbonsproductionandemissionsinthemediumterm.

Todemonstratetheyareonatrajectorycompliantwiththeirlonger-termemissionsgoals,webelieveEuropeanoilmajorsshouldsetquantified,absolutemedium-term(e.g.2030)emissionreductiontargets.Somewillarguethat2030istoofarout,andthatnearer-termtargetssuchas2025/26arerequired.Indeed,2030goalsleavethecompaniestimetogrowinthenextfiveyears(asTotal,ENI,andEquinorintendtodo)beforetheyhavetoinflectupstreamvolumesandemissionsdownwards.

Asareminder,onlyhalfofEuropeanoilmajorshaveabsolute2030emissionsreductiontargetsatpresent.Threecompanies–BP,ENI,andTotal–havesetabsoluteemissionstargetsonaScope1-3basisto2030.ShellandRepsolonlyhaveintensity-based2030targets,whileEquinorhasnointermediatetargetsbetweennowand2050.

SummaryofEuropeanoilmajors’emissionsreductiontargets

BaselineIntensityin

Intensityin

Tgt2030

Tgt2050

Tgt2030

Tgt2050

Boundary

year

baseline

2019

intensity

intensity

absolute

absolute

(gCO2/MJ)(gCO2/MJ)

reduction

reduction

reduction

reduction

BP

2019

79.3

79.3

15%

>50%

35-40%

100%

absolutetargetonequity

productionexRosneft;

intensitytargetbasedonall

energysales

Shell

2016

78.6

78.2

20%

65%/100%

n/a

100%after

allenergysales

incloffsets

customer

offsets

Total

2015

71.0

66.5

20%

>60-100%

c5-10%

n/a

allenergysales

ENI

2018

68.0

68.0

15%

100%

25%

100%

allenergysales

Equinor

2019

68.0

68.0

n/a

100%

n/a

100%

equityproduction

Repsol

2016

77.7

75.5

25%

100%

n/a

100%

upstreamequityproduction

Source:Companydata

Whatnext:

ThenextstepwouldbeforShellandRepsoltogiveabsoluteintermediatetargets(e.g.2030)ratherthanjustintensity-based.TherearemultiplewaysofreducingabsoluteScope1-3emissions:curbingupstreamanddownstreamoutputisaneffectivewayofdoingso,butdecreasingthird-partyemissionscanmakealargecontribution(NB:thisisthetacticchosenbyTotalandENI,aswewilldiscusslater).

EquinorhasnointermediateScope3targetsbetweennowand2050.ThecompanyaskedshareholderstorejectaproposaltabledbyDutchactivistgroupFollowThisaskingforintermediateScope3emissionstargets.Theproposalwasrejectedbyanunknownmargin.(In2020,27%ofshareholdersvotedinfavouroftheFollowThisresolution.)SuchtargetswouldconstrainEquinor’sabilitytogrowupstreamproductionuntil2026,asitcurrentlyintendstodo.IfconfirmedattheCapitalMarketsDayon15June,EquinorwouldbetheonlyEuropeanoilmajorwithoutmedium-termScope3emissionsreductiontargets.

TotalhascommittedtoadeclineinabsoluteScope3emissionsfromits2015baselineto2030;however,ithasnotquantifiedthisreduction.Companypresentationslidessuggesta

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c5-10%decrease–thesmallestreductionofthethreecompaniesthathavesetabsolute2030targets(BPtargetsa35-40%decreaseinemissionsfromitsequityproduction,ENItargets25%loweremissionsfromallproductssold).ThenextstepwouldbeforTotaltoformallyquantifythe2030absolutereduction,andpossiblyraiseitstargettoachievegreateremissioncuts.

2.Closeloopholesinemissionsboundaries

AswelaidoutinBigOilsandClimate:Decarbonisationtargets–readingthefineprint(27January2021),eachEuropeanoilmajorusesslightlydifferentdefinitions,methodologies,andemissionsboundariesinitsclimatetargetsandstrategy.Akeyaskforthecompanieswouldbetocloseanyremainingloopholesintheiremissionsboundaries.ENIandShellusethebroadestpossibleemissionsboundaries,i.e.Scope1-3emissionsonallproductssoldworldwide.Theotherfourcompanieshaveloopholes,whichwediscussbelow:

BP–setabsolutetargetsonthird-partyemissions

BP’snetzerotargetonlycoversemissionsfromitsownequityupstreamanddownstreamproduction.Itexcludesemissionsfromthird-partysales,whichrepresentnearly60%ofitstotalemissions.Inupstream,itexcludesemissionsfromitsshareinRosneft(whereScope1-3emissionsarenotdisclosed,butBP’sshareofproductionexceeds1.1mbd,or40%ofitsequityupstreamproduction).Forclarity,third-partysalesareincludedinBP’scarbonintensityreductiongoalof50%by2050,butnotinitsabsolute2030/50emissionreductiontargets.

Whatnext:WewouldexpectBPtosetabsolutetargetsonthird-partyemissionsatsomestageinthefuture,thoughnotnecessarilytoseta“netzero”2050aimonallenergysales.However,unlessRosneftacceleratesitsowntransitionstrategy,wedonotexpectittobeincludedinBP’semissionsboundaryintheforeseeablefuture,sinceBP’sinfluenceoverRosneft’sstrategyandemissionsislimitedbyvirtueofitsminoritystake.

Total–clarifygeographicalboundariesanddisclosethird-partyemissions

Untilrecently,TotaltargetednetzeroemissionsonlyinEurope,whichrepresentsc60%oftotalScope1-3emissions.Underpressurefromshareholders,thecompanychangeditsstanceandinsistsitnowsharesthe“ambition”togettonetzeroworldwideonallenergyproductssold.ItseemstousthatTotalismaintainingadegreeofambiguitythatisnothelpful.ItsSeptember2020climatereportstatesthatthenetzeropledgewouldbe“expand[ed][…]tootherregionswhentheyadoptthesamepathasEurope”(seep.3of“Gettingtonetzero”)–makingitclearthatthenetzeroworldwidegoalis/wasconditionalonthelevelofpolicyambitionoutsideEurope.Total’sstrategypresentationslidesfromFebruary2021continuetoshowanetzero2050ambitioninEuropeonly.

Whatnext:FollowingrecentclimatepledgesbythelikesoftheUS,Canada,andJapanattheLeadersSummitinApril,weexpectTotaltoformallyextenditsnetzeroambitionworldwide.Toenhancetheclarityandstrengthofitscommitment,wethinkTotalshoulddropanyreferencetoitsnetzerotargetinEurope.Thisaim(currentlyoneofTotal’sthree“majorsteps”onclimate)becomessuperfluousifthecompanyreallyistargetingnetzeroworldwide,andiscreatingunnecessaryconfusion.

Lastly,wethinkTotalshoulddiscloseemissionsfromthird-partysales.Thecompanysaysthesearesmall,buttheyrepresentjustover15%oftotallifecycleemissions,accordingtoourestimates.Totalintendstomateriallyreduceemissionsfrombulktradingofthird-partyoilvolumesinEurope–thiswillbeakeycontributortoitstargettocutEuropescope3emissionsby30%by2030.

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Repsol–includedownstreamemissionsintheboundary

Repsolonlyincludesupstreamemissionsinitsemissionsboundary,andexcludesdownstreamemissionsorthird-partyemissions.TheproblemisthatRepsolisadownstream-heavycompanythatrefines3.5xmorecrudeandsells4xmoreoilproductsthanitproducesintheupstream.Scope3emissionsassociatedwithrefinedoilproductsexcludedfromtheperimetermadeup45%ofitstotalScope1-3emissionsin2019.SincethevastmajorityofitsoildownstreamsalesoccurinEurope,Repsol’scurrentclimatetargetsdonotappeartobeconsistentwiththecontinent’sown“netzero”ambition.

Intheinterestoftransparency,Repsolrecentlystartedtodisclosehowits“netzero”2050ambitionwouldtranslatewhencalculatingitscarbonintensityonallproductssold,i.e.thesamedefinitionalboundariesasBP,Shell,Total,andENI.AccordingtoRepsol,its25%targetedemissionsreductionby2030isequivalenttoa14%fallincarbonintensityonallenergysales,andthe100%targetedcutby2050equivalentto74%oncarbonintensity.Ourcalculationsarebroadlyalignedwiththoseofthecompany.

Whatnext:Inourview,thenextstepwouldbeforRepsoltoformallytargetemissionsreductionsonallproductssold.Itcouldalsoraiseitsintensityreductiontargetsoutto2030,2040,and2050.MostofRepsol’speersalreadytargethigherintensityreductionsto2030comparedtoRepsol’simplied14%;forexample,ShellandTotalaimfor20%reductions,andBPandENIfor15%.

Equinor–includethird-partyemissions

SimilartoRepsol,Equinordoesnotincludedownstreamorthird-partyemissionsinitsdefinition.Thisboundarychoiceislessofanissue,inourview,forEquinorthanforRepsol,sinceEquinorisanupstream-biasedcompanywithnonetthird-partyoilsales.However,Equinorsellsgasproducedbythirdpartiesinadditiontoitsownequitygasproduction;anditsthird-partyelectricitysalesandemissionscouldriseinthefutureasitspowerbusinessexpands.

Whatnext:WethinkEquinorshoulddiscloseemissionsfromthird-partygasandelectricitysales,eventhoughthesearecurrentlysmall;andwebelievethird-partyemissionsshouldbeincludedinits“netzero”2050target.

3.Discloseemissionsreductionsfromdivestments

Background:Forsomecompanies,upstreamassetdivestmentsandexitsfromthird-partyoil&gasmarketingactivitieswillbeamaterialdriverofthedecreaseinemissionsby2030.Theyrepresentasmuchas15-20%ofbaselineemissions,accordingtoourestimates,amaterialproportionofoverallemissionreductions.

BPisthebestexampleofthisstrategy:thecompanyhasguidedtoupstreamdisposalsofc500kbd,whichweestimatecouldremovec20%fromits2019equityScope1-3emissions.Thismakesupmorethanhalfofthetargeted35-40%declineinBP’sequityScope1-3emissionsfrom2019to2030.Afteralreadyannounceddisposals(e.g.Alaska),weestimatethatBPwillrequireanother400-450kbdofyet-to-be-announceddivestmentstomeetits1.5mbdproductionguidanceby2030.Thefollowingchartshowstheimpactontotalemissionsandemissionsintensityofyet-to-be-announceddisposalsof425kbd(themid-pointoftherange).

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BP–Emissions(mtCO2)andintensity(gCO2/MJ)with/withoutfuturedisposals

1,200

85

1,000

80

800

75

600

70

65

400

60

200

55

0

50

2019

2020

2021e

2022e

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Equityemissions

Divestedemissions

Third-partyemissions

Netemissionsintensity

Intensityexdisposals

Source:HSBCestimates,companydata

OtherexamplesofcompaniesreducingemissionsthroughdivestmentsincludeTotalandENI.BothcompaniesintendtoreduceScope3emissionsfromthird-partyoil&gasmarketingandtradingactivities,aspartoftheir2030emissionsreductiongoals.Emissionsfrommarketingortradingbusinessesarehardertoquantifythanthosefromupstreamassets,butweestimatethattheyrepresentc15%ofbaselineemissionsinbothcases.

Whatnext:Inourview,emissionsfromdivestedassetsoractivitiesshouldbedisclosedbycompanies.Thisisnotasradicalasuggestionasitmightseematfirst:afterall,oilcompaniesroutinelytalkaboutupstreamproductionlevelsonan“underlying”basisexcludingdivestmentsandacquisitions,usuallybecauseunderlyingproductionisamoreflatteringnumberthanreportedproduction.Ausefulconceptinthefuturemightwellbe“underlyingGHGemissions”excludingdivestments.

AswewroteinBigOilsandClimate:Thejourneyto"netzero"by2050inpictures(20April2021),theproblemisthatsellingassetsandexitingcertainthird-partyactivitiesisunlikelytoimpactglobalemissions,astheyaresimplyshiftedtootherparticipantswhotakeoverthebusiness.Inmanycases,themajors’unwantedassetsandactivitiesareacquiredbyentitiessuchasprivately-ownedE&Psorcommoditytradersthathavelessstrictenvironmentalpractisesandfewerclimate/ESG-drivenconstraintsontheiroperations.Theseplayerstendtoinvestmoreintheassetsthanthemajorswouldhavedone,leadingtoincreasedoutputandemissions–aclassicexampleofthelawofunintendedconsequences.AgoodcaseinpointisBP’ssaleofitsAlaskaassetstoHilcorpin2019,whichledtoasubstantialriseindrillingactivity,oilproduction,andemissionslastyear(Bloomberg,15April2021).

USsupermajorChevroncriticisedthepracticeofreducingcompanyemissionsthroughdivestments:“therealissueisloweringcarbonintensity,notjustshiftingitoffourbalancesheet”(source:Upstream,11May2021).

TheconclusionisthatshareholdersofEuropeanoilmajorsshouldnotbeincentivisingcompanies–explicitlyorimplicitly–toshrinkinupstreamsolelyviadivestments,asemissionschanginghandspatentlydoesn’tsolveanyproblemsonaglobalscale.Ifwewantedtoplaydevil’sadvocate,we’darguethattheEuropeanoilmajorsshouldtakeoveroil&gasassetsfromworst-in-classoperatorsandimprovetheirScope1-2intensity(e.g.bycuttingflaringandmethaneleakage),asitwouldleadtoareductioninglobalemissions…

Sowhatcanbedonetoavoidsuchunintendedconsequences?

Shareholdersshouldexercisemorescrutinyovertheidentity/natureofassetbuyersinupstreamtransactions–forexample,theycouldobjecttobuyerswithpoortransparencyandaweaktrackrecordonGHGintensity(e.g.withhighlevelsofflaringorpoormethane

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controls).Howthiscanbedoneinpracticeremainstobeseen,asportfoliomanagementdecisionsarerarelymaterialenoughtobesubjecttoshareholdervotes.

Additionally,shareholderscouldaskcompaniestoprovideevidencethatthecapitalfreedupbyassetdisposalsisrecycledinlow-carbonactivities.Theabilitytoredeploycapitalintolow-carbonactivitiesisanargumentusedbyBPtojustifyitslarge-scaleupstreamdisposalprogramme.Wearesomewhatscepticalthatupstreamdisposalproceedsmakearealdifferenceonoverallcapitalallocationfortworeasons.Firstly,renewablepowerprojectscanbeeasilyfundedwithprojectfinancedebtandrequirelittleequitycapital.Secondly,thescaleofproceedsfromupstreamsalespalesincomparisonwiththeoilmajors’capitalflexibilityinupstream,asweexploreinthenextsection.

Quantifythedegreeofcapitalinvestmentandproductionflexibilityinupstream

TheIEA’s“NetZeroEmissionsby2050”scenariopublishedon18May2021statesthefollowing:“Beyondprojectsalreadycommittedasof2021,therearenonewoil&gas

fieldsapprovedfordevelopmentinourpathway.[…]Theunwaveringpolicyfocusonclimatechangeinthenetzeropathwayresultsinasharpdeclineinfossilfueldemand,meaningthatthefocusforoilandgasproducersswitchesentirelytooutput–andemissionsreductions–fromtheoperationofexistingassets.”

Thisquestionofupstream-relatedemissionsbringsuptheissueofcapitalallocationandinvestmentflexibility.Howmuchflexibilitydooilcompanieshavetoreallocatecapital?Inotherwords,howquicklycouldtheychangecourseiftheyreallywantedto?Whileprojectsalreadyunderconstructionaremostunlikelytobestopped,companiesstillhavechoicestomakeonprojectsatthepre-FID(FinalInvestmentDecision)stage.Theseinvestmentchoiceswilllikelycomeunderincreasinginvestorscrutinyinthenextfewyears,inourview.

BasedonRystadestimates,theEuropeanoilmajors’shareofuncommittedupstreamcapexfrompre-FIDprojectsandexplorationwillrisefrom17%in2021tonearly50%by2023andtoover60%bythesecondhalfofthisdecade.Indollarterms,themajorscouldhavearoundUSD20bnofuncommittedcapitalspendingin2023andcUSD25bnannuallythereafter.Thesefiguresshowthattheoilmajorscouldhaveanenormousamountofcapitalflexibilitywithinthenextcoupleofyears,atleastonpaper.

Europeanoilmajors–Upstreamcapexbylifecycle(USDbn)

60

50

40

30

20

10

0

2019 2020 2021e2022e2023e2024e2025e2026e2027e2028e2029e2030e2031e2032e2033e2034e2035e

Producing

Underdevelopment

Discovery

Exploration+undiscovered

Source:RystadestimatesbasedonUSD50/bBrent

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Thenextquestionis:towhatextentwouldhaltingnewoil&gasprojectapprovals

acceleratethedeclineofthecompanies’hydrocarbonoutput?Thechartsonthenextpageshowourbottom-upforecastsoftheoilmajors’productionprofiles,beforeassetdisposals.

Almostallfieldscontributingtoproductionoverthep