No oil and gas company has developed a business strategy that would offer a clear and robust path to shift away from fossil fuel production, according to recent research conducted by Sustainable Fitch.
According to the report Oil and gas companies struggling to come up with credible transition plans, the vast majority of these companies’ revenues continue to be generated from producing and selling fossil fuels and investment in upstream production and exploration and significantly larger than capex in low-carbon business models such as renewable energy.
The report also showed that 90% of the world’s GDP and 85% of the world’s population is covered under some sort of national net-zero policy or target.
It also disclosed that European major companies are leading the pack in terms of emissions reduction targets but mid-caps and juniors are increasingly feeling pressure from stakeholders to catch up.
The research also disclosed that, in the short term, no oil and gas company has developed a business strategy that would offer a clear and robust path to shift away from fossil fuel production.
The inclusion of Scope 3 emissions in companies’ targets is a clear differentiator in terms of ambition, but methodologies to calculate emissions and set targets still lack common standards, complicating comparison, the report stated.
A credible emissions reduction plan will encompass Scope 1, 2 and 3 and specifically methane emissions across a company’s entire operations. Reductions are increasingly likely to be in absolute, not just intensity terms, and targets should cover short, medium and long term.
The report noted that companies will face increasing scrutiny in the use of offsets and will need to demonstrate that targets translate to strategic changes through clear KPIs for senior management.
The transition to a low-carbon world presents the oil and gas industry with significant and unique risks such as demand destruction, price volatility, regulatory shocks, cost increases and investor pressure. A company’s financial flexibility and asset mix will determine its ability to manage the transition, the report added.
Majors, due to their size, asset mix and business diversification, are generally in a stronger position to successfully manage the energy transition.
However, mid-caps and juniors will face difficulties as they generally do not have the cash and/or scale and in-house expertise and capacity to develop robust climate strategies, finance decarbonisation effects and shift their business model while ensuring ongoing profitability.