The UN Environment Programme’s annual Production Gap report made for sombre reading when it was released just ahead of COP26. Governments plan to produce more than twice the amount of fossil fuels in 2030 than would be consistent with limiting global warming to 1.5°C, said the authors. Even with a less ambitious 2°C pathway, current production plans would lead to 120% more coal, 14% more oil and 15% more gas by 2030 than the climate can cope with.
The International Energy Agency (IEA) said in May that climate neutrality in 2050 means no new oil and gas fields should be approved for development from 2021. This is something no major oil-producing country has yet signed up to.
However, increasing activist and political pressure (climate change is now the most important issue for UK voters) means the energy transition is nonetheless gathering pace. National pledges at COP26 to phase out coal, agreements from certain countries to end oil and gas production and commitments to end public financing of fossil fuels abroad brought the prospect of a managed decline of fossil fuels into the mainstream.
Green technologies are also continuing to outpace forecasts with the latest battery price analysis from research company BloombergNEF showing lithium-ion battery pack prices fell 89% from $1,200 per kilowatt-hour (kWh) in 2010 to $132/kWh in 2021. The global electric car stock hit ten million in 2020, a 43% increase over 2019, while the latest IEA renewables forecast predicts global renewable electricity capacity will rise more than 60% from 2020 levels by 2026.
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Financing organisations are also responding by ending financial support for fossil fuel projects. More than 450 companies, representing 40% of the world’s financial assets (or $130trn), belong to the Glasgow Financial Alliance for Net Zero. Signatories commit to using science-based guidelines to reach net-zero carbon emissions by mid-century, and to set 2030 interim goals.
Analysts increasingly warn that continuing to bankroll new fossil fuels introduces not only climate risk but also financial risk. Research published in Nature in November, for example, found around half of the world’s fossil fuel assets will be worthless by 2036 in a transition to net zero by mid-century.
“You could be an investor who doesn't really care about climate change, or only wants to maximise their financial return, but avoiding investment in fossil fuels means avoiding risk, and that makes sense for any investor,” says Mike Coffin, head of oil and gas at think tank Carbon Tracker.
Coffin adds that if institutional investors withdraw capital from companies, over time fewer companies will exist that can invest in fossil fuels and accessing new capital will become harder for them. “The energy transition is becoming increasingly inevitable, and increasing divestment from investors will accelerate fossil fuels being left in the ground,” he says.
Early signs of an oil asset sell-off
Separate analysis from Carbon Tracker released this year finds that for most oil and gas companies, fitting into a net-zero trajectory would see production plummet in the 2030s. Shell, Chevron and Eni would see production fall by at least half. However, Saudi Arabia’s state-owned oil company Aramco would see production increase because the country’s low production costs would provide it with a significant advantage over its competitors.
The pressure is on for most oil and gas companies to pivot away from business-as-usual. The likes of Eni, Shell, BP, Equinor and Total now have net-zero pledges covering varying degrees of emissions. Eni, Shell and BP also have plans to gradually begin lowering oil and gas production as they transition to become “integrated energy companies” whose businesses include generating renewable electricity.
However, a transition towards clean energy does not mean companies will write off the value of their legacy assets: quite the opposite, they will seek to maximise this value in the shorter term. Evidence also suggests many companies see asset divestments as a way to meet this ambition. Data from analytics company GlobalData shows that the combined value of assets sold by ten listed oil and gas majors in the US and Europe since the Paris Agreement was adopted in December 2015 is nearly $200bn.
“Asset sales can be enticing because they help protect your dividends and keep investors happy,” explains Helen Wiggs from responsible investment NGO ShareAction.
"We have seen a general shift of European and US energy companies moving away from higher break-even assets, or those assets that are more sensitive to carbon prices such as oil sands projects,” says Biraj Borkhataria, who co-heads European energy research at RBC Capital Markets. In recent months, Anglo-Dutch oil major Shell sold off its shale gas operations for $10bn (an event that happened too late to be featured in the above graph), and also held discussions with the Nigerian government about divesting its onshore oil operation in that country, where it has been present for more than six decades.
Borkhataria adds that US oil majors like Chevron and ExxonMobil, which have largely not yet made net-zero pledges, “do not appear to be under as much pressure as the European majors”. The data from GlobalData backs up this thinking, with Shell, BP and Eni all selling off significantly more oil and gas assets than they bought since the Paris Agreement. In contrast, Chevron, Exxon and ConocoPhillips have bought more than they have sold.
Bad news for the energy transition?
The public oil majors, says Carbon Tracker’s Coffin, are “more integrated than smaller or private producers, with upstream and downstream operations, as well as cafes and forecourts that offer opportunities for things like electric vehicle charging operations”. Since they are also under more pressure to decarbonise, it makes sense for them to diversify their businesses, but while this can help their emissions profile, it also means other upstream operators will start extracting in their place.
Borkhataria suggests that by pressuring companies to focus only on “absolute emissions reductions”, there can be “unintended consequences” where assets “fall into the hands of operators under less scrutiny”. One area where standards can differ significantly between companies is in the flaring and venting of methane – an area that will be crucial to tackle in the next five to ten years if the world is to reach net zero by mid-century.
Asset sales from oil majors risk a greater share of future oil supply being under the control of national oil companies, which already control 55% of current oil and gas production and 90% of reserves. These companies typically do not have net-zero pledges and are based in countries with undiversified economies, whose governments will be strategising to maintain fossil fuel production to avoid financial difficulty.
Many asset buyers are independent or private companies that do not have to answer to shareholder ESG concerns in the same way as large listed companies. This trend has been seen in UK North Sea oil, where the five largest upstream asset sellers in North Sea oil in the past five years have been listed oil majors, while four of the five largest purchasers have been private or independent companies.
“In the UK, more and more companies are divesting and moving out of the declining North Sea basin,” says Euan Graham, a senior researcher at think tank E3G. “A third of production in the UK is now by privately owned companies, which are less susceptible to shareholder pressure and generally under much less pressure to transition to renewables.”
Coal miners under pressure
Similar asset disposal trends are taking place in the coal sector, but rather than prioritising certain regions or shedding assets to pay for a future energy transition, commodities majors are completely exiting this fossil fuel and focusing instead on other metals and minerals.
Multibillion dollar corporations Rio Tinto, Anglo American and Mitsubishi have exited the thermal coal sector since the Paris Agreement, making billions of dollars in the process. Rio Tinto sold off its mining assets to smaller mining companies, including the Chinese government-backed Australian coal specialist Yancoal. Meanwhile, Anglo American spun off its coal business into a new company, Thungela Resources, which is listed on the Johannesburg Stock Exchange.
“Having been in the thermal coal mining business for many decades, in 2021 we divested the last of our thermal coal operations,” says Anglo American’s James Tilby-Wyatt. “We spun out the assets into a new company based in South Africa, which is where the assets are located. By listing the company on the stock exchange, our priority was to ensure that the assets were operated responsibly until the end of their life, with all the responsible environmental and social standards and expectations met.”
Mitsubishi sold its assets to Glencore, the world’s largest commodities trader. Glencore has a decarbonisation strategy in place, along with a pledge to reach net-zero emissions across the entire value chain by 2050.
“Coal currently accounts for about 25% of global energy use, and while this will decline over time, it continues to make a contribution in all climate change scenarios to 2050,” said Ivan Glasenberg, the former CEO of Glencore, in its 2020 climate report. “Through responsible stewardship of assets and a commitment to a managed decline of our coal portfolio… we will deliver on our ambition to reduce our total emissions in line with the goals of the Paris Agreement.”
“Glencore will go down as one of the last major listed coal companies, but if they get too much grief I imagine they will spin it off or privatise it,” says Tim Buckley from the Institute for Energy Economics and Financial Analysis. “They are not building new greenfield capacity, they are just maintaining and buying up existing capacity at very low prices – and this is proving to be very profitable indeed: coal prices have gone up 400% in the last 12 months.”
Toby Hassall, a coal analyst at Refinitiv, adds that, while climate activists are logically pushing for an accelerated coal phase-out, the global economy would “likely collapse” if all companies in the coal business suddenly ended operations. “It is a fair supposition to think that, with the pressures on the industry, supply is going to be falling faster than demand, which will continue to push up prices – and Glencore would not be doing this if it did not think it was going to make money.”
Climate governance is multifaceted
Some 97% of Glencore’s shareholders approved the company’s climate strategy in May 2020, but acceptance of the proposal is not universal. At the end of November 2021, activist investor Bluebell Capital Partners called on the company to spin off its thermal coal business, encouraging the company to “chart a new future” in a letter seen by the Financial Times. Glencore CEO Gary Nagle suggested the company’s share price could rise by nearly 50% if it exited coal.
However, when fossil fuel assets are assessed from a climate governance perspective, says investment consultant Wolfgang Kuhn, it is important not to simply pressure individual companies to divest assets. There is a whole ecosystem of organisations maintaining the fossil fuel industry, all of which need to realign their priorities for the energy transition to accelerate.
“Banks, investors, legislators and regulators all need to step up, alongside the companies that actually extract,” says Kuhn. “Then we would get somewhere. Smaller or less scrupulous companies buying up assets and mismanaging them is a nonsense concept, if the risk for those assets is increased materially and they would not be able to profit from them.”
He sums up: “Both the operating of the assets and their financing need addressing. The operators and the financiers have a responsibility for those assets, and what consequence that responsibility has – the moral or legal debt – is for society to define.”