Low carbon transition—European majors lay out their plans

• Date: 01 August 2020
• Published date: 01 August 2020
• DOI: http://doi.org/10.1111/oet.12811

SURVEY

Low carbon transition—European majors lay out their

plans

Growing evidence of global warming, tougher climate

change policies, and rising public concern, as well as

technical advances and shareholder pressure, have led

the six biggest European oil and gas companies—Royal

Dutch-Shell, BP, Total, Eni, Equinor, and Repsol—to

declare zero, or close to zero, net carbon emission targets

for 2050 over the last 6 months, along with a raft of other

transforming proposals to move them away from oil and

toward more sustainable operations. We take a closer

look at their plans.

Over recent months, European oil and gas companies

appear to have been competing to outline the most sus-

tainable future strategies, including pledges to reduce

carbon intensity and remove a large portion of emissions

altogether, including those produced from the oil and gas

they sell (see Table 1). The emissions targets represent a

major management challenge for the companies, and

more detail on how they will get there will be required

over coming months and years. These companies still

enjoy significant cash flow, despite the downturn in oil

and gas markets, and it may come to a choice of whether

to keep paying out large dividends to shareholders or

government (in Equinor's case), or invest the money in

low-carbon projects—even though that may be at returns

well below what they had been used to in oil and gas.

The new targets suggest that low-carbon investment is

quickly rising up the priority list. The level of carbon-

intensity reduction, along with the areas covered—absolute

or net targets; global or local; tier 3 emissions or not and

whether third-party fuels are included (see below for com-

pany detail)—will affect how difficult it is to achieve the

targets, with each of the companies having a slightly differ-

ent end goal and approach. Not all are likely to succeed,

and some may need to adapt their approach in line with

the more successful models. Carbon intensity—where the

CO

2

per unit of energy is reduced—is generally seen as a

less ambitious measure of decarbonization success, as it

can be lowered by producing and selling more clean energy

alternatives, while fossil fuel production and emissions

continue to rise at a slower rate. Absolute carbon reduction

targets and net-zero targets are more significant.

Some of the companies are also undergoing major

reorganizations to facilitate the strategic change of

direction, with analysts suggesting either a split of clean

and dirty divisions (and possible divestment) or an

attempt to transition as a whole—in a similar manner to

Denmark's Dong (now Ørsted—the world's big gest wind

producer). Since it shed its remaining oil and gas assets

in 2017, Ørsted's shares have risen 75%, while oil com-

pany shares have failed to keep pace with the market.

Fortunately for the environment, competing oil and gas

investments are becoming even less attractive as compa-

nies price in lower anticipated oil and gas prices, partly

as a result of Covid-19, and cut the value of oil and gas

assets in the process (totaling over $45 billion already

this year—see Table 1) while an estimated $1.5 tn will

need to be invested annually for the world to meet the

Paris goals, which should provide opportunities—

adding commercial as well as environmental reasons to

move to lower-carbon energy.

Other factors helping with the commitments

include technological advances, which are making the

transition more feasible at reasonable cost. And there

is a growing weight of scientific evidence for global

warming, which could be more rapid than had been

thought, and a corresponding increase in the willing-

ness of governments to take the tough policy measures

required to start and keep the decarburization ball

rolling. This also applies in the United States, but in

Europe the policy responseisexpectedtobemuch

more severe—which, along with public and investor

opinion, explains why it is European rather than US oil

companies that are taking the plunge. Major policy

announcements on hydrogen and other energy transi-

tion support over recent months backs this up, along

with national net-zero by 2050 targets (United King-

dom and EU), bans on gas boiler and gasoline/diesel

car sales and the revised European Green Deal. Also,

the finalization last year of the reform of the Renew-

able Energy Directive gives a much clearer picture on

whereEuropeisgoingintermsofbiofuelsandrenew-

able energy in the transport sector.

Europe also has a carbon tax, which helps companies

justify spending on emissions reductions. Most expect

carbon prices in Europe to be much higher in future than

the €25/tCO

2

level they are now, covering far more areas,

DOI: 10.1111/oet.12811

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