The oil and gas industry and the use of its products accounts for approximately half of global C02 emissions and it is therefore central to achieving the climate goals outlined in the Paris Agreement. Our latest report 'In the pipeline' finds that 90% of oil and gas company emissions occur in downstream industries, for example utilities and transport. Looking at the world energy system, this is where policy and technological innovations are going to be key agents of change with ripple effects back up to the oil and gas companies. These changes are all set against a backdrop of low oil prices, peak oil demand on the horizon and investor concern about 'stranded assets' making this high emitting sector on the watch list.
In our award winning report series looking at high climate impact sectors, we focus on the link between company financial performance and climate issues. In this report we look at 11 global oil and gas companies. Our research shows a clear transatlantic divide with the European oil and gas majors outperforming their North American counterparts on three broad areas - namely, how much gas is in the portfolio relative to oil, exposure to high carbon, high-cost oil sands and broader themes of climate governance and strategy. European companies have been more active in investing in low carbon assets and stress testing their portfolios against 2-degree pathways.
We found that oil and gas business models still focus on resource ownership and reserve identification and we believe this will need to change to adapt to a low carbon transition in the future. Disclosure is also critical for investors to better understand the risks and opportunities faced by oil and gas companies and to ultimately inform their decision-making. With the momentum of Paris, and the TCFD recommendations expected in December, there is a drive to make climate disclosure more mainstream to ensure the financial and climate impacts in specific sectors are better understood.
Our report shows that a lack of disclosure in certain areas in the oil and gas space is a material loss to investors, specifically around how reserves are classified and the assumptions under which estimates are made. We would like to see more information on the wider resource base of companies to protect investors from potential shocks from provisions of reserves which can impact value. More standardised and consistent global reporting and disclosure would also allow investors to benchmark these oil and gas majors more accurately on sustainability and performance.
We expect investors to continue to engage with the oil and gas majors and ask questions around stress testing of portfolios against climate action scenarios, capital spending and investments in new technologies to enable the transition to a low carbon economy.
There will be change for oil and gas companies in both the short and longer term. More immediately companies will be getting a tighter grip on operational efficiency, especially on methane emissions. The 11 companies we analysed lost on average 6% of their natural gas in production. Instilling greater capital discipline on identifying and progressing low carbon investment opportunities and diversification of business plans will also be strategic imperatives.
When we look at the bigger picture diversification from oil and gas to a wider energy company will be a strong feature. DONG now generates more revenue from renewable energy than hydrocarbons as a key example. We can also expect to see the managed wind down of hydrocarbon production and potential return of capital to shareholders.
The high carbon value chain associated with the oil and gas industry will mean change is forthcoming, and as with other energy transitions, it could happen relatively. In our research we have outlined the companies that are positioning themselves more competitively for such a shift. Due to their size and balance sheets, oil and gas companies are well placed to push through a combination of these transition plans. We look forward to 2020 for signs of increased alignment between company and climate policy action to ensure we deliver on the Paris commitments.
To view the full report, click here.
For more information on the award-winning investor research series into the high emitting sectors, for example cement, steel, autos and utilities, click here.