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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Oil & Gas Companies Face Tough Decision On Emissions

  • Only very few oil and gas companies have an active plan to reduce emissions around the board
  • If energy companies misled investors about climate-related issues, the SEC may take action
  • Companies may soon revise their de-carbonization policies and up spending on low-carbon alternatives

With the COP26 climate conference underway in Glasgow, global energy companies are splashing on ads touting their green credentials. Despite the ads, the oil and gas industry accounts for about 40% of all greenhouse gas emissions. They need to get out in front of these climate related issues if for no other reason than a simple risk minimization strategy. Declaring their support for broad environmental goals serves an important purpose—it may postpone even more intrusive government restrictions and also serves to placate nervous providers of capital, equity investors as well as bondholders. According to a recently published study authored by European academics and think tankers (“How ambitious are oil and gas companies’ climate goals?”, Science, 22 October 2021), of the 52 major oil and gas companies studied, only two had set goals that would actually meet the 2050 climate target set by the international conferences to limit global temperature rise to1.5 degrees Celsius.

The European researchers noted, too, that many of the companies did not make clear the difference between Scope 1 and 2 emissions (from their operations ) and Scope 3 emissions which are produced when the customer uses the energy product. And while 45 of the 52 companies published data on Scope 1 and 2 level emissions, only 23 respondents published Scope 3 material, which rendered company to company comparisons rather difficult. This point is important, because Scope 1 and 2 emissions may account for less than one tenth of the industry’s total emissions.

The median sample company intends to reduce its greenhouse gas intensity (measured in terms of grams of GHG per unit of energy produced) by 7% by the target year of 2037. The decline in energy intensity needed to meet the 1.5 degree Celsius target is 3% per year. If these calculations are even remotely correct, the average oil and gas company plans no meaningful greenhouse gas remediation efforts while still touting its good climate related intentions.

This October study from the scholarly periodical Science should concern investors in three ways. First, it might indicate the unpreparedness of the average oil and gas company and the magnitude of the climate related compliance tasks facing it. But investors always need to judge management preparedness for all sorts of issues, and they should eventually be able to get their hands around this one, too.

Second, studies of this sort lead one to ask how good the newly popular ESG (environment- social-governance) ratings really are? Finally, what we would fear is if investors conclude that the oil and gas industry deliberately misled them about the magnitude of the problem and the speed (and expense) needed to address it. The US Congress has already held hearings on whether oil companies hid information about global warming. We would worry more about the Securities and Exchange Commission (SEC) finding that energy companies misled investors in documents filed with the SEC. Then the lawsuits would begin.

Those corporate targets for GHG remediation efforts should consist of more than political puffery and pleasing images. The financial data behind them go into quarterly and annual reports filed with the SEC. The SEC has higher standards than politicians and cable news presenters in terms of financial projections and environmental compliance. Corporations found to be too egregiously paltering with the truth may find themselves under investigation. Convicted violators of securities regulations face considerable fines, adverse publicity, and sometimes even jail. As a result, we would expect sobering revisions of those dreamy goals of corporate climate related compliance followed quickly by a large increase in climate related capital spending. So do not get comfortable about those numbers. Our bet is that they will change soon.

By Leonard Hyman and William Tilles for Oilprice.com

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