Divestment ‘pass the parcel’ poses transition dilemma

Investor and social licence pressure on the international majors is working — their strategies are changing and coalescing, particularly in Europe, around mid-century net zero ambitions. But getting the majors on track for net zero does not do the same for the world at large — a point underscored by recent efforts to trim their carbon footprint through divestments.

With one eye on the success enjoyed by activists and campaigners taking on oil companies in court, and even in the boardroom, many firms have been high-grading their portfolios, trying to sell higher-emissions, higher-cost oil and gas assets. Such divestments last year made up 72pc of the decline in BP's emissions from running the assets under its operational control.

But the approach certainly has its limitations, including some companies potentially deciding to dispose of certain oil and gas assets "at poor valuations in order to tick boxes" just to hit climate targets, Canadian bank RBC Capital Markets suggests.

Moreover, many oil firms do not seem to pay much attention to the type of companies they are selling to, as long as the price is right. Buyers are increasingly likely to be smaller private equity-backed firms or national oil companies, many of which are often under less environmental scrutiny and could be less inclined to maximise emissions reductions.

"Playing ‘pass the parcel' with fossil fuel assets does not get you out of the situation where we need absolute emission [cuts], which essentially translates as fewer projects," think-tank Carbon Tracker Initiative founder and executive chair Mark Campanale says. Oil firms accept this, but say the decision to completely stop production from an oil or gas field ultimately lies in the hands of the asset holder or government. They also see hydrocarbon divestment income and oil and gas proceeds as vital to building low-carbon industries of scale.

Environmentalists and activist investors say that while it matters who international oil companies sell their assets to, they want to see the firms align with the Paris agreement goals, which require absolute global emission cuts — not least because most emissions come from the use of products rather than the extraction of oil and gas. Activists also want to see output cut through government policy.

Buyer be wary

"As more asset owners and managers adopt net zero objectives, implementing strategies to integrate climate stewardship across asset classes, and as regulators tighten their policy responses to climate risk, the financial space for high-emitting assets to operate will shrink," activist investor the Church of England Pensions Board's deputy director for ethics and engagement, Stephen Barrie, says.

And a global fossil fuel constraint, where governments negotiate the cancellation of oil and gas licences, would "start to permanently retire production rights in line with the 1.5°C scenario", Campanale says. Last year, Denmark said it would phase out oil and gas output by 2050 and hold no more licensing rounds. Despite this, UK-based petrochemicals and energy firm Ineos has agreed to buy US company Hess' Danish offshore oil and gas business. The maximum lifespan of these fields is probably through to 2045, Ineos executive chairman — and former BP chief financial officer — Brian Gilvary says. Yet their production will allow Ineos to meet medium-term oil demand while funding a carbon capture project offshore Denmark, he says.

But constraining fossil fuel development in countries abundant with new oil and gas opportunities and dependent on their development for revenues and jobs will be harder to bring about. Achieving energy transition goals will require a co-ordinated push from governments and companies.

By Rowena Edwards and Konstantin Rozhnov