The ‘Follow This’ movement’s 2023 resolutions request that the Super-Majors put forward interim Scope 3 targets for 2030 “in line with the Paris Agreement”. The movement has not defined precise targets, but the IPCC has stated that globally, intentions are to halve emissions by 2030.
RBC has looked at the consequences of accepting the resolution and think it will force companies to shrink and shift market share to other regions.
Reducing their Scope 3 emissions are particularly tricky for the Super-Majors as they relate to the end use of the product. For them to reduce their Scope 3 emissions (which they do not control), they would need to either i) Shrink and sell less hydrocarbons; and ii) Divest assets, potentially to private players. Indeed, the Super-Majors combined market share has fallen to ‘only’ 8% of the oil market, and 9% of the gas market. Recent evidence suggests, their decline has done nothing to alter global oil or gas demand and has simply passed on their Scope 3 emissions to others.
”We think the Super-Majors would be better served by consolidating the sector, but this would require a re-defined framework on ‘progress’ through the energy transition.”
“We believe aggressive reductions in Scope 3 emissions will reduce their ability to drive further investment into renewable sources, as the majors could generate much weaker free cash flow as businesses decline. Further, we believe the OPEC+ group would likely see current trends as an opportunity to gain market share, further jeopardizing energy security goals and exacerbating geopolitical tensions.”
Biraj Borkhataria, Head of European Energy Research at RBC Capital Markets.
Measuring a company in transition
As Super-Majors sell lots of hydrocarbons their carbon footprints are large. We think investors should focus on the rate-of-change rather than absolute levels or intensity for the group. For the US majors CVX & XOM, upstream portfolios have benefitted considerably from Permian volumes becoming a more meaningful portion of range, where carbon intensity is materially below the group average for both. Going forwards, investors will need to incentivise companies to 1) Produce more low carbon products; and 2) Reduce the carbon intensity of current barrels produced.
RBC believes the combination of Scope 1 & 2 emissions (both intensity and absolute) alongside net carbon intensity of sales are effective measures for the European majors, while the US majors should be judged on upstream/downstream carbon intensity.
Consequences of forcing majors to shrink
Given oil demand is likely to break new records this year, the gap left by the majors shrinking will be filled by other producers, predominantly private companies as well as OPEC+ and Russia, with obvious geopolitical ramifications. RBC believes the majors should be consolidating the sector and not retreating, though equity valuations do not currently incentivise this. It seems much simpler to buy back your shares than invest in the business, particularly in Europe.
Similarly on the divestment front, RBC thinks a risk exists that companies leave value on the table by divesting higher emitting assets to other players. RBC also points out that sales to private players mean that emissions are no longer disclosed, while environmental and operating standards may also be lower, which could result in worse environmental outcomes globally.
RBC argues that a more holistic approach to emissions is needed, particularly on the gas front which could displace coal in the power mix globally over time, and thinks emissions targets should be adjusted to reflect inorganic activity.
Our Commitment to ESG
ESG Stratify™ encompasses all of RBC Capital Markets’ ESG thought leadership and insights, including our monthly ESG Scoop series and industry-specific publications from our research analysts. RBC’s Equity Research Group delivers thorough, comprehensive assessments of companies spanning all major sectors, along with macro insights and stock-specific ideas to help guide portfolio management decisions.
