Amid ever-increasing concerns over climate risks, BP is the latest European oil and gas company to announce a climate goal with their net zero ambition.
Having agreed to conduct probing scenario work in 2019, BP have now gone straight to setting themselves an ambition (this is not expressed as a binding “target”) for 2050. Unlike Total and Shell’s announcements over the last few years, BP pledges to cut the carbon emissions of its upstream production to zero on a net basis – thus placing a finite limit on the emissions from their oil and gas production and linking to the concept of the global carbon budget.
While the devil will be in the detail, this certainly appears to be a big step forward for an integrated oil and gas company, moving the dialogue beyond the intensity ambitions we have generally seen to date. Shell’s ambition to lower intensity by 50% still enables the company to increase emissions overall, by producing more, even as they lower the average carbon emissions per unit of energy produced. Conversely, BP have taken pains to point out that their ambition will result in a reduction in the number of tonnes of CO2 entering the atmosphere from their production. Of course, ambition is just that – it’s not binding in any way.
With corporate ambitions starting to take account of the realities of the climate challenge, the debate will increasingly move onto the details of how these good intentions will be implemented in reality. A key issue that we see is to understand what Net Zero might entail. What are reasonable expectations around offsets and carbon dioxide removal (CDR) at the company level, and how might these play out relative to future oil and gas production?
Structure of announcement
To understand BP’s announcement, it’s worth considering the two main parts of the oil and gas value chain within an integrated major as traditionally categorised: Upstream and Downstream. The Upstream part covers the exploration, development and production of hydrocarbons, while Downstream is further split into the processing of the raw materials into products (e.g. crude oil into petrol/gasoline or petrochemical feedstocks) and subsequent marketing of the products to consumers and businesses. BP, like other majors, will refine and market hydrocarbons that have been produced by other companies (and will also sell the crude it produces to others to refine).
While the headline of BP’s ambition is to be “Net Zero by 2050”, this is broken down into aims that do not apply equally to all parts of the business:
- Aim 1 specifies “net zero operations”. This includes the scope 1 and 2 emissions from their operations across both Upstream and Downstream, i.e. the emissions generated in the actual extraction and processing of fossil fuels, but not the scope 3 emissions of the final combustion of products which are by far the majority of emissions related to oil and gas use.
- Aim 2, to be “net zero” on “oil and gas production”, relates specifically to Upstream and covers the full life-cycle emissions (scopes 1, 2 and 3) from production on an absolute basis. This effectively limits the expansion of oil and gas production by BP, although the degree to which production is actually reduced is highly dependent on the extent to which emissions from any remaining volumes in 2050 can be offset elsewhere.
- Aim 3, “halving intensity” is a Downstream ambition, and while this does cover the scope 3 emissions of all the products BP sells – including crude extracted by others – it does so only on an intensity Adding renewables to the energy mix lowers the overall intensity (on a joule / tonne of CO2 basis) and so the overall volume of hydrocarbon products sold can remain flat, or even grow. This aim therefore places no finite cap on growth, or on the absolute emissions that result from the final combustion of these products. This approach is similar those adopted by Shell and Total.
BP would contend that if every hydrocarbon producer, public and private, had a binding target expressed in a similar way to BP’s aim 2, then every drop of oil would be subject to an absolute scope 3 target at the point of extraction, and that no additional absolute targets are needed for the subsequent refining of this crude (which is then covered by BP’s aim 3, the 50% intensity reduction).
While in theory this argument has merit, for it to be fully linked to the global carbon budget it requires all other producers that sell into BP’s business, be they listed or state-owned companies, to set such targets on the initial production. Until this happens, then as BP’s ambitions are currently framed, BP will continue to profit from the sale of hydrocarbon products that have no absolute scope 3 emissions constraint attached to them.
The implications of Net Zero – CDRs and offsetting
A corporate ambition announced with fanfare is one thing, delivery of that is quite another. Many questions remain, crucially around further detail on interim targets, and the execution strategy to achieve them.
“Net” Zero implies that there will still be some emissions of greenhouse gases, balanced out by the removal of an equivalent amount and permanently sequestered. For an oil producer, achieving net zero across upstream production (aim 2) requires either the significant deployment of CDR technologies or the purchase of offsets, or both. The deployment of carbon capture, usage and storage at the scales assumed in many scenarios remains a challenging prospect to say the least, and generally continues to lack a clear value proposition for investment. Significant questions also remain over other mooted CDRs and offsets, for example the land-use implications of afforestation and the potential for double-counting.
We need to develop our understanding on what level of CDRs are reasonable. Given the scope 3 emissions from BP’s upstream production in 2019 were 360 million tonnes of carbon dioxide equivalent, even with the significant deployment of CDRs and purchase of offsets, it is hard to imagine that BP would be able to reach net zero without an absolute reduction in production volumes. We would welcome more detail from BP on this side of the story.
One way for BP to achieve their ambitions would be to incrementally move out of hydrocarbon production, while continuing to refine and market the oil and gas produced by others (covered only by the 50% intensity reduction ambition of aim 3) alongside renewable energy. This would effectively shift the responsibility for absolute limits on scope 3 emissions from the produced hydrocarbons to others. We note that BP’s reorganisation combines Upstream and Downstream into a single business unit. However, we highlight that installed refining capacity is vulnerable to the risk of lower volumes and lower margins contributing to sharply lower earnings under conditions of weakening oil demand.
Paris alignment for oil and gas producers
With this, BP are effectively the first major to acknowledge that oil and gas production will most likely need to be reduced in the short to medium term for the world to reach the goals of the Paris Agreement. In our 2019 report Balancing the Budget, we developed our company-level analysis to explore the impact on both carbon emissions and production in a low carbon world; the implication for the average major is a 35% reduction in absolute oil and gas production by 2040. The scenario used relies on the deployment of CDRs at a global level, but did not we did not attribute any CDR factors to individual companies.
In this report we also included a framework of pre-conditions for upstream oil and gas company targets to be considered truly reflective of the planet’s finite limits, defining three “Hallmarks of Paris Compliance”. With the announcement of their Net Zero ambition, BP appear to have met two of these criteria, with the third being partially met:
- Is bounded by finite limits through absolute target(s), not just on an intensity basis – Yes
- Covers scope 1, 2 and 3 emissions – Yes
- Includes emissions from the vast majority of a company’s owned production on an equity share basis – Not fully met
We see emissions from production being calculated on an equity share basis (including that from joint-ventures) as an appropriate approach. However, BP’s ambition excludes its stake in Rosneft – a significant proportion of overall production and profits – meaning that the upstream production BP has an economic interest in will not be truly net zero.
BP’s major European peers Shell and Total have both published scope 3 emissions ambitions over the last few years, although crucially only on an intensity basis. With the inclusion of aim 2, BP have now leapt ahead of these two with the separation of Upstream and Downstream ambitions giving welcome granularity. Overall, BP’s aims appear similarly progressive to Repsol’s recently announced ambition of net zero in 2050. Repsol has noted that it expects to rely on carbon capture technologies to reach its ambition, along with offsetting via reforestation and other nature-based carbon sinks as necessary.
Financial risk in the oil and gas industry
While setting emissions targets is a worthy exercise, limiting the financial risk of investing in stranded assets additionally requires developing the “right” assets only. Carbon Tracker has argued that successfully maximising returns in the energy transition will require that companies should focus only on the most cost-competitive projects: the historic metrics of reserves replacement ratio and production growth are obsolete.
BP had a previously-announced strategy of only pursuing advantaged oil, yet as of 2019 they forecast continued growth in oil and gas production at a rate higher than global demand growth, let alone the reductions that will be required to hit the Paris goals. While companies do not all need to lower production at the same rate to achieve a well below 2 degree outcome, the key point is that for most companies, limiting investments to those projects which fit within the carbon budget will mean lowering production in absolute terms – and soon.
Our latest analysis looking at capex alignment (Breaking the Habit), found that all the majors, including BP, were continuing to sanction high cost projects that do not fit within a lower-demand pathway and hence run a heightened risk of destroying value in a decarbonising world. Partially in response to such analyses, in 2019 BP supported a shareholder resolution committing it to demonstrate that each of their major capex investments were consistent with the goals of the Paris Agreement.
It is positive to see this message reinforced in their latest announcement, although we continue to await the results of this exercise, and we look forward to seeing these along with the methodology and underlying assumptions in the upcoming annual report. BP will hope that this foresight is recognised by the financial community; it will be interesting to see the market response.
Corporate behaviour and disclosure
BP has stated it wants “to help the world meet net zero” and has five further aims around engagement. While it is positive to see BP finally adopt the recommendations of the TCFD (Task Force on Climate-Related Financial Disclosures), this is something Eni, Shell and Total did in 2017. BP is playing catch-up here.
To give greater transparency to investors and wider society alike, we will need to see further disclosure on a variety of different dimensions, for example the scenarios BP use in their modelling, the implied deployment of CDRs, the oil and gas reduction pathway they intend to adopt to 2050, and their forecasts for commodity prices used in reserves and impairment definition. All of this needs to be backed up by a remuneration policy that appropriately incentivises this new strategy.
We would like to see increased pressure from BP towards the implementation of carbon prices – ideally on a global basis – after all, they will find little opposition from those seeking a solution to the climate crisis.
Corporate lobbying has long been an issue for the industry and here BP has indicated an end to these activities (aim 6); as framed this aim should also move BP away from “greenwashing” advertising that seeks to justify continued hydrocarbon expansion – we welcome this. BP is a member of many trade associations and aim 8 hints at having greater influence in the direction and intentions of these. The proof of the pudding, however, will be whether BP does distance themselves from those organisations that are looking to perpetuate the status quo of increased hydrocarbon production.
In summary, overall BP’s announcement is progressive, and they appear to have taken a significant step ahead of their peers. We await further detail on these ambitions, in particular relating to the mechanics of how BP will implement them. As practice moves on from recognising the need for change, towards making that change real, it is these details which will determine the materiality of this new direction, and how it is valued by both the financial community and wider society.
 CDRs can also be referred to as negative emissions technologies (NETs), and include for example carbon capture, utilisation and storage (CCUS), as well as afforestation.
 As part of this announcement, BP has said it intends to combine these into a single function.
 See Carbon Tracker, “Margin call: Refining Capacity in a 2ᵒC world”, November 2017
 The International Energy Agency’s Beyond Two Degrees Scenario is used as the benchmark – we estimate this to result in 1.6°C of warming vs pre-industrial levels by 2100. This scenario does not go as far as achieving net zero emissions globally by 2050.
 On an mmboe basis.
 “Upstream Strategy” within BP Annual Report 2018, published March 2019.