Oil giants under scrutiny as climate pressure intensifies

On the sidelines of the global climate summit COP26 last year, Australian business tycoon Andrew Liveris began spruiking the benefits of carbon pricing.

The politically toxic ‘carbon tax’ has ended prime ministerial careers and divided the nation, but Liveris said the government’s technology roadmap was insufficient and a carbon price was the “next logical step”.

The COP26 event held in Glasgow, where oil giant Santos had a pavilion display as leaders debated the best way to signal the death of coal, seems a lifetime ago.

The Kremlin’s invasion of Ukraine has triggered a rush for fossil fuel supplies, as the world cuts off Russian exports. Energy and petrol prices are soaring, prompting a global discussion around energy security and the role of oil and gas.

There is consensus among analysts that the current spike in energy prices does not reflect long-term demand, with dependence on fossil fuels waning as global economies switch to cheaper renewable energy sources in pursuing net-zero targets.

But the comments by Liveris, who was the architect of Australia’s gas-led recovery policy, have now taken on new meaning. Could a global carbon price be the only way to secure gas’s role in the energy transition? Or will these companies need to reinvent core operations to keep investors on board?

Last week, The Age and Sydney Morning Herald revealed Woodside had commissioned the national science agency to model the impact of exporting gas on global emissions.

The CSIRO report, which was released after a lengthy freedom of information request, found increasing gas exports could only reduce emissions if there was a high carbon price in every region around the world by 2025.

Without this, increasing gas supply could displace renewables, prolong coal and increase emissions – undermining the gas industry’s key environmental justification for new projects, that global emissions will be reduced by gas displacing coal in Asia.

Oil and gas majors, including Santos and Woodside, are under unprecedented pressure to develop credible climate plans to secure not only a social licence to operate but investor capital.

Chief executives from both companies have said it is now harder than ever to secure funding for new projects, as scrutiny mounts from shareholders, regulators, banks and activists that want to see fossil fuels phased out faster.

Both companies have recently gained approval for major new projects, Scarborough and Barossa, despite the International Energy Agency’s declaration last year there can be no new fossil fuel projects if the world is to keep global temperature increases to 1.5 degrees.

Fund manager Allan Gray’s Simon Mawhinney says increasing production is vital to avoiding “astronomical” price spikes and social upheaval.

“Are these projects needed? Absolutely. Will they get funded? You bet. Who’s going to do it? Somebody,” he says. “If people want hydrocarbons to stop by 2035, fine, don’t invest in them now. But make sure we all know what the consequences are.”

Mitigate, change or self-fund?

Mawhinney says Santos and Woodside can largely self-fund new projects, and high commodities prices will help build buffers for capital expenditure in the future.

“If the oil and gas companies don’t invest in their businesses between now and 2035, they won’t have anything to produce,” he says. “It’s a difficult thing to admit but the world is not ready for no new oil and gas developments.”

But these companies are also increasingly at the whim of large investors, who are demanding greater action on a range of environment, social and governance factors.

‘It’s a difficult thing to admit but the world is not ready for no new oil and gas developments.’

Simon Mawhinney, Allan Gray

Australia’s superannuation funds have become vocal advocates for corporate action on climate change, holding large stakes in companies such as Woodside and Santos to agitate for change.

The Australian Council of Superannuation Investors (ASCI), which represents more than $1 trillion in assets, says the now-public CSIRO report raises a key question investors have been focused on for some time.

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“What role will LNG play as the world decarbonises?” ACSI chief executive Louise Davidson says. “Investors need more detailed reporting on climate strategies such as emissions reduction targets that are science-based.”

Davidson says this will be considered in the lead up to Woodside’s annual general meeting in May where investors will vote on a resolution seeking to force better reporting on emissions and plans to reduce them.

However, Janus Henderson’s head of global natural resources Daniel Sullivan says companies like Woodside need to do a lot more than displace coal or report emissions to win the support of long-term capital.

“In the big picture, the hardest industry to mitigate is oil and gas because that’s all they do,” he says. “They literally have to mitigate everything or change their business line entirely.”

Sullivan says companies like Woodside cannot offset their way into the future, and short-term plans to curb carbon emissions will only cause more pain for investors. He provides the example of the Spanish energy company Repsol, which recently introduced a voluntary cap on the number of barrels it produces per day to reduce its carbon footprint.

“It’s good for the climate but not for equity holders,” he says. “You’re now deliberately stopping your core activity which involves bringing on new projects and making good margin and growing the company.”

And he says short-term price surges, like the current rally, can also hurt investors by triggering “knee-jerk” reactions from governments to protect consumers from essential products becoming unaffordable.

“I know this is an extraordinary circumstance of having a war but if governments are going to intervene and tax your profits, ad hoc, just because they think you’re making too much money – that’s very bad for equity markets and ratings.”

Investors need to see long-term plans to diversify core operations which is difficult but not impossible, he says, providing examples of Dutch companies DSM and Vestas which executed strategic overhauls over 15 to 30 year periods.

‘They can’t just give it up in a day. If you wake up tomorrow and say we’re going to make cornflakes, most people would be horrified.’

Daniel Sullivan, Janus Henderson

“Nearly everyone you look at is anti-oil now. And all those forces will basically come together to stop your projects, increase your cost of capital, lower returns to shareholders, super tax you out of big events – it’s a much harder area.

“They can’t just give it up in a day. If you wake up tomorrow and say we’re going to make cornflakes, most people would be horrified. You need to come up with a credible plan which is acceptable to the shareholders in the sense that they’re there for a reason.”

So, what is the plan?

Both Woodside and Santos have released climate plans in recent years which include commitments to reach net-zero emissions by 2050 and 2040 respectively.

These plans feature prominently across the companies’ websites and branding. But drilling into the details provides a more cynical picture.

The focus is always on their own operational, or Scope 1, emissions rather than their Scope 3 emissions from their customers burning the oil and gas they buy.

To decarbonise their operations companies have three difficult options and one unpalatable one.

Eliminating emissions in the first place is the obvious starting point. However, a Woodside proposal for a million solar panels will reduce emissions from its Pluto LNG plant by just 1.5 per cent.

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As an alternative, Santos is spending $220 million to capture emissions at its Moomba gas field for storage in depleted oil and gas fields. Carbon capture and storage (CSS) has a poor track record, with Chevron’s $3.1 billion effort at its Gorgon LNG project in WA falling 9.5 million tonnes short of its target in the first five years of operation.

If emissions are difficult to eliminate, capture or offset at scale and cost effectively then fossil fuel producers have one last unpalatable lever to achieve net-zero emissions: produce fewer fossil fuels.

Woodside declined to answer questions from this masthead about its longer-term plans but last week told trade publication Energy News Bulletin that after 2030, “we have an aspiration not a target for now, which reflects that we don’t have detailed business plans that far ahead”.

Woodside also declined to answer whether it was confident carbon credits purchased now would stand the test of time and be accepted in the future?

A Woodside spokeswoman said it engages directly with investors and referred to its publicly available Climate Report that explains its strategy.

Santos plans to cut its net emissions by up to 30 per cent by 2030 with a mix of offsets, elimination and its Moomba CCS project, and manage the remaining 70 per cent of emissions in the 2030s with mainly more CCS.

It aims to reduce global emissions by exporting more LNG, the approach questioned by the Woodside-commissioned CSIRO report. Its target is just a 3 per cent reduction by 2030.

A Santos spokeswoman said a 2019 International Energy Agency report concluded switching from coal to gas halved power generation emissions and cut heating emissions by a third.

Woodside has no target to reduce its Scope 3 emissions and instead aims to spend about $6.6 billion by 2030 to provide lower carbon products such as hydrogen and carbon storage to its customers.

Burn less?

Mawhinney says Woodside and Santos are only at the start of executing transition strategies and urges investors to be patient. But in time, he says genuine transition plans mean addressing Scope 3 emissions.

Alternatively, Mawhinney says the companies could continue producing oil and gas until all the reserves are burnt. “That is a credible business model to follow as well. But it’s one with significantly less longevity attached to it.”

Atlas Funds Management chief investment officer Hugh Dive says it is unlikely that Woodside could reinvent itself. It’s a company specialising in drilling wells and that’s not going to change anytime soon.

Woodside has recently doubled down on the sector in signing a major deal with BHP to acquire its oil and gas assets. Dive says this is good news for investors because it means the combined entity is now bigger and diversified beyond Australian LNG.

Liveris’ suggestion of a carbon price could benefit the gas industry by penalising more carbon-intensive sectors such as thermal coal. Although, Dive says carbon pricing will mean fewer projects and higher costs, which will be passed onto consumers in the form of higher energy prices.

While there are sure to be loud calls for change at the upcoming AGMs, the most likely course of action is business as usual. Dive says Woodside and Santos could seek to charge a premium because the products are coming from sought after, politically stable countries.

“If the sanctions are ongoing with Russia, and Russian gas and oil is removed, conditions will be bullish for some time,” he says. “I think the transition will be slow and relatively gradual.”

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