“Why climate activists give me hope” – the Shell homepage welcomes visitors with a piece by CEO Ben van Beurden, where he sets out his belief in a low-carbon economy. In his view, oil majors and environmental and social activists share the same goals, and these companies also have a high degree of responsibility given their substantial finances resources, expertise and size that can help them meet these targets. Shell has pledged to half greenhouse gas emissions from the energy products it sells by 2050, and as an interim measure reduce them by around 20% by 2035. The company has also introduced environmental, social and governance (ESG) KPIs in its executive performance-related compensation policy. Meanwhile Spanish company Repsol has taken an even more ambitious approach, announcing that it will go carbon neutral by 2050.
After only some best in class oil companies standing out with this type of initiative previously, these fresh examples are evidence that a real transition is getting under way right across the oil industry. This challenge has now become a key focus for all large sector events, with the program for the 2020 edition of IP Week virtually entirely devoted to the issue and including talks such as “how can we raise access to energy while still lowering our emissions”, “defining industry’s role and delivering low carbon energy”, “four energy transition scenarios”, “lithium ion battery supply chain and the electric vehicle revolution”, “the shifts of energy and its impact on geopolitics”, “strategies for delivering a low-carbon future”, etc.
The most active oil groups in combating climate change have set up renewable energy or low carbon divisions devoted to their investments in energies that can provide alternatives to oil, as well as gas at a later stage. However, these green or low carbon investments account for at most 10% to 15% of their total investments, and this transition primarily aims to address increasing calls from investors and shareholders, who are more systematically screening for ESG factors and setting out formal goals to align with or contribute to the Paris climate agreement. This particularly applies to France and the UK, where banks and insurers will have to undergo climate stress tests for the first time in 2020 as they test their resilience to climate change scenarios (resilience to physical risks) and scenarios of tougher regulation in order to promote a low-carbon economy: these tests will include assessments of the potential depreciation in value of fossil fuel-related assets.
In another major milestone, asset manager BlackRock now takes on board ESG factors in its investment decisions, particularly in its in-house risk management system (Aladdin). The company announced that it would screen for climate aspects to the same exacting degree as traditional criteria, such as liquidity and credit risk. “We are seeing a complete about-turn in the industry” notes Brice Le Foyer, industry banker who covers Oil & Gas majors at Natixis, “climate challenges and the energy transition have become crucial issues for all companies in the sector regardless of whether they are listed, such as large energy groups, or private companies, such as traders.”
Initiatives to address these challenges
Oil sector companies have several options to stage their transition. Natixis’ Green & Sustainable Hub has set out a sector categorization system that outlines the various possibilities: they can firstly exit or avoid businesses that are responsible for high emissions (coal, oil sands), and they can also reduce the carbon weighting of their longstanding and/or main businesses i.e. reducing flaring or methane leaks. The entire value chain is developing solutions to cut back CO2 emissions that are directly generated by their businesses with, for example, drilling platforms that traditionally used part of their energy generation – particularly gas – to provide energy for their own production systems, now developing more emission-neutral solutions by connecting to the electricity network, where the energy mix has a more renewable weighting e.g. in the North Sea and Norway.
The entire oil and gas industry is also conducting pilot CCS projects (carbon capture and storage), which involve capturing carbon and storing it in underground storage facilities. Some companies are also investing in natural CO2 capture solutions, such as forestry. Traders have also realized that they play a crucial role in the value chain and are starting to invest in new-generation boats with engines that use less environmentally harmful fuels. “In this respect, the IMO 2020 standard is radically transforming the sea transport industry, driven by user demand” states Olivier Menard, industry banker in charge of large trading companies at Natixis. Lastly large oil groups can – and must – diversify their business mix and develop renewable energy operations, with Repsol targeting 7.5GW in installed renewable energy capabilities out to 2025. This diversification into green businesses particularly involves M&A, and over the past fifteen years we have seen a constant increase in the number and volume of deals, such as Total’s acquisitions of Sun Power and Direct Energie.
So far, this shift in the generation mix has promoted natural gas, which is often seen as a transition energy. Gas has increasingly replaced more carbon-intensive fossil fuels such as oil and particularly coal in several cases over the past two decades: for example emissions from buses that use natural gas are one-third lower than vehicles using traditional fuel.
However, while natural gas can help drive this trend, it is still ultimately a fossil fuel, so it is not the end goal for the transition to a low-carbon economy. Meanwhile, carbon capture and storage helps offset the carbon footprint from fossil fuel use, but it is not a miracle solution either, and there are several obstacles to widescale roll-out of CCS i.e. continued high cost of the process, insufficient industrialization of this business, lack of world price signals on carbon emissions hampering large-scale initiatives, risk of CO2 leak and energy usage related to transporting carbon curbing the climate benefits of the technology.
Biomethane and green hydrogen are emerging solutions to step up the transition to a low-carbon world economy
Some large energy groups have taken their strategies further by getting involved in developing alternative energies, such as biomethane and green hydrogen. The Hydrogen Council brings together various stakeholders involved in developing this gas, which does not emit CO2 when burnt: they include oil groups Total, BP and Aramco.
Green hydrogen is another promising option that offers stronger potential for a low-carbon world economy than biomethane. The gas is generated by electrolysis with electricity provided from renewable sources, so this process means that the fuel can avoid any carbon footprint across the entire value chain. It can be stored and injected into existing transport and distribution networks up to a point, and has several potential uses that have mostly already been tried and tested i.e. steel works, glass, plastic, residential or collective heating, transport via fuel cell-based vehicles, etc. “The main limitation for hydrogen is its transport and storage: it makes steel unstable, so developing this technology means replacing some components in existing infrastructure” states Ivan Pavlovic.
Supporting our clients in their energy transition
Natixis has supported producers, refiners and traders for more than 30 years as the company has built up trusted relationships and developed in-depth insight into the sector. Natixis is one of the trailblazers in green and responsible finance with its strong engagement and innovative initiatives. The bank’s Corporate & Investment Banking division is home to the Green & Sustainable Hub (GSH), which is devoted to developing financing, investment and advisory solutions in the green and sustainable space covering all businesses and solutions. Meanwhile, the recently implemented Green Weighting Factor is an unprecedented mechanism that allocates capital to each of our financing deals based on their climate impact with the aim of steering Natixis’ balance sheet transition. These initiatives make Natixis a key partner in supporting sector companies in their energy transition. Brice Le Foyer notes “We do not just finance more green assets, but rather we actively support the transition of existing assets and act as a real catalyst for the energy transition”.
Cédric Merle, an expert in Natixis’ Green & Sustainable Hub, coordinates the bank’s work on the transition of highly emitting industries. “Here at Natixis, we are convinced that our collective fight against climate change will fail if sustainable or so-called responsible finance takes an inflexible approach and sticks to purely green businesses” he notes. Most of the potential for reducing CO2 emissions lies in high carbon emitting industries, where there is a real lack of alternatives i.e. steel, aluminum, cement. “We must not want to give in to green puritanism, but it is important to keep on expecting efforts from these industries, as they need to undergo extensive transformation” he adds.
A series of publications entitled “Brown Industries: the Transition Tightrope” was launched in December 2019*, drawing on a survey with 75 investors to set out an analysis framework to define what transition to truly address the climate emergency would really mean and truly involve. These efforts aim to help Natixis support oil companies that have the most credible and ambitious strategies, by financing their transition strategy via devoted banking or bond solutions, such as developing transition bonds, which still need to be fully defined by the market. Natixis is very much in favor of KPI-linked bonds, whereby issuers pledge to meet specific and detailed low-carbon targets with precise timeframes, e.g. 10 or 15 years. If they fail to meet these goals, financing costs increase, so this set-up creates unprecedented responsibilities and a real incentive to meet their goals and comply with their commitments.
“Real conversations are beginning to happen on the question of transition” states Brice Le Foyer, “our clients know traditional financial products very well, but they are extremely interested in green and responsible finance”.
Natixis also helps clients identify realistic projects in the renewable energy sector and provides access to them. “Large energy groups have massive budgets to invest in green energy, and we support them in selecting and structuring projects” adds Olivier Menard.
* The Transition Tightrope page is available at the following address and contains several freely accessible publications: https://gsh.cib.natixis.com/transition-tightrope