Fossil Fuel Industry Increasingly Misaligned with Transition Goals
Some recent research from Carbon Tracker highlights how misaligned the fossil fuel industry is with the energy transition that is needed to avoid the worst impacts of climate change. Carbon Tracker’s recent research also highlights how compensation and strategy at oil and gas companies are not meeting the moment. Some of the highlights/lowlights from the work of Carbon Tracker are:
Misaligned executive remuneration still geared heavily to production growth that is not required, versus production management
Misaligned Corporate goals – continued high-risk investments in new oil and gas project sanctions, watered-down emissions targets, and negligible investment in renewables squandering growth opportunities
Misaligned technology — Carbon Capture Utilization and Storage (CCUS) is a costly diversion, with poor performance and practically no climate impact while adding to the cost of doing business
A high-stakes game of chicken
In their recent report, Navigating Peak Demand, Carbon Tracker shows how demand for oil and gas is expected to peak this decade. As the race for a cleaner energy future gathers pace, the demand for oil and gas will inevitably decline. However, it looks like most oil and gas companies are positioning themselves to be the last ones standing, as most are still investing in developing oil and gas resources that will need to stay in the ground if the global community is to reach the most desirable climate goals (2.0 C degrees of warming).
That's a dangerous game of chicken, as few oil and gas companies are likely to survive in the long term as the demand for oil and gas falls in the coming years due to increased regulation and falling consumer demand. This presents outsized risks for oil and gas companies and their shareholders. Simple math tells us that oil and gas production from the current coterie of oil and gas companies will have to shrink substantially to meet the very limited demand likely in the long term. Some of these companies my survive if they change their business models.
But that doesn't look like it is happening.
Look at pay to see what is incentivized
In the report, Crude Intentions II, Carbon Tracker examined the pay at 25 of the largest publicly traded companies to better understand whether these firms are incentivizing a transition away from oil and gas, or incentivizing business as usual. Here are their findings:
Almost all companies studied continue to incentivize the growth of hydrocarbon output, the reverse of a prudent financial risk management strategy
Metrics that appear to superficially drive the transition from oil and gas are growing under a different name, e.g. LNG as part of “low-carbon” offerings.
Overall, there was little change from 2021, which brings many oil and gas companies three years closer to the consequences of stranded assets
Stay tuned to Carbon Tracker for more excellent research on carbon-related issues. Their research shows that to this point, the oil, gas, and coal industries are lagging well behind the progress that is needed for a transition to clean energy to avoid the worst-case scenarios that climate change may bring.
The companies and their shareholders are playing a high-stakes game, that most of the players are likely to lose.