Treasury Practice

Oil and gas: the road to net zero

Published: Mar 2023

Decarbonisation of the oil and gas industry is essential to cap global warming and transition to a new energy system. So far, European groups are leading the transition, investing most in clean energy infrastructure and introducing more ambitious carbon targets with profound implications for corporate treasury. Still, critics warn that overall, progress remains slow.

In the late 2000s, Ørsted A/S, or DONG Energy as it was known back then, was one of the most fossil-fuel intensive companies in Europe. Today, the Danish energy group is one of the most sustainable companies in the world following its decision gradually to exit fossil fuels and invest instead in renewable energy, particularly offshore wind.

The story goes that around ten years ago executives analysing the legacy business found very little value creation. The only place the company had a competitive edge and the opportunity to build a scalable business was offshore wind in Denmark’s shallow, windy waters where supportive government policy would fan investment.

Adopting a new business model met fierce pushback and resistance from the company at the time. Early nail-biting decisions included ordering 500 Siemens turbines to shore up the supply chain. Such a huge financial commitment for the new company, Martin Neubert, Chief Commercial Officer and Deputy CEO at the time, called it “mind-blowing.”

Later, Ørsted acquired new companies to better control its supply chain. Elsewhere it structured innovative new funding partnerships to bring in more capital, including selling a stake to one of the country’s biggest pension funds. In 2012, the company came under financial pressure following the hit to global gas prices with consequences for planned investment in oil and gas (still a growth area back then) and windfarms. Ørsted’s credit rating was downgraded, impacting the cost of capital and its green transformation suddenly looked on shaky ground.

The company divested non-core assets and slashed costs to curry new investment, all the while focusing on scale and innovation, developing larger sites, installing larger turbines, and pushing procurement, construction, operations, and maintenance harder. In 2016 Ørsted went public, securing new access to equity investors jostling to participate in its green journey. Expansion in Asia and the US, and diversification into green hydrogen and energy storage, have since followed.

Ørsted’s promotional videos describing how the company achieved such a transformation, stress the importance of convincing all stakeholders in its vision as well as careful selection of partners. Top-down decision making and calculated risk taking in a new, entrepreneurial culture, were also vital parts of the mix.

Ørsted’s transformation is often cited as an example of the type of corporate change oil and gas groups, responsible for much of the world’s greenhouse gas emissions, can and should embark on. But the energy transition doesn’t mean that today’s fossil fuel producers must all become renewable energy providers like Ørsted. Indeed, Treasury Today interviewees argue that it’s unlikely they will if their current renewables production and investment is anything to go by. However, oil and gas groups will need to change course if the world is going to reach the goals of the 2015 Paris Agreement and keep global warming well below 2°C from pre-industrial times, and ideally 1.5°C, by cutting greenhouse gas emissions.

Road ahead

In one trajectory, today’s oil and gas majors may decide to remain fossil fuel producers. They will continue to feed demand in a world that still consumes north of 100 million barrels of oil a day and will still need oil and gas years into the future. They will likely manage their existing assets in a way that extracts most value for shareholders before slowly winding them down as the transition gathers pace.

Alternatively, corporate treasury teams will galvanise for huge capex investment as companies let go of the dirtiest parts of their business and commit to invest in new clean infrastructure. This could be in carbon capture and storage for hard to abate sectors like cement, green hydrogen, or biofuels. These companies will continue to produce hydrocarbons but use that cash to invest in renewables and low-carbon products. As low-carbon products gain market share, they will reduce hydrocarbon production while investing in offsets to be net-zero by 2050. In another scenario, integrated companies with refining and marketing businesses will expand on new opportunities like rolling out charging infrastructure or involvement in the green power network because of their expertise in gas.

“The energy transition is a mega trend that is here to stay and will only become more potent over time,” says Pavel Molchanov, Managing Director, Renewable Energy and Clean Technology at financial services group Raymond James in Houston. “The faster companies move in this direction the better for them. There will be companies that end up recognising too late what’s going on and by the time they come to that recognition, it will be difficult to make a smooth transition.”


One of the best windows into progress is analysis of oil and gas groups capex expenditure, continues Molchanov. “Change requires money. These companies need to invest large amounts of capital to transform from oil and gas businesses into diversified energy providers.” Companies most recent capital budgets reveal European oil and gas groups are allocating more of their capital programme to renewables and clean tech than their global peers, driven by legally binding European climate law and shareholder pressure.

For example, British multinational oil and gas company Shell has allocated 33% of its capital programme to clean energy while BP, which allocated 33% last year, is targeting 50% by the end of the decade. French oil major Total has allocated 29% of its capital programme to clean energy while Norwegian major Equinor’s growing portfolio of clean investments include carbon capture and wind generation. “European companies are the leaders, and the energy transition is moving more quickly in Europe,” says Molchanov.

Although many governments outside Europe have committed to net zero, it is rarely enshrined in law. In contrast, European and UK climate law has created a legally binding mandate for the entire economy (not just the energy sector) to reach net zero emissions, or carbon neutrality, by 2050. To be clear, not every individual business will reach net zero, and there will still be fossil fuel usage at mid-century, but decarbonisation involves everyone, explains Molchanov. Unlike European peers, his analysis shows oil groups based in the US, the Gulf, Latin America, China and Russia typically invest less than 10% in clean/low-carbon energy, with the vast majority of their capex still going into oil and gas infrastructure.

Although Treasury Today interviewees note signs companies are slowing down the level of investment in new oil and gas projects, it is continuing despite the International Energy Agency (IEA) saying new, long-lead oil or gas fields are incompatible with 1.5°C and consumption must fall rapidly to meet the Paris climate target.

A recent report by Carbon Tracker, the financial thinktank that maps the risk and opportunity for investors on the path to a low carbon future, explores the production and spending plans of upstream oil and gas companies over the next decade. It finds that from January 2021 to March 2022 these companies approved US$166bn of investment in new oil and gas fields.

More than a third of this investment – US$58bn – was committed to projects that are only likely to be economic if demand for oil and gas pushes global temperatures beyond 2.5°C. Mike Coffin, Head of Oil, Gas and Mining at Carbon Tracker, believes that investment in the transition is not happening as fast as oil majors are saying, or their messaging might imply. “Renewable energy produced today by oil and gas companies is negligible as a proportion of total energy production, while investment in future renewables is still just a small proportion of overall investment,” he says.

Other Treasury Today interviewees add that although many companies say they intend to transition, they are doing little on the ground because demand for oil continues to boom and the price of oil remains high. Indeed, James Vaccaro, Executive Director of the Climate Safe Lending Network believes many companies won’t actually transition. “Many oil and gas groups are never going to transition. They will extract as much as they can until regulation changes, or they are undercut by the economics of clean energy,” he says. “These companies believe there is a bit more they can get away with until the music stops. Although the climate music has stopped and the proliferation of new fossil fuel investment is no longer compatible with warming targets, the economic music hasn’t stopped yet.”


Net zero targets offer another window into progress and fossil fuel groups’ progress positioning for the new energy system. Global oil and gas companies acknowledge the concept of a carbon budget (the amount of carbon emissions permitted over time to keep within a given temperature threshold) and the need to reduce emissions, while upstream oil and gas groups have published climate targets. However, Coffin notes a wide discrepancy in these companies’ approaches to targets and importantly, many aren’t linked to a temperature outcome of 1.5 degrees.

The term net zero is used loosely in many corporate targets, he continues, explaining not all fossil fuel groups’ net zero targets are the same. “The hallmark of the Paris Agreement is alignment with 1.5 degrees, and only a few fossil fuel companies come even close to having Paris-aligned targets.” Paul McConnell, Executive Director, Climate and Sustainability at S&P Global Commodity Insights whose work includes producing long-term outlooks for the sector, adds. “We have seen progress over the last three and four years. But it’s very difficult to compare companies across the board because the approach of each company is very different.”

Scope 3

The disparity is most apparent when it comes to Scope 3 targets. Very few fossil fuel groups – and mostly European companies – have committed to cutting Scope 3 emissions, pledging to reduce emissions in their supply chain. “Scope 3 is a much bigger challenge for oil and gas groups than Scope 1 and 2, and companies will still be reporting significant emissions a long way into the future,” says McConnell.

Scope 3 targets, which make up the bulk of oil and gas groups’ greenhouse emissions, are a crucial part of the jigsaw because it amounts to fossil groups committing to – and acknowledging – their product volume will fall in the medium to long term. “It amounts to an honest acceptance they will have to shut stuff down and take the revenue hit,” says Vaccaro. “There is no way around it because Scope 3 incorporates end-use emissions which make up nearly 90% of the total,” adds Coffin, “If companies aren’t putting Scope 3 targets in place, they aren’t planning for a decline in production volume. With Scope 1 and 2 targets, companies can still increase oil production whereas there’s no way around Scope 3 targets set on an absolute basis.”

Carbon Tracker’s Absolute Impact report names companies like ENI, Repsol, Total and BP as doing most to set emission targets and incorporate Scope 3. European majors have pledged to reach net-zero Scope 3 emissions by 2050 by phasing out production of refined products while using cash flows from oil and gas to finance investments in renewable energy, primarily wind and solar. But across the Atlantic, only three of 24 North American firms had Scope 3 net-zero-by-2050 goals.

Experts counsel that focusing on specific emissions goals shouldn’t overlook important innovation. For example, the US is the world leader in carbon capture and sequestration. Moreover, one of the barriers to Scope 3 progress is many US oil and gas producers argue that customers need to be accountable for the carbon they emit by paying a tax on it. Research from the Market Intelligence business at S&P Global finds that many in the US industry believe a carbon tax would shape consumer behaviour and naturally lead to less fossil fuel use because consumers will have to pay for the privilege. The industry’s belief that a carbon tax that increases the cost of oil and gas to the user is the best way to reduce demand, was expressed by ConocoPhillips Chairman and CEO Ryan Lance speaking to analysts on the company’s May 2022 earnings conference call.

“The problematic piece has always been the Scope 3 because of the double counting, because of who’s responsible for that, and should you hold a company like ConocoPhillips responsible for a consumer’s decision to buy a pickup truck versus a Toyota Prius.” Last year shareholders at the firm voted down proposals to limit Scope 3 emissions.


Continuing to plough money into legacy business puts oil and gas majors at risk of stranded assets, best understood as assets becoming less productive than predicted at the point they were sanctioned because of lower demand and pricing. A fast transition, triggered by a policy response, or renewables rolling out more quickly than expected, increases the risk of stranded assets. For example, the war in Ukraine has highlighted Europe’s vulnerability to Russian oil and gas and speeded up the transition, argues McConnell. “Decarbonisation is now seen as a strategic response to energy security and removing dependency on fossil fuels is seen to maximise energy security,” he says.

“There’s going to be a lot of oil refinery capacity the world doesn’t need in a 1.5 degrees world that’s potentially going to have to be written down. We’re not seeing the discussion we’d expect to see by companies reflecting the risk on this,” adds Coffin. As assets become economically stranded, investors will play a vital role in triggering rapid re-evaluations. He predicts that fossil fuel companies in the Middle East, sitting on hydrocarbon reserves that are cheap to develop, may be more resilient as the transition unfolds.

Cost of capital

In another treasury risk, interviewees say fossil fuel groups’ abilities to access finance across many capital markets is beginning to change. Sweeping regulatory reform is starting to drive private capital to more ‘green’ or ‘sustainable’ activities, explains Matthew Townsend, Co-Head of the International Environmental, Climate and Regulatory Law Groups at Allen & Overy and one of the founders of the firm’s Global ESG Group. “Investors will become more selective over the type of projects they invest in, so this is likely to be felt across multiple sectors. This may be more keenly felt in new oil projects depending on how gas is treated under local or regional taxonomies.”

Elsewhere, some European banks are growing more reluctant to lend to new infrastructure. For example, Denmark’s Danske Bank has said it will not offer refinancing or new long-term financing to any oil and gas E&P company that does not set a credible transition plan in line with the Paris Agreement, making it one of the first banks to introduce restraints on corporate lending to fossil fuel groups, a profitable corner of bank business.

Although banks will continue to finance OPEX and the maintenance of oil and gas operations in the short term, Vaccaro believes Danske’s decision is indicative of the start of a wider move amongst lenders to wind down financing of new operations and begin to dictate terms via covenants in loan agreements that direct the use of proceeds. “Danske has shown they can put in covenants and lend money but on the condition it funds net zero infrastructure which aligns the company with the Paris Agreement. This is the direction of travel, and other banks will follow,” he says, predicting UK, French and Dutch banks could be next. “If you choke off debt, you choke off the project.”

Still, according to the latest analysis by the Rainforest Action Network, global banks provided US$742bn in financing to coal, oil and gas companies in 2021, despite the fanfare of climate pledges by lenders that signed up to former Bank of England governor Mark Carney’s industry alliance. The research finds fossil fuel financing remains dominated by the same four US banks.

But Townsend concludes the conversation between banks and oil and gas groups is starting to change. “Lenders will need to meet their own regulatory requirements and voluntary commitments. This will drive how they deploy their capital,” he predicts. “There are significant adjustments ahead and, for many, this is a deliberate realignment of capital.”


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