Research from the asset management-backed research group, Transition Pathway Initiative (TPI), reports that three out of 58 oil and gas firms assessed had emissions reduction targets ambitious enough to reach net zero by 2050 and align with the Paris 1.5°C benchmark, while 83% remain unaligned with any benchmarks (including the less ambitious ‘below 2°C'). 

The three aligned to a 1.5°C benchmark are Eni, TotalEnergies and Occidental (Oxy); the last of which issued a high yield bond in the US in December 2020. We try to understand whether there is a credible pathway for companies to continue producing new oil and gas and whether investors should trust in its ambitious targets. In turn, we take a look at the methodology used by the TPI to claim that the oil and gas firm is on track for a 1.5°C scenario. 

Oil and gas outlier?

Seemingly an ESG outlier among LevFin oil and gas firms, Oxy was the first to appoint a female CEO in 2016. Vikki Hollub has since diverted from the company's traditional operations and is on a journey to transform Oxy into a “carbon management” company within the next 10 to 15 years. 

This means that it plans to develop the world’s first commercial scale Direct Air Capture (DAC) facility and in order to sequester as much carbon from the atmosphere as it extracts from the ground. Oxy has an ambitious climate strategy aiming to achieve net-zero GHG emissions associated with operations (scope 1 and 2) by 2040 and use of end products (scope 3) by 2050. The company is rated level 4 by TPI (their highest assessment score) and has comprehensive policies related to climate engagement. 

Oxy also sold the world’s first "carbon neutral crude oil” in 2021. On the other hand, groups varying as widely as government panels, international agencies and NGOs assert that a credible 2050 net zero target cannot include the continued production of oil and gas, with Greenpeace calling some of the methods used by Oxy "greenwashing". 

Oxy’s 2020 Climate Report is ambitious in nature, although the Science Based Target Initiative’s definition of net zero requires “rapid, deep emissions cuts”, which Oxy's plan is not based on. Instead, it relies on offsetting its carbon while increasing production. The strategy to transition to a carbon management company is built on its unique market position; as a specialist able to operate older fields by utilising enhanced oil recovery (EOR) technology. 

Oxy states that this places it in the perfect position to be developing the world’s first commercial scale Direct Air Capture (DAC) facility. The company plans to capture one million tonnes of CO2 annually from the atmosphere from its first DAC facility, scheduled for start-up in 2024, and then use this together with its EOR system to extract an increased quantity of oil from reservoirs. Oxy has announced 11 more DAC facilities in the Permian Basin, where most of its operations are based, before expanding into the DJ basin, Powder River and ultimately Oman and Abu Dhabi. 

Enhanced Oil Recovery

A well known process in the oil and gas industry, EOR involves injecting CO2 into an oil field in order to increase the pressure within the reservoir in order to extract more oil than would otherwise be possible. According to the IEA’s global database, 500 thousand barrels of oil are extracted daily using EOR technology, meaning that it is already a well-established and proven technology. The IEA gives a mixed analysis of the technology. 

Despite the fact that net oil production increases as a result of its use, at least in theory, the technology could produce oil with net zero emissions. This is because between 300 kg CO2 and 600 kg of CO2 can be injected into the reservoir per barrel produced. As such, this could offset the CO2 released through production and end use of that barrel (approximately 500g). 

However, this is reliant on proper offsetting procedures and due diligence must be in place to assure that the carbon offset is not double counted somewhere else down the supply chain. Additionally, the technology is promising due to the prospect of it incentivising funding of carbon capture technology (such as DAC) due to the amount of investment available from wealthy oil and gas firms.  

Direct Air Capture

DAC is considered the most advanced of the carbon capture, utilisation and storage (CCUS) technologies as it extracts CO2 directly from the atmosphere and can in theory be deployed anywhere in the world. This differs from "point source" carbon capture that captures CO2 from industrial smokestacks before it enters the atmosphere. Until very recently, DAC was considered a fantasy technology and not likely to be viable at commercial scale. 

However, the technology has recently had huge support from companies like Stripe, Microsoft and Shopify, with Stripe stating that it would pay “any price” for long term CO2 capture and storage, upping its investment in December to $15m for the carbon capture startups it supports. Additionally, the technology has strong political backing, with Joe Biden’s recently signed $1 trillion infrastructure bill allocating $3.5bn to build four regional DAC facilities. Some however are still not convinced that it is a viable option and the technology was criticised as a "sound bite" by a metal industry CEO in October 2021. 

Oxy’s first facility plans to extract one million tonnes of CO2 annually. At this rate, according to models referenced by Bloomberg, 10,000 other DAC facilities globally would be required to sequester the same amount of carbon every year between now and 2050 for this to be a viable solution to the climate crisis. 

Along with its spearhead DAC projects, Oxy’s strategy also includes measures to reduce its own operational GHG emissions (accounting for approximately 10 - 20% of overall emissions). These measures include methane and volatile organic compound (VOCs) capture and leak reduction, improved efficiency of equipment and production facilities, switching to natural gas and electricity for drilling operations, improved transportation logistics and ending routine methane flaring by 2030. The development of a solar plant in 2019 also led to a 10% decrease in CO2 emissions at the Goldsmith oil field and OxyChem, the manufacturing arm, has reportedly reduced CO2 emissions by 50% using combined heat and power (CHP) and efficiency improvements. 

The impact of these measures, and the reality of the outlook for its DAC facilities is still largely unknown but one research group, the TPI, has made an attempt to score the company on its alignment to a climate pathway.

The TPI method

The company is rated level 4 by TPI (their highest assessment score) and is said to be aligned with the Paris 1.5°C benchmark. Given that this assessment seems to be at odds with other scientific research, we took a closer look at the methodology used by TPI to come to this conclusion. 

Firstly, although a useful indicator, any third party analysis is not an exact science. With limited information on the TPI website, we reached out for more clarity over their assessment and received the following in reply: when asked about the use of carbon capture technology and carbon offsetting, TPI responded that “TPI assesses the ambition of company carbon emissions reduction targets, not the strategies which companies aim to employ in order to achieve them”. They went on to say that “TPI considers technological feasibility in the calculation of sectoral carbon budgets but remains technology agnostic in company assessments”. 

On our reading, this could suggest that the underlying carbon budget allocated to Oxy by TPI takes into account technologies available to the oil and gas sector as a whole, but the analysis does not consider the feasibility of the technologies used within Oxy’s strategy specifically.

Additionally, for Oxy, the TPI calculated scope 3 emissions (approximately 85% of total emissions) using its own methodology and not using a figure reported by Oxy. Issues arise with both methods of scope 3 calculations, explored here, but TPI’s calculations would be based on sectoral averages, meaning that (as Osmosis Investment Management points out) they could be detached from reality. 

Additionally, although not mentioned in Oxy’s 2020 Climate Report, the purchase of carbon credits is reportedly the method behind its so-called ‘carbon neutral crude oil’. 

The carbon credits used in conjunction with this product have been issued and verified by a third party, Verra, and are associated with projects in Thailand and Turkey between 2016 and 2019. This is in conflict with World Resource Institute (WRI) guidelines that offsetting projects should be undertaken in the country of operations. Reuters points out that Verra has since stopped issuing offsetting credits from these countries due to these projects now being competitive enough without offset revenue. 

In general, the purchase of carbon credits is becoming increasingly controversial due to the difficulty in quantifying (in tonnes of CO2) the impact of projects and pricing this CO2 appropriately. For example, at the time of publication the price of carbon in the EU was $93 per tonne. The US does not yet have a national carbon market, but the Brookings institute notes that outside of the EU the price on most carbon markets is around $20, with some as low as $5. 

This is at odds with expert views at the last G20 climate conference, which asserted that to align to current policy (which falls short of a 1.5°C scenario) carbon would need to be priced at between $50 - $150. Currently, there are no provision in US GAAP (Generally accepted accounting principles) that covers accounting for carbon offsets and 9fin could not find any indicator of the extent to which Oxy is currently reliant on carbon credits, or the price paid for those credits. 

A relative climate leader

On the whole, Occidental is clearly an ambitious climate leader in the oil and gas sector. Proponents of carbon capture technology, such as Columbia University’s Julio Friedmann, assert that “There is no greenwashing involved … She is genuinely committed to reducing the carbon footprint of the company’s products and operations, and also committed to shareholder value.” On the other hand, increasing oil production is still key to Oxy’s strategy and new exploration work is being carried out, which is unavoidably at odds with the IEA’s Net Zero pathway.

Additionally, it's important to be realistic about what we can accurately calculate and project based on targets and ambitiousness of a strategy alone. As such, investors should retain some skepticism when reviewing not only company documents but also third party analysis, even those of research initiatives such as the TPI, in order to differentiate between good marketing and genuine performance.

If Occidental is the creme de la creme of climate conscious LevFin oil and gas firms, one may assume that not much hope can be held out for the remaining 73 firms covered by 9fin. To date, we have assessed Ithaca Energy and Harbour Energy from an ESG perspective, neither of which have credible Net Zero plans or energy transition strategies. If you would like to request a copy of the Ithaca Energy or Harbour Energy ESG QuickTakes, please follow the links and complete your details.

Keep an eye out for more on the oil and gas sector as part of our climate series. Next, we will take a wider look at investment in oil and gas firms within the high yield space, as well as the shift in oil field licence purchases. 

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