Environment in Turm-Oil: Oil giants need to make cuts to hit climate targets

December 3, 2019

2 min read

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What's going on here?

Oil companies need to cut combined production by more than a third by 2040 to keep with climate targets set out in the Paris Agreement.

What does this mean?

According to a report released by Carbon Tracker, a think tank researching the effects of climate change on the financial market, none of the major oil companies are en route to keeping emissions within international targets, contrary to what what their public statements will have you believe. In fact, the biggest oil companies will have to cut production significantly, with ExxonMobil needing to dial back by 85%. Carbon Tracker recommends that oil companies limit future investment to more environmentally friendly projects.

What's the big picture effect?

Big Oil has long relied on hefty dividends and share buybacks to keep their shareholders happy. However, recently they have been struggling to convince investors that they are able to deliver. With profit margin inextricably linked to price, and the ever more pressing concerns over climate change, low oil prices and Big Oil’s reliance on cold hard cash to keep investors from fleeing are putting immense strain on their balance sheets.

Over the past few years, several major oil producers have resorted to asset sales to fund dividends, buybacks and new projects. Such efforts have fallen short however, as many reported major losses or drastically shrunken profits in their third quarter results. As a matter of fact, energy has been the worst performing sector of the S&P 500 in the past decade, as we saw Oil-and-gas companies shrink from 14% to 5% over this period. However, the shift to renewable energy sources has been occurring at a very slow pace.

Although many are convinced that oil is the new coal, it is hard to predict when exactly the global thirst for oil will begin to decline. Even with growing demands for the climate crisis to be addressed, oil-and-gas companies are still not investing a whole lot into clean energy alternatives (just 1.3% of total capital expenditures), as evidenced by a report by the Carbon Disclosure Project. Not to mention, new supplier countries such as Canada, Norway, Brazil and Guyana are coming onto the scene, adding to production, driving down prices and feeding into the growing demand in importing countries like China and India. The fact remains that so long as there is a demand for oil, production will not halt and the global effort to fight climate change is likely to stay as challenging as ever.

Report written by Wendy Wan

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