The Issue

The pandemic-driven downturn in 2020 led to a serious cash crunch, putting more pressure on Western majors to offload assets after they were forced to cut dividends, capital spending and raise debt. With attention now back on shareholder returns, capital discipline and the energy transition, companies want to hang onto only the most profitable — and preferably lowest-carbon — assets as they seek to fulfill their climate commitments. Divestments alone, however, may not be enough to keep 2030 emissions objectives intact as companies reprioritize upstream production.

Deals in Play

The five leading Western majors — BP, Chevron, Exxon Mobil, Shell and TotalEnergies — divested roughly $16 billion of assets in 2022, almost half the $30 billion sold in 2021, a tally of figures in companies’ reports shows. They are currently targeting more than $30 billion worth of potential oil and gas disposals in the coming years.

Global upstream M&A activity plunged more than 30% last year despite record energy prices and low valuations, as geopolitical threats and economic uncertainty contributed to price volatility. Heightened energy security concerns exacerbated by the Ukraine conflict could support dealmaking this year, as evidenced by Chevron’s $7.6 billion swoop for shale producer PDC Energy this week.

But Western majors will also continue to evaluate opportunities to sell higher-carbon assets in pursuit of decarbonization goals. Such activity will depend partly on macroeconomic and other factors, such as interest rates, policy and regulation.

Divest to Decarbonize

Indeed, recent analysis by Rystad Energy shows the extent to which the majors have so far used divestments to cut their emissions, rather than doing so by capturing emissions or optimizing operations, for example. A Rystad comparison of data from BP, Eni, Exxon, Shell and Total showed that by the end of 2022, those companies had cut Scope 1 and 2 (operational) emissions by 20%-40% from their various base lines.

BP has achieved a 40% cut and is close to achieving its target of a 50% cut by 2030, against a 2019 baseline. Divestments accounted for around 30% of that reduction, Rystad’s Jon Marsh Duesund said on a recent webinar. It last year sold its 50% stake in the carbon-intensive Sunrise oil sands project in Alberta in return for a 35% stake in the Bay du Nord project in Eastern Canada, with a much lower emissions profile.

Total CEO Patrick Pouyanne said last month that the French major's planned exit from the oil sands through the sale of its Canadian subsidiary to Suncor Energy is “giving us some space in terms of CO2.” He also emphasized on a first-quarter earnings call that “we have looked recently more to divestments than to a merger or an acquisition.” Total is targeting a cut of at least 40% in its Scope 1 and 2 emissions, from 2015 levels, by 2030.

Exxon has set a 2030 net-zero goal for its Permian Basin operations. It is also working toward a $15 billion divestment target reported in 2019 and CEO Darren Woods said on a recent earnings call he expects that to be hit in 2023, a couple of years later than planned. "We've been, I think, pretty successful at consistently putting assets in the market and realizing the value of those," Woods said, adding that the company would continue to high-grade its portfolio, ”seeing if we can find buyers who have a higher use for the assets than we do."

Shifting the Burden

But in Duesund’s view, selling assets is "basically shifting emissions from one company to another” — a problem that industry observers have warned about for years. “We also see that when a lot of these companies are divesting carbon-intensive assets, the buyers tend to be companies that are less transparent and open about their emissions and plans for abatement,” Duesund noted.

Going forward, companies acknowledge they will have to offset rising operational emissions from new investments, including biofuels, with improved efficiency and greater use of carbon capture, electrification and renewable power to achieve their 2030 targets. New investments “will exceed reductions associated with planned divestments and natural decline,” Shell admitted in its annual report in March.

The major has already achieved a 30% cut in Scope 1 and 2 emissions against a 2016 baseline, with disposals accounting for around half of that reduction. Its emissions fell by 15% last year alone to 58 million tons of CO2 equivalent, partly through US refinery divestments as part of Shell's wider strategy to reduce its refining portfolio down to five core sites. Like BP, the company is targeting a 50% reduction in Scope 1 and 2 emissions by 2030.

Scope for Improvement

In a recent report, the New York-based Columbia Center on Sustainable Investment (CCSI) looked at 76 upstream oil and gas disposals made by the majors, plus Eni and ConocoPhillips, from 2017-21. The overall asset sales totaled $67 billion and almost half were in the Americas, while around 33% were sold in 2021 alone. The CCSI report highlighted the “massive scale” of emissions transfers, except in the case of Eni, which offloaded a lower percentage of its emissions than the other majors.

It also looked at Scope 3 emissions — those from end-use of products that make up around 90% of majors' carbon footprints. Scope 3 emissions from sold assets were equal to roughly 25% of the majors’ reported and estimated Scope 3 emissions over the five-year period. Sold assets also demonstrated higher post-sale emissions intensities, which indicates that they operated less efficiently, the report said.

While Spain's Repsol was not included in CCSI’s analysis, its sale in 2021 of E&P assets in Malaysia and in Block 46 CN in Vietnam to Hibiscus Petroleum explains the huge improvement in its emissions performance the following year — its Scope 1 and 2 upstream emissions dropped by a massive 72% in 2022. In prior years, Repsol had attributed its poor performance in upstream emissions intensity to its carbon-intensive asset in Malaysia.

The CCSI report urges regulators, notably in the EU, UK and US markets, to plug existing gaps around corporate disclosure standards in order to track emissions attributable to upstream oil assets sold by the majors. Moreover, as scrutiny of climate stewardship grows, dealmakers expect to increase the integration of ESG factors into the M&A process, including the use of ESG clauses in M&A contracts. This could entail the seller screening the buyer’s climate credentials or the latter undertaking to ensure such targets/compliance are met. It could also involve a commitment by both seller and buyer to be transparent in reporting an asset’s emissions.