Home > 10% of Oil Search shareholders call for fossil fuel wind up plan

10% of Oil Search shareholders call for fossil fuel wind up plan

30 April 2021

30 April 2021

Almost a tenth of Oil Search’s investors today told the Australian stock exchange’s third largest undiversified oil and gas producer to wind up fossil fuel production and return capital to shareholders.

The vote for the Market Forces-coordinated shareholder proposal follows votes of 19% and 13% for similar resolutions at Woodside and Santos earlier this month.

Like its peers Santos and Woodside, Oil Search’s expansion plans are a bet on the failure of the Paris Agreement, with shareholders’ capital, employees’ livelihoods, and environmental remediation at stake.

While the company has no intention of reining in its plans to increase oil and gas production to 80% above 2020 levels by 2030, a couple of moments during today’s AGM hinted the company may be starting to turn an ear to the demands set out in the resolution.

In his opening address, Managing Director Dr Keiran Wulff, spoke of using “free cash flow toward the latter half of the decade” to pursue sustainable investment opportunities “or returning capital to shareholders”.

This sentiment was echoed later in the meeting by company chair Rick Lee, who stated that following “this phase of development, we will be in a position then to make judgments about whether the strategy is to continue producing, to wind back, or whatever, without putting at risk shareholder funds through stranded assets”.

However, the company’s belief that its current planned growth projects are “sustainable” investments leaves serious cause for concern.

Expansion plans inconsistent with global climate goals

Analysis of the carbon budget required to limit warming in line with the Paris Agreement’s 1.5°C target
shows oil and gas production must fall respectively by 4% and 3% annually from 2020 to 2030.

By contrast, Oil Search plans to increase production by 80% from 2020 to 2030 (equivalent to 6% each year). This involves plans to spend more than US$3.5 billion on new development projects between 2021 and
2027, including Papua LNG and the Pikka project in Alaska.

To justify its increasing production plans, Oil Search cites a global LNG by 2035 which is 5% higher
than the demand projected in the IEA’s STEPS, and 29% higher than that forecasted in the SDS. This
suggests the company is planning for a future consistent with more than 2.7°C of global warming.

When Market Forces Executive Director Julien Vincent asked why the company uses this demand projection, which is consistent with the failure of the Paris Agreement, in its investor material, while also claiming to align its strategy with the Paris goals, Mr Lee failed to address that disparity.

Julien followed up to point out that more shareholders should have paid attention to Carbon Tracker Initiative’s assessment that Oil Search’s growth plans are out of line with the Paris climate goals when weighing up a vote on the resolution.

Claims of Paris-alignment rest on unrealistic assumptions

The International Energy Agency’s Sustainable Development Scenario (SDS), which Oil Search relies on to claim alignment with the Paris climate goals, includes unreasonable projections of the deployment of carbon capture and storage technology. The SDS projects the capacity of large-scale carbon capture projects in power generation reaching around 200Mt by 2025, yet the IEA has also found just 10Mt (or 5%) of such CCS capacity is actually planned to be developed by that date. 

Despite the deployment of CCS is falling well behind the SDS projections Mr Lee confirmed the company believes this scenario is still a reasonable basis for the company’s claims that its growth projects are aligned with the Paris climate goals. He did suggest this assessment would be regularly reviewed going forward, but investors will no doubt be concerned that investment is being committed to development projects when the rapidly increasing understanding of climate science and the energy transition is already leaving the industry behind.

Selective use of scenario elements?

Even with the major flaws outlined above, the IEA SDS projects carbon prices well above those used by Oil Search, and long term oil prices well below those used by Oil Search.

The board was challenged over its failure to base its internal carbon assessments on the IEA SDS, which projects a carbon price of US$63 per tonne in 2025 rising to US$140 by 2040. Oil Search’s Sustainability Report states that the company tests growth projects against carbon prices of just US$25 in PNG and US$40 in USA.

In response, Mr Lee explained that the company’s carbon price testing involves applying just a single, static price, rather than assessing prices that increase over the proposed lifetime of growth projects, in line with the Paris climate goals. This should ring alarm bells for big investors, who want to be sure that Oil Search is not pursuing projects that don’t stack up economically in the face of the rapid decarbonisation required to limit warming to 1.5°C.

The company’s long-term oil price assumption of US$63 per barrel is roughly 30% above Carbon Tracker’s assessment of an SDS-aligned oil price in the high US$40s. Concerns about the potential impact this could have on Oil Search’s asset valuations were also raised at today’s AGM.

Targets allow for increase in absolute emissions

Oil Search has committed to reduce greenhouse gas emissions intensity by more than 30% by 2030. However, the company’s increasing production plans would see its absolute scope 1 and 2 emissions increase by 26% from 2020 to 2030. This is before we even consider the massive increase in scope 3 emissions – those generated when customers burn Oil Search’s oil and gas products – as a result of the company’s increasing production plans. 

When asked reconcile plans to increase oil and gas production and absolute emissions with the company’s stated support for the Paris climate goals, which require rapid cuts in emissions and oil and gas production this decade, Mr Lee failed to acknowledge the clear inconsistency.

The board would do well to consider this position in light of the updated legal advice on directors’ duties and climate change, which warns of the risk of declaring climate goals without credible plans or efforts to achieve them.