Even With Trump 2.0, Oil and Gas Companies Will Still Be Grappling with Climate Change

To understand how oil and gas companies see the climate future under a new Trump administration and a new Department of Energy, consider the story of TPG Inc., a massive private equity firm based in Fort Worth, Texas. TPG has been involved in several oil and gas investments, including two recent ones which are noteworthy:

• TPG Pace Energy Holdings was involved in the creation of Magnolia Oil & Gas Corporation, a publicly traded oil and gas company focused on exploration and production in South Texas.
• TPG formed Sixth Street Partners, a partnership with Glendale Energy Ventures, to fund acquisitions of non-operated oil and gas properties.

It’s clear that, during the years of Trump 2.0, climate change will still demand the attention of senior executives who lead hydrocarbon-focused businesses, even the ones that are based in the US. One primary driver is the fact that many of the OECD governments, alongside much of the public-at-large, and even some prominent financial institutions, have drawn this conclusion: based on scientific research, increasing volumes of GHG in the atmosphere represent a real and credible financial risk to companies.

The warming of the planet comes with more than rising temperatures. In a fast-changing world, it means policy changes that aim to respond to climate change, plus a slate of emerging technologies. The changes created by the global environmental reality are being seen by corporate and government leaders as a substantial risk to the global economy as a whole and to the future of each and every enterprise. It’s especially notable for those companies that produce, process, or distribute hydrocarbons. Financial markets have made it known what they want and need: clear, comprehensive, high-quality information on the enterprise-level impacts of climate change.

Nearly 900 executives were asked by McKinsey & Co. to consider what lay ahead for their companies. The results are notable: “Economic Conditions Outlook for December 2024” reveals a shift in executives’ focus towards potential changes in trade policy and relationships, rivaling geopolitical instability as the most significant concern for the global economy in 2025. This marks a notable change from previous surveys, where geopolitical concerns dominated. The share of respondents citing trade-related changes as a top risk to the global economy has more than doubled since the previous survey, reaching levels not seen since December 2019.

The report from McKinsey indicates that overall sentiment about the global and domestic economies remains cautious but stable compared to earlier in 2024. Executives are nearly evenly split on expectations for interest rates, with predictions of rate hikes, decreases, or no change being roughly equal. There’s also a growing anticipation of increasing unemployment rates, with 47% of respondents expecting unemployment to rise in the coming months – the highest level since December 2020.

The current levels of geopolitical instability pose really significant challenges for oil/gas companies considering expansion. It may lead to:

• Increased risk assessment requirements for new projects
• Potential delays or cancellations of expansion plans in politically volatile regions
• Higher costs for insurance and risk mitigation measures
• Greater focus on diversifying operations across multiple geographies to spread risk
• Increased emphasis on local partnerships and community engagement to navigate complex political landscapes

Geopolitical tensions create a complex landscape that oil/gas companies must navigate carefully to ensure their continued success and expansion.

One of the primary effects of geopolitical instability is the increased need for risk assessment and mitigation. Oil/gas companies are compelled to invest more heavily in evaluating and managing geopolitical risks, which can significantly increase operational expenses and potentially reduce profitability. This heightened focus on risk management becomes an integral part of strategic planning, often requiring specialized expertise and resources.

Supply chain disruptions present another significant challenge. Geopolitical events can cause major interruptions to global supply chains, affecting the movement of equipment, materials, and finished products. These disruptions can lead to increased costs and project delays, potentially impacting a company’s ability to meet production targets and fulfill contractual obligations.

Resource nationalism is a growing concern in many jurisdictions. As geopolitical tensions rise, governments may implement protectionist policies, such as additional royalties, taxes, or restrictions on foreign ownership. These measures can substantially reduce the profitability of oil/gas operations and deter investment, forcing companies to reassess their global portfolios and investment strategies.

Shifting market dynamics resulting from geopolitical tensions can also significantly impact companies. Changes in trade policies can affect demand for certain fuels and alter global market dynamics. This volatility requires companies to be agile, potentially exploring new markets and adjusting their product mix to align with changing global demands.

The investment landscape becomes more challenging in times of geopolitical uncertainty. Political instability can make it more difficult for companies to secure financing, particularly for projects in emerging markets perceived as high-risk. This can slow growth and limit expansion opportunities, especially for smaller or mid-sized companies.

Regulatory changes driven by geopolitical factors pose another layer of complexity. New regulations – such as in environmental standards, and labor practices — can increase compliance costs and operational complexities. Companies must stay ahead of these changes and adapt their operations accordingly to remain competitive and compliant.

Asset valuation fluctuations are another consequence of geopolitical tensions. Political decisions can create premiums or discounts on assets and fuels from specific jurisdictions, affecting the overall value of companies’ portfolios. This volatility can impact stock prices and investor confidence, requiring careful management of investor relations and clear communication of risk mitigation strategies.

However, it’s important to note that geopolitical tensions also create opportunities for companies. There’s an increased focus on diversification, with companies looking to strengthen their positions in strategic markets and reduce reliance on any single jurisdiction. Additionally, geopolitical concerns may lead to government support for domestic operations, potentially benefiting companies operating in certain countries.

To navigate these challenges and capitalize on opportunities, companies need to develop sophisticated risk management strategies, maintain flexibility in their operations, and stay attuned to evolving geopolitical dynamics. This may involve building strong local partnerships, engaging more deeply with communities and governments, and investing in technologies that enhance operational resilience.

While geopolitical tensions pose significant challenges to the long-term growth prospects of companies, they also drive innovation and strategic thinking within the industry. Companies that can effectively manage these risks and adapt to the changing global landscape will be better positioned for sustainable growth and success in the years to come.

The potential implementation of new tariffs under a new Trump administration could have several implications for oil/gas companies:

• Increased costs for imported equipment and materials, potentially affecting the feasibility of expansion projects
• Shifts in global demand for certain fuels based on changing trade patterns
• Opportunities for domestic oil/gas operations if tariffs make imported fuels less competitive
• Need for more flexible and adaptable supply chain strategies to navigate changing trade landscapes
• Potential for retaliatory tariffs from other countries, affecting export markets for energy products

In all cases, oil/gas companies may need to adopt more cautious and flexible approaches to expansion, with an increased focus on scenario planning, geopolitical risk analysis, and adaptable strategies that can respond quickly to changing global economic and political conditions.

The G20’s Financial Stability Board (FSB) created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase the reporting of climate-related financial information. The FSB was created in April 2009, at the height of the Global Financial Crisis, as an international body that monitors and makes recommendations about the global financial system. It was established after the G20 London summit as a successor to the Financial Stability Forum. The FSB’s headquarters is down the street from the Bank for International Settlements’ headquarters in Basel, Switzerland.

The TCFD Oil and Gas Preparer Forum is an important effort by key hydrocarbon companies. They released in depth look at climate-related financial disclosure across four major oil and gas companies. This report is entitled “Climate-related financial disclosure by oil and gas companies: implementing the TCFD recommendations.”  It has received almost no attention – but it deserves a close examination, especially in light of the new and unprecedented initiatives on decarbonization at both Equinor and Total.

That Forum was the publisher, in July 2018, of a special report on the best practices on the disclosure of climate-related information and on the implementation of TCFD recommendations. It was authored by the four companies which are members of the Forum (Eni, Equinor, Shell and Total) and it received support from the World Business Council on Sustainable Development, a non-profit membership organization which those companies belong to.

The companies participating in the TCFD Oil and Gas Preparer Forum concluded that there are some clear benefits of better disclosure:

-Risk assessment

All of the key stakeholders — the company, their shareholders, lenders, regulators — can more effectively evaluate climate-related risks. That includes the risks to their hydrocarbon business, to the supplier ecosystem, and even to competitors.

-Capital allocation

The various actors can all make better-informed decisions on where and when to allocate capital.

-Strategic planning

Everyone is in a better position to evaluate risks and exposures over the short-term, medium-term, and long-term.

Two Different Companies, Two Different Approaches

Equinor

In November 2020, Equinor announced its ambition to become a “net-zero energy company by 2050.” As the most ambitious of all hydrocarbon companies, Equinor made it clear that this will include emissions from production and final consumption of energy. The new approach was designed to set a clear strategic direction and demonstrate Equinor’s commitment to “long-term value creation in support of the Paris Agreement.”

Equinor’s CEO/President, Anders Opedal, declared that the company “is committed to being a leader in the energy transition. It is a sound business strategy to ensure long-term competitiveness during a period of profound changes in the energy systems as society moves towards net zero. Over the coming months, we will update our strategy to continue to create value for our shareholders and to realize this ambition”.

Earlier this year, Equinor announced its plans to achieve carbon-neutral global operations by 2030 and to reduce absolute greenhouse gas (GHG) emissions in Norway to near zero by 2050. At the same time, Equinor outlined a value-driven strategy for significant growth within renewables, as well as a new net carbon intensity ambition. Continuing to deliver on the short and mid-term ambitions will be key to achieving net-zero emissions.

For years Equinor has delivered on their declared climate ambitions, and the company has a strong track record on lowering emissions from both oil and gas. Now, Opedal says, “we are ready to further strengthen our climate ambitions, aiming to reach net zero by 2050.”

Equinor expects to deliver an average annual oil and gas production growth of around 3 percent from 2019 to 2026. Equinor is well positioned with world-class global assets in attractive areas with substantial value creation potential. By optimizing its portfolio through financial discipline and prioritization, Equinor will continue to develop competitive and resilient projects whilst maintaining industry-leading recovery rates, unit costs and carbon efficiency. Opedal says, that “the net-zero ambition will strengthen future competitiveness and value creation at the Norwegian continental shelf (NCS). Equinor’s plans for production, development and exploration at the NCS remain firm.”

To develop Equinor as a broad energy company, renewables will be a significant growth area. Equinor has previously set ambitions for profitable growth within renewables and expects a production capacity of 4-6 Gigawatts (GW) by 2026 and 12-16 GW by 2035 (1). Equinor now plans to expand its acquisition of wind acreage, with the aim of accelerating profitable growth and will continue to leverage its leading position in offshore wind. Equinor will establish renewables as a separate reporting segment from the first quarter of 2021.

To achieve net-zero emissions requires a well-functioning market for carbon capture and storage (CCS) and natural sinks, as well as the development of competitive technologies for hydrogen. Building on its capabilities from oil and gas, Equinor is positioning itself to provide low-carbon technologies and establish zero-emission value chains. Equinor’s management is taking steps to drive the development of these technologies through projects such as Northern Lights, which aims to store CO2 from industrial sites across Europe. Equinor also assumes that an increasing share of oil and gas will be used for petrochemicals towards 2050.

“Climate change is a shared challenge. The combined efforts of governments, industries, investors, and consumers are crucial to reaching net-zero emissions for Equinor and for society. Together, we can overcome technological and commercial challenges, cut emissions, and develop CCS and zero-emission value chains for a net-zero future,” says Opedal.

Equinor expects to present an updated strategy at its Capital Markets Day in June 2021. Equinor’s net-zero ambition covers scope 1 and 2 GHG emissions (operated basis 100%) and scope 3 GHG emissions (use of products, equity share).

Equinor’s bold climate ambitions have been laid out clearly:

• Become net zero by 2050. This part of the program includes scope 1, 2 and 3 GHG emissions, where scope 3 emissions represent a calculation of indirect emissions from customers’ use of Equinor’s production volumes.
• Reduce emissions from oil and gas.

Maintain industry leading carbon efficiency by undertaking to achieve the following targets and goals:

• upstream <8 kg CO2 per boe by 2025
• carbon neutral global operations by 2030
• reducing absolute greenhouse gas emissions from operated offshore fields and onshore plants in Norway towards near zero by 2050 without offsets
• ensuring no routine flaring and near zero methane emissions intensity by 2030.

*Grow in renewable energy. Expecting a production capacity of 4-6 GW by 2026 and 12-16 GW by 2035.

*Reduce net carbon intensity to zero by 2050.

The company announced “boundaries and assumptions” as follows:

• Our net-zero ambition covers scope 1 and 2 GHG emissions on an operational control basis (100%) and scope 3 GHG emissions (use of products, category 11, on an equity share basis).
• Success will depend on society moving towards net zero in 2050.
• We assume a well-functioning market for carbon capture, storage, and natural sinks and that these mechanisms can be accounted for as negative scope 3 emissions.
• We assume the development of a hydrogen market.
• We assume that an increasing share of oil and gas will be used for petrochemicals towards 2050.

Total

In his letter to the TCFD’s then-Chairman, Michael Bloomberg, Total Chairman Patrick Pouyanné announced support for the TCFD and its recommendations. (Pouyanné was formerly Total’s President of Refining & Chemicals). At that time, during the summer of 2017, Pouyanné noted that it is up to companies to define the information about climate-related risks and opportunities that is material, which should, consequently, be disclosed in financial fillings. Total continued discussions by taking part in the Oil & Gas Preparer Forum.

In 2019, Total also took part in the first Task Force set up by the EFRAG (European Financial Reporting Advisory Group) Reporting Lab on Climate-related disclosures, which aim to identify the best practices in this area. This Task Force published the results of its work in February 2020.

Within the scope of its 2019 non-financial performance statement, Total applied the TCFD recommendations to disclose its climate challenges. What this means could be profoundly important for Total’s future.