Repsol’s carbon-reduction pledge puts the onus on peers to follow suit

Olivia Konotey-Ahulu December 04, 2019

LONDON (Bloomberg) --Repsol’s announcement this week that it will eliminate emissions from its business by 2050 throws down the gauntlet to competitors as large oil companies face mounting investor pressure to clean up their act.

European majors Royal Dutch Shell Plc and Total SA have already set emission targets in response to the Paris Agreement, but Repsol’s plan is the most ambitious by far. That puts the onus on its rivals to show shareholders they can keep pace with the energy transition without sacrificing generous returns.

“Repsol put itself ahead of the pack,” said Irene Himona, an analyst at Societe Generale SA in London. “It is tempting to think that is the direction of travel. No one can ignore climate change.”

The Spanish oil producer plans to erase all greenhouse-gas emissions from its own operations and its customers by mid-century, with its exploration and production unit focusing on value instead of output growth. The company also revised its long-term view of the value of oil and gas assets in a decarbonizing world, resulting in a 4.8 billion-euro ($5.3 billion) accounting charge.

“Repsol’s actions should cause other large oil and gas companies to ask themselves whether they may also be using excessively optimistic assumptions for their balance sheets,” said Alex Bibani, a fund manager at Sarasin & Partners LLP in London. “Shareholders need to know fossil fuel companies are looking forward, not back, when it comes to the energy transition.”

Repsol also approved new investments in solar and wind projects with a combined capacity of 1,600 megawatts. It’s among a number of European oil companies investing in cleaner energy, with Shell, Total and BP Plc all expanding in renewables, electric-car charging and battery technology. Yet the larger players may struggle to match Repsol’s ambitions, according to SocGen’s Himona.

“Shell is about 10 times bigger, from its balance-sheet scale to the number of petrol stations,” she said. “So, tempting though it is to say that they will all write off their assets and move into renewables, I think there are different models and portfolios to Repsol’s.”

Price Weakness. Citigroup Inc. also sounded a note of caution, saying Repsol’s writedown may reflect current oil-market weakness amid U.S. output growth.

“The impairment is really more a reflection of changes in the short-term view,” Citigroup analysts said in a note. Previous oil and gas-price assumptions now look “highly unlikely in a world where U.S. shale continues to set lower marginal prices.”

Yet there’s little doubt that Repsol’s move raises the stakes in an industry confronting an end to burgeoning oil-demand growth in coming decades. Many companies are speeding up efforts to diversify and retreating from the kind of multibillion-dollar mega-projects that take years to come to fruition. With Repsol raising the bar for businesses to adapt, its competitors should be emboldened to act, according to activist shareholder group Follow This.

“Repsol is now the first oil major to be part of the solution to the climate crisis, and truly leading in its sector,” Mark van Baal, the founder of Follow This, said in a statement. “We hope shareholders and customers will reward CEO Josu Jon Imaz for his bold and brave decision, and other oil majors will follow.”

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