Transferred Emissions: How Oil and Gas Divestments Mislead Investors and Harm the Climate
The world is struggling to keep the Paris Agreement’s 1.5°C goal in reach. Pressure on oil and gas companies is reaching an all-time high.
Global bodies such like the Intergovernmental Panel on Climate Change and International Energy Agency are emphatic about the urgent need for transparent, immediate, and ambitious decarbonization of the oil and gas industry. Despite significant pushback from petrostates and US oil executives, COP28’s final agreement included language about the need to “transition away” from fossil fuels.
Unfortunately, the appearance of action is seemingly more important than real emissions reductions. This is exemplified by the worrying divestment practices of oil and gas companies, who improperly claim “emissions reductions” from divesting assets, even though emissions are just being transferred between operators, rather than eliminated.
In addition to this misleading accounting, research shows that, in aggregate, upstream oil and gas assets are moving towards smaller operators who often have weaker climate standards, meaning that emissions reductions claimed from divestments often lead to overall emissions increases. Reaching a net zero world by 2050 requires a rapid decrease in emissions, not just the appearance of it, and when companies like Chevron and ExxonMobil sell assets to less climate conscious operators, they are falling short of their aspirations to contribute to a net zero economy.
There is a solution to make divestment work towards climate goals. The Environmental Defense Fund’s Best Practices for Oil and Gas Mergers and Acquisitions, developed in conjunction with over 30 industry partners, is clear that sellers should engage with buyers to maintain or improve the emissions reductions strategy associated with the assets they divest. Purchasers almost always alter the management and operation of assets, and data shows that purchasers tend to have weaker climate standards.
Companies that divest assets to less climate-conscious operators face scrutiny. A current case in Colorado alleges that a small private operator called HRM Resources bought uneconomic end-of-life wells from Chevron, and used a series of bankruptcies and transfers to avoid the significant clean-up costs so that both Chevron and HRM could still make a profit. This well-known industry tactic leaves unabated wells to continually leak methane into the atmosphere until state or federal agencies use taxpayer dollars to clean them up.
Investors are in unique position of power to request more disclosures on the climate impact of divestments. As You Sow represents shareholders filing proposals at both Chevron and ExxonMobil asking that they report on whether their asset purchasers have GHG emissions disclosures or 1.5°C-aligned emissions reduction goals. Without basic divestment disclosures investors are unable to determine how much the companies they own contribute to the problem.
Chevron and ExxonMobil were the top two American sellers of upstream oil and gas assets between 2017 and 2021, but neither company provides enough information for investors to determine if their divestments result in higher realized GHG emissions. These proposals seek transparency from oil and gas companies, which is essential if we are to keep the Paris agreement’s goal of limiting temperature rise to 1.5°C in reach.