Benchmarking upstream resilience to a low-carbon future

Investors, and the companies themselves, need to integrate financial and non-financial data points into the decision-making process. The Task Force on Climate-Related Financial Disclosures guidelines last July has made it even more important to satisfy these demands. The wider range of metrics will include sustainability metrics.

Our new carbon efficiency indicator, NPV/tonne, assesses the financial implications of corporate carbon emissions. Analysed alongside ‘cash margins’, we’re able to compare the relative exposure of upstream portfolios to carbon costs and lower hydrocarbon prices.

Akif Chaudhry, Senior Analyst in our research team, and Amy Bowe, Director of Upstream Consulting, benchmarked the sustainability of companies’ upstream portfolios in 'New metrics for evaluating oil and gas portfolio resilience in a low-carbon future'. Here are three of the key findings.

1. One or two assets can move the needle.

Some company portfolios contain one or two large, mature assets with exceptionally high emissions intensity. The analysis shows how emissions intensity rises as assets enter late life and production starts to decline. Why? Production and processing units may still operate at peak capacity, with the same power requirement, but declining hydrocarbon production. Or perhaps enhanced recovery mechanisms such as water, gas or chemical injection are needed. Prudhoe Bay is a great example.

There are assets with high CO2 concentrations in the gas stream which needs extraction and venting. The PM3 CAA field in Malaysia is over 50% CO2. Again, this alone can weigh heavily on a company’s upstream portfolio’s performance on our carbon metric. The devil really is in the asset-level detail.

2. Portfolio composition matters.

Resource theme, maturity and geographic location can have a significant effect on corporate resilience. Deepwater assets tend to have relatively low emissions intensities. This reflects their offshore location and typically strong natural reservoir drive that limits the need for intensive recovery mechanisms. They also have some of the best unit valuations on average with high upfront production generating strong margins (that rise over time).

So deepwater assets have the highest NPV/tonne of emissions produced on average – nearly four-and-a-half times higher than conventional onshore assets.

They also suffer from weak valuations that reflect large up-front capital costs and through-life spend.

3. Few companies excel in both categories.

Some NOCs with very mature, emissions-intensive and low-value legacy assets, are most exposed on these metrics. At the other end of the scale, companies like Anadarko or Petrobras are among the most resilient, with portfolios concentrated in high-value, low emissions-intensity unconventional and deepwater assets respectively.