On May 14, shareholders in Norwegian oil and gas major Equinor will be given a vote on whether the company should increase the pace of its low-carbon transition. The shareholder resolution asks the Board to ensure Equinor’s strategy and investment plans are consistent with the Paris Agreement goals. This vote matters not just to Equinor’s shareholders; it matters to the world. Shareholders should vote in support.
The economic case for Equinor to embrace a faster transition strengthens by the day. The International Energy Agency’s (IEA’s) latest World Energy Outlook once again upgraded its projections for the renewables roll out, and the concomitant reduction in gas demand[1].
The IEA now projects global oil and gas demand will peak before 2030[2], with demand to fall 45% by 2050. If the world adopts policies aligned with Paris, demand would fall 75% by 2050[3].
Oil and gas production is a long-term business and Equinor’s project pipeline includes proposals that will start delivering volumes in the 2030s, running as far out as 2100[4].
Having future production come onstream at a time of materially lower oil and gas prices undermines Equinor’s promise to deliver a 15% internal rate of return. This should worry shareholders.
While it is hard to determine the precise downside risk, if prices fell in line with the IEA’s 1.5C scenario, Equinor's current upstream and certain intangible assets could be impaired by $10bn, equivalent to 20% of its reported equity at the end of 2023[5]. More broadly, Equinor estimates a potential hit to its net present value (NPV) of 42% in a 1.5C scenario. If prices fell in line with the IEA’s Announced Pledges Scenarios, consistent with a 1.7C warmer world, Equinor calculates a $3bn impairment.
The more capital Equinor deploys into expanding production, the higher the potential write-downs. Using Rystad data, the Australasian Centre for Corporate Responsibility calculates Equinor’s unsanctioned international projects NPV would fall 50% if it uses the current forward Brent price curve, rather than Equinor’s $75 per barrel assumption. The hit would be even greater using the IEA’s 1.5C price curve.
While Equinor has made a welcome commitment to support Paris, it says the development of new reserves is important for energy security. The problem with this argument is two-fold.
First, the ‘balance’ Equinor says it is seeking between energy security and a safe climate is at odds with the Paris Agreement signed by 195 countries, including Norway.
Second, doubling down on fossil fuels is more likely to exacerbate energy security risks, as greener renewables reduce the reliance on imported fossil fuels. Furthermore, wind and solar are now more often than not the lowest-cost form of power[6].
While the long-term economic case for oil and gas companies to embrace a faster transition remains strong, no group is willing to act. Equinor is, in our view, best placed to take this step.
Critically, the Norwegian government, with its two-thirds ownership in Equinor, made clear at the company’s 2023 AGM that it should set “targets and implements measures to reduce greenhouse gas emissions in both the short and long term in line with the Paris Agreement, and reports on goal attainment.” [7]
Equinor has the expertise to pivot. In particular, its latest market update underlined its ability to use vast depleted reserves in Norway’s continental shelf for storing carbon emissions captured from European heavy industry. It is planning a large-scale pipeline from Europe to store up to 50mn tonnes of CO2 a year by 2035, equal to Norway’s current annual emissions[8]. The total capacity is estimated to be equivalent to 1,000 years of Norwegian emissions[9]. With an appropriate carbon price, Equinor could move from the business of extraction to one of transporting and storing harmful gases.
Whether or not Equinor meets this challenge is important for the world. It will tell us whether it is possible for an oil and gas company to align with Paris. It will also tell us whether a petro-state, which has accumulated substantial wealth from oil and gas, is prepared to embrace the realities of a low-carbon world. If Equinor and Norway are unwilling to turn the promises of Paris into concrete action, who will?
Note: The Shareholder Resolution is being put forward by four long-term institutional investors, including UK-based Sarasin & Partners LLP, the Danish pension scheme Sampension, the UK’s West Yorkshire Pension Fund and Dutch Achmea Investment Management.
[1] IEA, “World Energy Outlook”, October 2023.
[2] IEA, “Oil and gas industry in Net Zero Transition”, November 2023; https://www.iea.org/reports/the-oil-and-gas-industry-in-net-zero-transitions
[3] ibid
[4] ACCR, “Equinor’s challenge: which way to Paris”, April 2024 (https://www.accr.org.au/research/equinor%E2%80%99s-challenge-which-way-to-paris/).
[5] Equinor, “Integrated Annual Report 2023”
[6] IEA, “Renewable Energy Market Update”, June 2023. https://www.iea.org/reports/renewable-energy-market-update-june-2023/executive-summary
[7] Ministry’s statement: https://cdn.equinor.com/files/h61q9gi9/global/8ec49409d8ac1bff4ba613604b3ffe36ee623d13.pdf?minutes-from-annual-general-meeting-in-equinor-asa-10-may-2023.pdf
[8] Equinor, ESG Day transcript, 8 April 2024, p. 4 and 13: https://www.equinor.com/investors/esg-day-2024
[9] https://www.equinor.com/magazine/how-carbon-capture-and-storage-became-a-decisive-climate-solution#
Important Information
This document is intended for retail investors. You should not act or rely on this document but should contact your professional adviser.
This document has been issued by Sarasin & Partners LLP of Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU, a limited liability partnership registered in England and Wales with registered number OC329859, and which is authorised and regulated by the Financial Conduct Authority with firm reference number 475111.
This document has been prepared for marketing and information purposes only and is not a solicitation, or an offer to buy or sell any security. The information on which the material is based has been obtained in good faith, from sources that we believe to be reliable, but we have not independently verified such information and we make no representation or warranty, express or implied, as to its accuracy. All expressions of opinion are subject to change without notice.
This document should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this material when taking individual investment and/or strategic decisions.
The value of investments and any income derived from them can fall as well as rise and investors may not get back the amount originally invested. If investing in foreign currencies, the return in the investor’s reference currency may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results and may not be repeated. Forecasts are not a reliable indicator of future performance.
Neither Sarasin & Partners LLP nor any other member of the J. Safra Sarasin Holding Ltd group accepts any liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. The use of this document should not be regarded as a substitute for the exercise by the recipient of their own judgement. Sarasin & Partners LLP and/or any person connected with it may act upon or make use of the material referred to herein and/or any of the information upon which it is based, prior to publication of this document.
Where the data in this document comes partially from third-party sources the accuracy, completeness or correctness of the information contained in this publication is not guaranteed, and third-party data is provided without any warranties of any kind. Sarasin & Partners LLP shall have no liability in connection with third-party data.
© 2024 Sarasin & Partners LLP – all rights reserved. This document can only be distributed or reproduced with permission from Sarasin & Partners LLP. Please contact [email protected].