New Delhi: Oil and gas companies are jeopardizing shareholder returns by rewarding bosses for endlessly chasing growth in a world where investor pressure to conform to climate targets and sharp falls in renewables costs are set to eat into future demand, financial think tank Carbon Tracker said on Thursday.
Previous research by it has found that rapid growth of clean technologies coupled with tightening climate policies would see global demand growth for oil weaken through the 2020s before eventually declining, with growth in demand for gas curtailed.
The new report warns that companies that try to maximize production risk overinvesting and wasting money on projects that deliver poor returns and destroy value.
The report titled “Paying with fire: How oil and gas executives are rewarded for chasing growth and why shareholders could get burned” analyses remuneration schemes at 40 of the largest listed oil and gas companies in North America, Europe, and Australia, and will fuel investor campaigns for policies that deliver better value.
Released ahead of these companies’ annual general meetings, it demonstrates that policies which incentivize production growth and reserves can deliver less value to investors than schemes which reward top executives for delivering financial returns.
Andrew Grant, the Senior Analyst at Carbon Tracker and author of the report, said: “The vast majority of oil and gas companies incentivize their executives to chase growth — behavior that risks destroying value given uncertainty over future demand.”
This report provides shareholders with the ammunition they need to challenge this approach and press for remuneration policies which reward executives for delivering solid financial returns, Grant added.
The report found that 92 percent of 2017 incentive schemes rewarded executives for either increasing production, growing reserves or resources volumes, or both, although companies are increasingly moving away from this model.
Only one company, US-based Diamondback Energy, does not reward growth, incentivizing executives purely on controlling costs and improving financial returns.
Four companies have no direct incentives for growth but include other measures which indirectly reward growth: Equinox (although only in a minor element), BP, Galp Energia, and Origin Energy.
It says the companies that disclose the greatest focus on rewarding volume growth are Anadarko, Cabot Oil & Gas, CNRL and Oil Search; at the other end of the scale, production and/or reserves metrics determine just eight percent of annual bonuses at Total and 10 percent at Repsol.
Nine companies include metrics related to mitigating climate change — Shell, Equinox, Repsol, Eni, CNRL, ExxonMobil, Suncor, Total and BP — but this affects only a small proportion of remuneration, and most still simultaneously reward fossil fuel growth.
Carbon Tracker warns that demand for oil and gas is likely to slow and then decline as a result of action to meet the Paris climate targets and the rapid growth of renewables and electric vehicles.