A new report suggests Big Oil continues to link executive pay to increased fossil fuel production, even if this conflicts with energy transition targets and climate policies.
Published by think tank Carbon Tracker, the ‘Crude Intentions II’ report finds that all but one of the 25 largest listed oil and gas companies incentivise their management teams to increase fossil fuel production and assume that hydrocarbon demand will continue to grow.
It finds that in 2022 – the latest year for which full data is available – seven companies had remuneration policies where volume growth metrics made up 30% or more of target variable pay.
Of these, PetroChina – the listed arm of state-owned oil group CNPC – was the most growth-oriented, with two-thirds of its target variable pay decided directly or indirectly by volume growth.
Yet European firms also have “a high proportion” of pay weighted towards growth metrics, with Eni (29%), Repsol (23%) and Shell (23%) singled out.
Moreover, the authors contend that some companies with the most ambitious climate policies – Eni and Repsol have both pledged Scope 1, 2 and 3 emissions cuts in the region of 30-35% by 2030 – “are among the worst offenders”.
While only some firms have disclosed 2023 plans, the same two companies increased their relative shares of growth metrics, while Chesapeake and BP made reductions and Shell removed them outright.
The International Association of Oil & Gas Producers (IOGP) – a global industry trade body – declined to comment on the findings.
A spokesperson for Eni said: “Hydrocarbon production accounts for only 12.5% of the Short-Term Plan, while it is completely absent in the Long-Term Share-based Incentive Plan. Since the Short-Term Plan (annual and deferred quota) accounts for approximately 38% of the CEO’s total target remuneration, the impact of the production parameter on the total target remuneration is equal to 4.75% (38% x 12.5%).
“We would also like to highlight that energy transition and decarbonisation targets accounts for 25% of the Short-Term Plan and 35% of the Long-Term Share-based Incentive Plan.”
The only outlier in Carbon Tracker’s list is US-listed Occidental Petroleum, which did not link growth metrics with remuneration – though its late 2023 acquisition of rival CrownRock will see its production base grow nonetheless.
Meanwhile, of the six global supermajors, five are currently planning to either increase production or keep it level over the medium term.
Even BP – which had vowed to make production declines – has scaled back its 2030 targets from a 40% cut to 25% of 2019 levels.
© Carbon Tracker‘Low-carbon’ labels
The report, the first edition of which was published in late 2022, also notes that many companies – including BP, Chevron, ExxonMobil and TotalEnergies – have framed their strategies around transition, but still include incentives to grow production.
In many cases, metrics aimed at driving “low carbon” investments are linked to gas and LNG badged as ‘transition’ fuels – making them “effectively volume growth metrics under different names.”
And of the companies which have emissions reduction remuneration metrics in place, just five directly match wider corporate targets. Of these, four cover just Scope 1 and/or 2 emissions, while only Shell has an incentive towards its Scope 3 emissions target
None of these targets link to the finite limits of the remaining carbon budget, the report found.
Carbon Tracker associate analyst and report author Saidrasul Ashrafkhanov said: “We’re increasingly likely to see peak demand for each of the fossil fuels by the end of the decade. For most oil and gas companies this means planning for their own output to decline over time, yet going by their remuneration policies, this generally doesn’t seem to be in planning.”
It follows a similar report prepared by the think tank last month which claimed that private equity firms’ North Sea cash flows could fall by more than 60% if a fast-paced energy transition is delivered.
Transatlantic divide
Regional divides also play out in the data. Ten firms in the cohort – six in Europe and four in the US – incorporated transition metrics which incentivised diversification.
However, Carbon Tracker found that the relative importance attached to these metrics was greater in Europe than across the pond, suggesting that European companies “incentivise diversification far more” than their counterparts.
Only ExxonMobil came close to its European peers in 2022 in terms of the relative share of diversification metrics, with the other US companies trailing behind at below 4%.
“The fact that many North American companies have no transition response metrics at all indicates North American company leadership is less concerned about the threat of oil and gas demand substitution,” the report notes.
Last year Exxon boss Darren Woods topped the list of Big Oil earners, with a pay packet of nearly £29m for 2022 – roughly three times that of then-Shell CEO Ben van Beurden and BP’s Bernard Looney.
Call for NOC transparency
Transparency on these metrics also remains an issue.
The authors found nine company remuneration policies to be “partially or fully undisclosed”, with national oil companies identified for their opacity. Sinopec, CNOOC Saudi Aramco and Petrobras had no clear disclosed targets, while PetroChina has disclosed some incentives but with limited detail on values which make up executive remuneration.
Overall, they point to “an industry-wide mismatch” between the vesting periods of long-term incentive plans and the timelines over which executive decisions can be made.
“Because this can insulate CEOs from the consequences of their actions, oil and gas companies focussed on risk management should ensure that their long-term incentive plans and corporate timelines are aligned,” the authors urged.
As AGM season approaches, Carbon Tracker says investors should hold companies to account, asking how these firms reconcile continued use of growth metrics given the energy transition, and what scenarios and assumptions are used.
The group’s head of oil, gas and mining Mike Coffin said: “The energy transition is accelerating, and oil and gas companies must plan for peaking demand for their product. Investors should be concerned executives are continued to be incentivised to grow production volumes, and develop new long-cycle assets, particularly if this is contrary to stated company strategy.
“Asset owners and asset managers should use their votes accordingly to ensure that executives are acting in their best long-term interests.”
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