Oil and gas industry rewards fossil fuel growth at its peril, report warns

Canadian oil and gas companies are rewarding their executives for expanding fossil fuel activity despite global economic and environmental realities that make this unsustainable, says a report from Carbon Tracker.

But they are far from alone. Carbon Tracker's team of financial specialists found that 92 per cent of 40 incentive schemes they analyzed at major oil companies worldwide contained rewards to executives for increasing fossil fuel production, growing reserves or resource volumes, or both.

The incentive schemes were in place in 2017. Carbon Tracker is a London-based think tank that maps the risks and opportunities related to a global shift to less carbon-intensive energy supply.

“We believe that oil and gas companies should focus on extracting maximum value whether demand is growing or not -- but particularly so in a low-carbon transition,” report author Andrew Grant said in a statement.

A transition to a low-carbon economy is deemed necessary if the world is to have a reasonable chance of meeting the Paris Agreement goal of limiting global warming to -2 C and mitigate the worse effects of climate change.

Canadian Natural Resources Ltd. was one of the companies where bonuses were most closely linked to the expansion of its fossil fuel exploration and extraction business. A third of its long-term incentive plan related to reserves replacement. And production growth also featured in its bonus plan.

“From a value perspective, metrics that are growth neutral are preferable in our view – particularly in the context of uncertain future demand,” the report said.

Only one company studied, U.S.-based Diamondback Energy, does not reward growth at all, providing incentives to executives purely to control costs and improve financial returns. Four others (Equinor, BP, Galp Energia and Origin Energy) only indirectly rewarded growth.

“Focusing on generating the highest returns may mean getting smaller in terms of absolute production, as capital is returned to shareholders or redeployed in other sectors where sufficiently low cost oil and gas project options aren’t available," the report said. "Executives should not have pay packets that reward them for chasing ever greater volumes of reserves and output.”

The six Canadian companies studied were Suncor, Canadian Natural Resources, Imperial Oil, Husky Energy, Cenovus Energy and Encana. They all used production and or sales to judge executive performance, while CNR, Cenovus and Husky also rewarded expansion of reserves, resoures or exploration.

Nine companies included metrics related to mitigating climate change -- Shell, Equinor, Repsol, Eni, CNRL, ExxonMobil, Suncor, Total and BP -- but this affected only a small proportion of remuneration, and most still simultaneously rewarded fossil fuel growth.

The full report can be accessed here: https://www.carbontracker.org/reports/paying-with-fire/