The energy transition requires reduced use of oil, gas and coal, yet fossil fuel executives are rewarded for increasing output. Companies that try to maximise production risk wasting money on projects that deliver poor returns, as was seen in the high oil price years. Following the 2014 crash, those companies that had a higher weighting of production and reserve/resource additions in management bonuses underperformed their less growth-oriented peers.
Specifically, this report finds that:
- Most oil and gas companies incentivise their management to pursue growth, rather than focus solely on shareholder returns. Climate is rarely taken into
- In 2017, 92% of oil and gas companies in our universe included measures that directly incentivise growth in fossil fuel development, relating to either production, reserves, or both.
- Companies with the highest weightings on production and reserves/resources growth include Anadarko, Cabot Oil & Gas, CNRL and Oil Search.
- Only three companies (Galp Energia, Diamondback Energy and Origin Energy) did not include production/reserves in their incentive structures in 2017; BP and Equinor joined them in 2018. However, 4 of these 5 companies have other metrics that indirectly reward growth, but in a less obvious manner.
- The authors highlight Diamondback Energy as the only company to have no growth metrics in its incentive structure for 2018, with its executives incentivised entirely on returns and cost metrics. Equinor is next closest, with only a minor inclusion of cash flow from operations.
- Shareholder pressure to focus on value has had an effect – 10 companies (26% of those giving full disclosure) introduced or increased emphasis on returns measures in 2018 over 2017.
- In the 2 years following the 2014 oil market crash, US E&P companies with a lower proportion of reserves or production incentive in their annual bonuses outperformed more growth-oriented companies by 7% CAGR (although the gap has subsequently closed). Shareholder returns exhibited a negative correlation with production and reserves-related annual bonus metrics, but a positive correlation with financial returns metrics.
- 9 companies have performance metrics that relate in some way to mitigating climate change. This includes half of the European companies reviewed, such as Equinor and Shell, but only one US company out of 20 (ExxonMobil, relating to its algae, CCS and methane reduction initiatives). However, where they are included, these metrics tend to affect a small minority of compensation, and most of these companies simultaneously encourage fossil fuel growth.
The authors 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. 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. Accordingly, executives should not have pay packets that reward them for chasing ever greater volumes of reserves and output.