Naftogaz

Naftogaz’s ambition is to achieve carbon neutrality by 2040 through investments in emissions reduction, development of hydrogen and biofuel production projects as well as carbon capture and storage (CCS) technologies. However, the company has set no near or long-term targets, which makes it impossible to track the company’s progress against its carbon neutrality commitment. To achieve its ambition, Naftogaz must set long-term and intermediate emissions reduction targets aligned with its 1.5°C pathway, covering its scope 1 and 2 as well as its scope 1, 2 and 3 emissions.

In 2019, Naftogaz invested 895 million UAH (around USD 35 million) in R&D. While the company is investing in environmental protection, such as soil protection and remediation and water treatment, there is no evidence that it is undertaking R&D in low-carbon and mitigation or carbon removal technologies. By disclosing this information and setting targets to increase R&D investment in low-carbon innovation, Naftogaz can develop projects to transition to a low-carbon business model.

In 2019, Naftogaz’s subsidiary Energoservice SE implemented the Affordable Heat program in different Ukrainian towns to help consumers save 40-60% on heating through individual gas heating systems. Energoservice plans to expand this service to household customers and to offer energy efficiency services among its range of commercialised products by 2022. Naftogaz’s current ambition can be further strengthened through a planned growth and promotion strategy of these business activities, to turn energy efficiency services into one of the strategic focal points of the company.

Several companies included in the benchmark assessment have set up board oversight of climate change issues without having the expected climate change expertise. By contrast, Naftogaz has board-level climate change expertise, with one of its board members sitting on the US Sustainable Energy Committee Bureau since 2017. However, climate change issues do not fall within the remit of the board committee that has oversight of Naftogaz’s low-carbon transition plan. The company should use its existing climate change expertise, as well as extend it, to strengthen its low-carbon transition plan and climate scenario analysis. This would allow Naftogaz to test the resilience of its current and future business model.

Naftogaz has established an Energy Business Unit in 2019 with the objective of creating and operating renewable energy facilities. Among the unit’s ongoing projects are the development of an onshore wind power plant, Mariivka WPP, with a capacity of 20 megawatts (MW); a solar power plant, Chudniv SPP, with a capacity of 33 MW; an offshore wind power plant, Andriivka SPP, aiming for a capacity of 995 kW; and Naftogaz’s subsidiary Energoservice SE. Further disclosure on capital expenditure (CapEx) allocated to low-carbon business activities would substantiate the company’s growth plans for these projects and add credibility to its ambition of becoming an integrated energy service provider.

Between 2014 and 2019, Naftogaz’s scope 1 and 2 emissions intensity decreased only marginally. The company’s rate of emissions reduction is not projected to align with the annual 9% decrease required by the company’s 1.5°C pathway. Naftogaz performs better in terms of locked-in emissions as it is forecast to have lower emissions than its 1.5°C carbon budget till 2050. The company has some headroom but its plans to keep up its gas exploration and hydrocarbon production activities place it at risk of overshooting its carbon budget. Instead, the company should seize this opportunity to significantly reduce its absolute emissions and comfortably remain within its carbon budget.

Naftogaz aims to transition from being an oil and gas company to becoming an energy company offering renewable energy and energy efficiency services. The company also plans to be carbon neutral by 2040 but has not committed to any emissions reduction targets for its total scope 1 and 2 and its scope 1, 2 and 3 emissions.

To achieve its objective of carbon neutrality, Naftogaz intends to rely on investments in emissions reduction, development of hydrogen and biofuel production and CCS technologies. The company does not indicate the share of emissions reduction that it plans to achieve through each of these projects.

Naftogaz launched a new Energy Business Unit in 2019 to become a national energy provider. The company does not disclose information about the CapEx dedicated to low-carbon projects within this new business unit. This information is essential to understand the company’s planned low-carbon transition.

Between 2014 and 2019, Naftogaz’s scope 1 and 2 emissions intensity decreased marginally, mainly driven by a decrease in its upstream oil and gas operations during 2019. However, this trend is unlikely to continue as the company plans to increase production volumes and invest in finding new gas reserves.

The absence of emissions reduction targets and a detailed long-term transition plan suggests Naftogaz is unlikely to achieve its commitment for carbon neutrality by 2040. The company needs to set intermediate and long-term emissions reduction targets and invest in energy transition opportunities to achieve its objective.