After years of pressuring Big Oil to curb production, political leaders from London to Berlin to Washington changed tack last year as prices surged, calling on companies to boost output or help them procure replacements for Russian fossil fuels following Moscow’s full-scale invasion of Ukraine. Those
companies that were best positioned to respond were the most rewarded by investors. US giant ExxonMobil, which has resisted pressure to decarbonise more than any other energy major, increased production in 2022, and its shares rallied more than 50 per cent in the year as it raked in a record $55.7bn in profits. This week BP, the oil major that had gone the furthest in its commitments to the energy transition, announced that it would slow the pace as it reduces oil and gas output this decade.
Western policymakers are still committed to the energy transition. However, the EU has accelerated plans to roll out renewable power and hydrogen projects across the bloc as a way to replace dependence on Russian fossil fuels. «There has only ever been one way to get the world off oil and gas, and that is not to expect the companies who benefit most from that industry to lead the way,» says Adrienne Buller, research director at Common Wealth, a UK think-tank. «These companies are set up to maximise returns to their shareholders, and they’re doing exactly that».
Soon after Bernard Looney was appointed chief executive of BP in February 2020, he pledged to bring down the company’s carbon emissions by cutting the group’s oil and gas production by 40 per cent and acquiring 50GW of renewable power, all by 2030. Yet to Looney’s dismay, investors did not reward his efforts. Instead, it was a signal that energy security «has been invited to the energy transition table», says Jeff Ubben, a US hedge fund activist investor and Exxon board member. Looney frames the shift as not a strategy change but a strengthening of it.
The adjustment by BP need not be seen as the death knell for Big Oil’s effort to become Big Energy, says Nick Stansbury, head of climate solutions at Legal & General Investment Management, a BP shareholder. «I definitely don’t think that what we’re seeing at BP tells you that it’s the wrong thing for a big oil company to try to transition its business model in the right way to make it fit for the future». The challenge for chief executives, Stansbury says, is how to transition while protecting financial performance during what promises to be an era of extreme commodity price volatility, as the world’s energy system moves from fossil fuels to renewable power. «We want these businesses to develop in such a way that they are resilient and poised for success in a net zero world,» Stansbury adds.
«Investors are not yet confident of that today, in part because of the lack of certainty and clarity that exists around what the energy system of the future is going to look like». That market tension can be seen in the reluctance among executives at the energy majors to bet bigger on uncertain future revenues from renewables, analysts say. Shell, Europe’s biggest energy company, doubled its profits in 2022 to almost $40bn but left its capital spending plans unchanged. Shell spent $3.5bn on its renewables and energy solutions division in 2022, representing only 14 per cent of the group’s total capex.
«The reality is, oil is what runs the world today,» Chevron chief executive Mike Wirth told in a recent interview. «It’s going to run the world tomorrow and five years from now, ten years from now, 20 years from now». The company made $35.5bn in profits last year and announced plans to return a gargantuan $ 75bn to investors through share buybacks. In addition, executives cannot «rip up» years of corporate strategy by ramping up capital spending after profits rise, one investor adds.
On Wall Street, there has been a palpable shift back in favour of western oil and gas producers, say people familiar with the pitches made by supermajors to their investors in recent months. Some position it as a question of energy security. In the wake of the Russian energy war with Europe, holding back funding for US producers would be the «road to hell for America» JPMorgan’s chief executive Jamie Dimon told Congress last year. Some believe Big Oil should mostly leave the energy transition up to others.
«Without better alternatives, that capital can and should be returned to shareholders who can diversify, including investing in the energy transition, themselves,» he says. Indeed, he and other climate-focused Exxon investors do not think investment in lower-return renewable projects is a sensible use of capital. Over the next eight years, Looney has committed to invest $60bn in BP’s energy transition businesses, which will represent over 50 per cent of its spending in 2030. Rather than slow progress, Dotzenrath argues that a new global focus on energy security due to the effects of the war in Ukraine can accelerate the energy transition by encouraging more investment in domestic renewables as an alternative to imported fossil fuels.
However, even with the impetus of renewables-driven energy security, BP may need more help from policymakers and regulators to convince investors to stick with it through the transition.
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