In 2022, the six largest western oil companies will make more money than any year in the history of the industry: more than $200bn, most of it from pumping and selling fossil fuels that the world must replace to prevent the climate crisis.
The shocks revealed by BP, Chevron, Equinor, ExxonMobil, Shell and Total in their year-end results sparked outrage and accusations of war profiteering. It also casts doubt on the commitment of executives, politicians and investors to the Paris climate agreement to slow global warming by reducing emissions.
After years of pressuring Big Oil to curb production, political leaders from London to Berlin to Washington changed tack last year as prices rose, urging companies to boost production or help them get Russian fossil fuel substitutes after Moscow’s full-scale invasion of Ukraine. .
The companies that respond best are the ones most rewarded by investors. US giant ExxonMobil, which has resisted pressure to decarbonise more than other energy majors, has increased production in 2022 and its shares rose more than 50 per cent that year as it posted a profit of $55.7bn.
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This week BP, the oil company furthest behind in its commitment to the energy transition, announced that it will gradually reduce oil and gas production this decade, meaning that emissions will also fall slowly.
The U-turn dominated the headlines, sparking outrage from environmentalists and adding fuel to calls for a windfall tax. But the market agreed – BP shares rose more than 10 percent over the next 48 hours, hitting their highest level in three and a half years.
Western policy makers are still committed to the energy transition. The EU has stepped up plans to launch renewable energy and hydrogen projects in the bloc as a way to replace Russia’s reliance on fossil fuels. Across the Atlantic, Joe Biden’s Inflation Reduction Act promises to boost green investment.
But the resurgent demand for hydrocarbons, the blockbuster profits earned by shippers and the response from the market have raised serious doubts about whether the legacy industry and investors will push for decarbonisation.
“There is only one way to get rid of oil and gas in the world and not expect the companies that benefit the most from the industry to lead,” said Adrienne Buller, director of research at Common Wealth, UK think. – tank. “These companies are set up to maximize returns for their shareholders and they are doing exactly that.”
Beyond petroleum?
As BP chief executive Bernard Looney unveiled plans to overhaul the British energy company by 2020, the environmental, social and governance (ESG) movement is on the rise, dominating the conversation among European asset managers and on Wall Street.
In response, the newly appointed Irish executive pledged to reduce the company’s carbon emissions by cutting the group’s oil and gas production by 40 percent and acquiring 50GW of renewable power, all by 2030.
The plan is the most ambitious in the sector – still no other oil and gas major has such a tough target to cut production – and it looks visionary as oil prices have collapsed during the coronavirus pandemic lockdown.
But to Looney’s dismay, investors did not reward his efforts. Despite last year’s strong rally, BP’s share price performance has typically lagged behind its rivals since its launch.
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BP has now withdrawn part of the plan. The group’s oil and gas output will now fall by just 25 percent in 2030, compared to 2019 levels, so emissions will also fall more slowly. “Governments and societies around the world are asking companies like us to invest in the energy system today,” Looney told the FT on Tuesday after reporting a record $27.7bn profit.
The announcement made waves throughout the industry. Some see it as a welcome concession to reality. This is a signal that energy security “has been invited to the energy transition table”, said Jeff Ubben, a US hedge fund activist investor and Exxon board member. “Today’s dinner conversation involves affordability and reliability, which makes it more robust,” he added.
This is the second time BP has reversed its plans to switch from oil to clean energy production. The first attempt, under chief executive Lord John Browne’s “Beyond Petroleum” strategy in the early 2000s, was abandoned a few years later as crude oil prices rose to a historic peak in 2008 of nearly $150 a barrel.
Looney frames this latest shift not as a change of strategy, but a strengthening of it. At the same time it invests an additional $8bn in oil and gas between now and 2030, the group will also spend $8bn more in “transition” businesses, he said – biofuels, convenience, charging, renewables and hydrogen.
The adjustment by BP should not be seen as the death knell for Big Oil’s efforts – at least in Europe – to become Big Energy, said Nick Stansbury, head of climate solutions at Legal & General Investment Management, BP’s shareholder. “I certainly don’t think that what we’re seeing at BP tells us that one of the big oil companies is trying to change their business model in a way that’s appropriate for the future.”
The challenge for the chief executive, Stansbury said, 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 this business to develop in such a way that they are resilient and poised to succeed in a net zero world,” added Stansbury. “Investors are not confident about the current situation, in part because of the lack of certainty and clarity about the future of the energy system.”
That market tension can be seen in the reluctance of executives in energy majors to bet bigger on the uncertain profits from renewables, analysts said.
Shell, Europe’s biggest energy company, is doubling its profits by 2022 to nearly $40bn – the highest in its 115-year history – but is not changing its capital spending plans. Shell is spending $3.5bn on its renewables and energy solutions division by 2022, just 14 per cent of the group’s total capital expenditure. It will spend about the same in 2023.
“Oil companies will complain that they don’t get rewarded in the market for being greener than Exxon,” said Rachel Kyte, dean of Tufts University’s Fletcher School and a former UN climate adviser. “I don’t think it’s enough of a reason, but I think the fundamental question about the strategy regarding the energy transition: how do we send a signal in the market that shows that we value these oil and gas companies better than others?”
Oil rules the world
In the US, oil executives have done little to build alternative low-carbon businesses and feel they have been vindicated by the rise in share prices over the past 12 months. Shale producers dominated the list of top performers in the S&P 500 last year.
“The fact is, [fossil fuel] what opens the world today,” Chevron chief executive Mike Wirth, told the FT in a recent interview at headquarters in San Ramon, California. “It will open the world tomorrow and five years from now, 10 years from now, 20 years from now.”
The company generated $35.5bn in revenue last year and announced plans to return a whopping $75bn to investors through share buybacks. In contrast, it will only spend $2bn on low-carbon projects in 2023 out of a total capex budget of $14bn, and $10bn between now and 2028.
Investors point to the fact that oil and gas has always been a cyclical industry, where companies boost returns to shareholders during periods of high prices to make up for poor performance during periods of low prices. Also, executives can’t just “rip off” the company’s strategy for years by increasing capital spending after profits rise, one investor added.
On Wall Street, a change could be felt again for western oil and gas producers, said a person familiar with the field that the supermajor has created for investors in recent months. Some of these positions are questions of energy security. In the wake of Russia’s energy war with Europe, holding back funding for US producers would be “the road to hell for America”, JPMorgan chief executive Jamie Dimon told Congress last year.
However, a record $110bn in dividends and share buybacks to be paid to investors by 2022 by the western major has fueled anger on both sides of the Atlantic as households struggle with rising bills and low-carbon energy systems cry foul. for other investments.
Reporting these gains “in the midst of a global energy crisis” is “surprising”, US president Joe Biden said in his State of the Union address to Congress this week. He also proposed a quadrupling tax on corporate stock buybacks.
But Biden is also sending mixed signals about the energy transition. Despite signing into law a $369bn clean energy subsidy package and promising to “transition away from oil”, Biden has spent the past several years urging oil and shale gas producers to increase supplies and release millions of barrels of crude oil from the US. strategic reserves in an effort to reduce the price of fossil fuels.
Some believe Big Oil should mostly leave the energy transition up to others. Charlie Penner, a former executive at US hedge fund Engine No. encouraged to return cash to investors.
“Without a better alternative, the capital can and should be returned to shareholders who can diversify, including investing in the energy transition, themselves,” he said. Indeed, he and Exxon’s climate-focused investors don’t think investing in low-cost renewable projects is a wise use of capital.
BP, for now, is still trying to do both. Over the next eight years, Looney has committed to invest $60bn in BP’s energy transition business, which will represent more than 50 percent of spending in 2030. “I take this as a sign of support and confidence in the strategy and capabilities we have built,” said Anja-Isabel Dotzenrath, executive vice president of BP in the charging of hydrogen and renewable energy projects, which represent about half of the “green” budget.
Instead of slow progress, Dotzenrath said the new global focus on energy security due to the impact of the war in Ukraine could accelerate the energy transition by encouraging more investment in domestic renewable energy as an alternative to imported fossil fuels.
However, despite the impetus for renewable energy security, BP may need more help from policymakers and regulators to convince investors to stick with the transition.
“We are relying on a hodgepodge of voluntary codes, voluntary standards, and the market,” says Kyte at Tufts. “Regulations and laws for transition and net zero are missing in action.”
Additional reporting by Camilla Hodgson
Data visualization by Chris Campbell