In the past four years, several of the world’s largest oil and gas producers have outlined ambitious plans to shift from fossil fuel production to clean energy provision. The transformation would be needed, chief executives argued, to help cut global emissions and provide a future for their companies as the energy system evolved to greener fuels.
Now, though, some companies have already begun to row back on certain goals, raising the question of whether Big Oil can progress to lower carbon sources of revenue — and whether it wants to.
BP, last year, slowed the pace at which it will reduce its oil and gas production while, in March, Shell weakened its climate targets to accommodate plans to grow its liquefied natural gas business.
In the US, ExxonMobil, which has never committed to move away from oil and gas, has appeared bolder than ever: filing a lawsuit against an activist shareholder that has been pressuring the company to set more ambitious transition goals.
Part of the reversion reflects a recognition by some stakeholders of the challenges of the energy transition, and the fact that more oil and gas will be needed to meet global energy demand until renewable alternatives can be scaled up.
But it also reflects how few investors have been convinced that large oil companies can profitably execute the transition plans they set out.
“Some of them attempted to go to market to create transition strategies, and the response from the shareholder base has been largely that they do not believe these companies can do that,” says Joanne Salih, partner in the energy and natural resources division at consultancy Oliver Wyman.
“It creates a very difficult dynamic for a public company, because you either go against your shareholder base and risk the implications, or you continue with the strategy that’s proven.”
Shu Ling Liauw, chief executive of Accela Research, which analyses climate strategies, says part of the problem is that many of the sector’s plans were conceived in the middle of the coronavirus pandemic when oil prices had collapsed and it was easy to make “transformational decisions”.
“It’s not really a backtrack, it’s a rebase, it’s a changing of the emphasis from aspirational targets to ‘how do we actually execute?’,” she says. “When they made those ambitions, they didn’t really have a plan . . . transitioning customers away from oil and gas is the only way to sustainably reduce emissions.”
New chief executives have been appointed at both BP and Shell since the strategies were set out and both have tempered expectations over the pace of change.
BP remains committed to its five transition growth engines: biogas, convenience, electric vehicle charging, hydrogen and renewables. “The question that will change over time is [at] what pace do these things move forward”, chief executive Murray Auchincloss told the FT earlier this year.
When Shell adjusted its climate targets in March, chief executive Wael Sawan said the changes in strategy — including a move away from providing electricity directly to households — was “more about shifting the focus to the areas where we can really compete”.
Among the largest European oil and gas companies, TotalEnergies has arguably been the most consistent in its approach. Patrick Pouyanné, chief executive since 2014, has repeatedly emphasised a need for continued investment in oil and gas, while growing a “low-carbon” integrated power business, which he expects to become cash flow positive in 2028.
“You can look at Total’s transition ambition, compare it with transition performance, and it’s the one that’s doing the thing that it’s saying,” says Liauw.
Salih says the largest oil and gas companies have the financial and technical resources to be significant investors in clean energy infrastructure but that the industry will only transition when it is profitable to do so.
“We can’t fool ourselves that we don’t work in a pretty efficient capital market,” she says. “You invest to create value and that’s what shareholders expect . . . If you create an environment whereby the transition is truly profitable, companies in effect will follow the money.”
As a result, she thinks Big Oil is unlikely to lead from the front, opting instead to build the capability to enter new markets for lower-carbon energy products as demand evolves. “Without very clear pricing and incentivisation models, it is difficult to say, ‘we’ll build it and they will come’,” she says.
In addition, rather than replicate the oil and gas model of building capital-intensive upstream projects, the integrated oil majors may instead seek to use their trading capability, vast customer bases, and global footprint to build “asset-light” low-carbon businesses where they connect producers and consumers.
“They really sit at the nexus of all of things,” notes Salih — adding that this ability to make and connect markets could be “one of the very real enablers of the transition”.
Climate Capital
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