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February 13, 2023

Explainer: Where do the oil majors stand on the green transition?

Oil companies have come under fire after announcing record profits for 2022 and are facing intense scrutiny over their investments in renewable energy.

Shell, BP and TotalEnergies were among the oil companies to release their full-year results in February, revealing record profits that have been fuelled by high gas prices.

As consumers face steep rises in their utility bills, huge profits driven by Russia’s invasion of Ukraine and accompanied by increased dividends and new share buyback pledges have been met with fury by activists.

The controversy surrounding these profits has been compounded by questions over some oil majors’ commitments to the green transition.

For now, only BP has explicitly reined in the pace at which it is slowing its oil and gas production. The company, which reported record underlying profits of $27.7bn for 2022, said that it will look to lower its oil and gas production by 25 per cent by 2030, instead of a previous target of 40 per cent set against a 2019 baseline. However, it has also pledged to ramp up investment in “transition” activities by the end of the decade.

Meanwhile, despite its adjusted earnings more than doubling since the prior year to a record $39.9bn, Shell chief financial officer Sinead Gorman said the company would maintain its investment in renewables in 2023. A third of its total operating and capital expenditure related to low and zero-carbon energy last year.

The frustration towards oil majors has boiled over into protests on company property. After reporting record net profits of €20.5bn, TotalEnergies’ Paris headquarters were covered in paint by climate activists.

The company expects to invest €5bn in low-carbon energies in 2023, having pledged €3.5bn of its net investments towards renewables and electricity for 2022.

The legal side

This battle is also unfolding in regulators’ offices and in the courts. Shell, in particular, is facing legal challenges over its approach to sustainability.

Non-profit Global Witness has asked the US Securities and Exchange Commission to consider whether Shell’s inclusion of natural gas within its renewable energy bracket is misleading to investors. 

ClientEarth, meanwhile, is taking the company’s directors to court over its “flawed climate plans”, which the charity alleges have put board directors in breach of their legal duties under the UK Companies Act to manage climate risk and protect shareholders, including pension funds. The lawsuit’s supporters include Shell investor Nest, the UK’s largest defined contribution workplace pension scheme.

“Shell is seriously exposed to the risks of climate change, yet its climate plan is fundamentally flawed,” ClientEarth senior lawyer Paul Benson said. 

“In failing to properly prepare the company for the net zero transition, Shell’s board is increasing the company’s vulnerability to climate risk, putting its long-term value […] in jeopardy.” 

A Shell spokesperson rejected ClientEarth’s allegations and said the company “will oppose their application to obtain the court’s permission to pursue this claim”.

Accounting for renewables

At the start of 2023, Equinor and ExxonMobil joined BP, Shell and TotalEnergies in announcing bumper earnings for the prior year. Equinor’s adjusted pre-tax earnings sat at a record $75bn, while ExxonMobil reported earnings of $55.7bn – more than double its 2021 earnings, which stood at $23bn.

There are differences in the ways that the oil majors account for their investments in renewables, as well as renewable energy-linked revenues and profits.

BP rolls gas production and low-carbon energy into one segment, which contributed $16bn of its $27.7bn in underlying profits for 2022. The segment covers BP’s gas businesses, as well as biofuels, onshore and offshore wind, solar energy, hydrogen and carbon capture, usage and storage.

Overall, BP said it invested $4.9bn, around 30 per cent of its total $16.3bn capital expenditure, into its “transition growth engines” in 2022, investing in areas including bioenergy and electric vehicle charging – up from around 3 per cent in 2019. BP expects this proportion to grow to around 50 per cent in 2030, pledging up to $8bn more towards its these activities by the end of the decade.

Shell, meanwhile, has a designated renewables and energy solutions segment. It recorded adjusted earnings of $1.7bn last year, up from a loss of $243mn in 2021. This represented 4.3 per cent of the company’s overall adjusted earnings. 

While Shell reports that it spent $3.5bn on capex for the segment – representing 14 per cent of its overall capex, compared with 12 per cent in the prior year – Global Witness has challenged the way that the oil company accounts for this area of its reporting, claiming that its 2021 renewable energy capex actually sat at 1.5 per cent of total.

For TotalEnergies, renewable energy is covered alongside electricity under its integrated power business, which is rolled into its integrated gas, renewables and power segment in its 2022 results. This bracket provided 32 per cent of the group’s $38.5bn in adjusted net operating income.

From this year onwards, TotalEnergies will report its integrated power segment’s contribution separately in order to help shareholders.

Equinor’s renewables segment’s adjusted loss widened from $136mn in 2021 to $184mn last year. The segment’s revenue slumped from $1.4bn to $185mn over the period, accounting for a fraction of its $150.8bn of group turnover.

Quilter Cheviot equity analyst Jamie Maddock placed BP as having the most robust commitment to investing in renewables of the majors, with ExxonMobil sitting at the other end of a spectrum that has Shell “in the middle”. 

“BP has hard renewable output targets and hard production decline targets,” Maddock said, observing that ExxonMobil has “very few objectives”. The largest portion of ExxonMobil’s renewable-focused investment is concentrated on reducing its own emissions, while at the other end BP is both seeking to slash its emissions and push into areas such as wind power.

“We’ve seen in the past two to three years, generally, a lot of evolution in the strategies of these companies,” Moody’s senior credit officer Tobias Wagner told Sustainable Views. 

“I’m not surprised to see the continuous refinement as events occur and markets develop, and I would expect to see continued evolution of those strategies going forward,” he said.

In the hands of less patient shareholders?

Shareholders have been handsomely rewarded, with dividends increasing at double-digit rates across oil majors. Having lifted its dividend over the previous two quarters, BP once again increased its quarterly dividend by 10 per cent to 6.61p a share. This was “likely to be a surprise to many investors”, RBC analysts said.

Carbon accounting platform Persefoni’s chief executive, Kentaro Kawamori, told Sustainable Views that elements of these companies’ strategies, such as rising dividends and new share buybacks, were the inevitable outcome of capital being withdrawn from oil and gas, with the universe of shareholders becoming smaller than previously. Shell and BP announced fresh $4bn and $2.75bn buyback programmes respectively.

“In some ways, these companies have been left no choice than to pursue the strategies which they are now, which is to satisfy those shareholders more in the form of increased buybacks and consistent dividends,” Kawamori said.

“That is exactly in counter to, of course, more investments into the energy transition side of the business.”

With oil majors seeking to play up their allocations towards renewables in varying degrees, divestment also offers a path to improved sustainability. Some oil and gas assets deemed no longer core to these companies’ strategies have been sold.

But in a recent note, Rystad Energy senior sustainability analyst Olga Savenkova observed that the claim by some companies of a reduction in emissions through divestments has been met with scepticism. More than 90 per cent of BP’s cut in Scope 1 and 2 emissions have been achieved through divestments, she noted.

“The sale by a company of oil and gas assets to focus more on renewables may improve the emissions profile for a specific portfolio, but will not reduce emissions on a global scale as the assets will continue to produce emissions under a new operator at the same level – or potentially higher if the new owner is less concerned about the emissions intensity of its operations,” she said. 

“BP’s decision to produce more oil and gas for the rest of this decade compared with its previous target will see it remain accountable for a larger share of upstream emissions than under its previous plan.”

Policymakers’ role

For as long as competing needs exist over energy security and the transition towards renewables, and while the majors continue increasingly to allocate capital towards the transition, any regulatory pushback is unlikely to be severe, Maddock said.

“Despite the rising share allocated to the energy transition, there could be increased pressure to allocate the excess proceeds received from the high oil and gas prices towards more renewable energy-oriented projects,” he added.

“However, this could only be attained if there were to be sufficiently attractive, ‘shovel-ready’ projects.”

Investors in oil companies may not share the patience of sector analysts, however.

Nest, a Shell investor and backer of ClientEarth’s legal action against the company, highlighted the need for short to medium-term strategies to meet the Paris Agreement goals. 

“The company’s new oil and gas projects in development pose risks to investors in terms of carbon lock-in and stranded assets,” Nest said. 

“This isn’t just about Shell. There are oil and gas companies in our portfolio who aren’t doing enough to seriously transition their business and we hope they take note.” it added.

The London CIV, which pools London Local Government Pension Scheme assets, echoed Nest’s criticism of Shell. The oil company accounted for 2.31 per cent of the total carbon footprint of LCIV funds across Scope 1, 2 and 3 emissions, as of December 2022. 

“It presents a significant portion of our own footprint and is a primary hotspot of risk and exposure within our portfolio,” London CIV said.

Photo credit: Christophe Archambault/Getty Images

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