Big Oil’s Ambitious Decarbonization Strategies Have Gone Bust

• A sharp focus on ESG and renewable energy has been cited as a big reason why European Big Oil stocks, including BP and Shell, are facing a considerable equity valuation gap with their U.S. peers.
• In 2023, various oil majors have made considerable changes to their renewable energy portfolios, keeping only the most profitable assets.
• Despite the revision of clean energy plans, Big Oil companies stand to benefit from $7 billion in subsidies from the U.S. government as part of the bipartisan infrastructure law to build seven regional hydrogen hubs.

Back in February 2020, British oil and gas multinational BP Inc. (NYSE:BP) announced an ambitious goal to become net-zero by 2050 through, among other things, aggressively cutting oil and gas production and also undertaking one of the industry’s most expansive renewable electricity build-outs. 

In April of the same year, deep in the throes of the oil price crash, BP’s Dutch peer Shell Plc (NYSE:SHEL) warned that global oil demand had been permanently destroyed and effected its biggest dividend cut since the Second World War. 

A year later, a Dutch court ordered Shell to cut its greenhouse gas emissions harder and faster despite the company having previously pledged to cut GHG emissions by 20% by 2030 and to net-zero by 2050. The court in The Hague demanded Shell to cut emissions by 45% by 2030 compared to 2019 levels. 

Unfortunately, the global energy transition is proving more arduous than expected, which, combined with rising costs and profitability concerns, is forcing Big Oil companies to recalibrate their decarbonization goals to align with market realities. 

Last year, BP unveiled a new decarbonization strategy that entails (1) a slower decline in upstream investments and scrapped former plans to shrink refining; (2)  focus more on higher-margin hydrogen and biofuels as well as offshore wind; and (3) higher spending in both oil and gas as well as low carbon. According to the company, the new strategy will offer higher shareholder returns, especially critical to the company after it severed ties with Russia’s Rosneft. BP’s nearly 20% stake in Rosneft helped to add several billion dollars to its bottomline. Related: Oil Prices Slump by 4% As Demand Concerns Trump Supply Risks

Another hit to the decarbonization drive: the ESG investing boom of yesteryears has gone bust. Environmental, social and governance (ESG) investing spiked in 2020 and 2021 amid the COVID-19 pandemic with low oil prices driving more investments beyond fossil fuels, while fund managers tried to appear more climate-conscious. But the latest oil price boom; political backlash against ESG led by Republican politicians as well as claims about greenwashing have made ESG investing lose plenty of luster. 

Indeed, LSEG Lipper data showed that in the first 11 months of 2023, ESG funds only managed to pull $68 billion in net new deposits, a sharp drop from $158 billion in 2022 and $558 billion for all of 2021, Energy Intel reports. 

A sharp focus on ESG and renewable energy has been cited as a big reason why European Big Oil stocks, including BP and Shell, are facing a considerable equity valuation gap and continue to trade at a discount to their American counterparts.

Exxon: Too Much Renewables Could Backfire

It’s going to be interesting to see whether these European oil and gas majors will start adopting some of the more innovative, if somewhat disingenuous, decarbonization strategies that their American brethren have unveiled. 

Last year, Exxon Mobil Corp. (NYSE:XOM) CEO Darren Woods urged companies to stop focusing on certain energy sources, such as renewable energy, to save the climate, warning that it would be a “huge mistake to be picking winners and losers and focusing on specific technologies”, according to Business AMBE. Instead, “we need to look more broadly and let the markets figure out which solutions deliver the most emissions reductions at the lowest cost," Woods said. Woods argued that an attempt to quickly move away from oil and gas immediately could be disastrous for clean energy, adding that producing less LNG, for example, something else–could lead to higher demand for dirtier fuels such as coal.

According to Woods, Europe should borrow a leaf from the U.S.’ approach to climate policy, adding that the continent risks driving companies away by over-regulating. Woods told Bloomberg that various carbon capture technologies under development in the U.S. will play a key role in the global decarbonization drive.

Back in April 2023, Woods touted Exxon’s burgeoning Low Carbon business, saying it has the potential to generate hundreds of billions in revenues and even outperform its legacy oil and gas business in the coming decades. According to Woods, the business could grow to generate tens of billions of dollars in revenue after the initial 10-year ramp-up. 

"This business is going to look quite a bit different from the base business of Exxon Mobil. It is going to have a much more stable, or less cyclical, profile," Dan Ammann,  president of Exxon's two-year-old Low Carbon Business Solutions unit, has vowed.

Last year, Exxon Mobil signed a long-term contract with industrial gas company Linde Plc. (NYSE:LIN) involving offtake of carbon dioxide associated with Linde’s planned clean hydrogen project in Beaumont, Texas. Through the contract, Exxon will transport and permanently store as much as 2.2M metric tons/year of CO2 from Linde’s plant.

Exxon is hardly alone in ambitious CCS plans. 

Last February, oil field services giant Schlumberger Ltd (NYSE:SLB) discussed its newly carved SLB New Energy unit which will focus on niches such as carbon solutions, hydrogen, energy storage, geothermal/ geoenergy and critical minerals each with a minimum addressable market of $10 billion, as reported by Bloomberg NEF. 

Meanwhile, scores of Big Oil companies stand to benefit from $7 billion in subsidies from the U.S. government as part of the bipartisan infrastructure law to build seven regional hydrogen hubs.

By Alex Kimani for Oilprice.com

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