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Big Oil Fights For Its Life

Tsvetana Paraskova

Just as Big Oil has returned to growing profits after the 2015-2016 price crash, the world’s largest oil companies are facing another formidable challenge amid growing calls from activists, shareholders, and institutional investors to start saving our planet.  

This new task presents a new dilemma for the largest listed companies that extract, process, and sell fossil fuels and their by-products—how to stay relevant in the energy transition in which everyone demands attention to carbon emissions, while at the same time keep profits and payouts to shareholders high.

Every major oil and gas firm has started to invest in some kind of green energy and technologies, but those investments—even if they are a billion or two billion U.S. dollars—are tiny compared to the dozens of billions of dollars each of those companies continue to plow into their core business, oil and gas.  

And no major oil corporation is giving up their core business. First, because, as they say, the world will continue to need energy from oil and gas in the foreseeable future. Second, returns on investment and profit margins in the alternative energies business are still being tested and currently, they are nowhere near the high margins in fossil fuels.

Big Oil has to find a way to reconcile the need to keep dividends (and growing them) with the growing need to not fall entirely out of favor with investors as it faces the backlash from society and activists who criticize oil companies for continuing to produce energy from fossil fuels.

The world’s largest oil firms already invest in green energy—including in wind, solar, biofuels, hydrogen, and electric vehicles (EVs) charging networks—but these alternatives are not their core business and will not be such for years, and probably decades, to come.

Will these investments in green technology and the pledges to work to reduce carbon emissions will be enough to appease shareholders? And what if Big Oil shifted more capital expenditure to alternative energies? Will it still be able to make sustainable profits and pay handsome dividends to shareholders?

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“We have to find a way to preserve that dividend-paying capacity, while at the same time growing the value of the company, while at the same time also changing the make-up of the company,” Shell’s chief executive Ben van Beurden tells Financial Times’ Senior Energy Correspondent Anjli Raval.

On its Management Day 2019 in June this year, Shell said it is building a business with the potential to return US$125 billion or more in the form of dividends and share buybacks to shareholders between 2021 and the end of 2025.

Shell is also re-focusing its business into three categories: Core Upstream, Leading Transition, and Emerging Power. Core Upstream—including deepwater, shale, and conventional oil and gas, will continue “to focus on delivery and financial performance and is expected to continue generating robust cash flow for decades to come,” Shell said.

“If you are able to return $25bn to the owners of the company every year . . . you’re not going to disappear,” van Beurden told FT last week.

Shell and the other European oil majors have started to set goals to reduce the carbon emissions they generate.

Earlier this year, BP’s shareholders voted in favor of a climate change shareholder resolution, pushing the UK oil and gas supermajor to set out a business strategy consistent with the climate goals of the Paris Agreement.

Shell announced its first-ever short-term goals to cut the carbon footprint of its operations and product sales. Van Beurden said in July that the world reducing emissions to net zero “is the only way to go,” and called on businesses to work together to move faster in addressing climate change. 

But shareholders want more.  

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“While we applaud Shell’s leadership, we continue to require further action. We expect a full set of measurable targets by next year linked to remuneration as well as continued efforts by Shell to provide clarity on the alignment of its ambitions and scenarios with the Paris Agreement and capital deployment,” Adam Matthews, Director of Ethics and Engagement for the Church of England Pensions Board, said, commenting on Shell’s annual general meeting in May.

Yet, a speedy energy transition would be a major challenge for Big Oil because it would disrupt their existing business models and threaten their profitability, a recent paper from the Oxford Institute for Energy Studies (OIES) argues.

While Big Oil increases investments in low-carbon energy solutions, it has yet to clarify if its green investment is just an ad-hoc response to the growing societal awareness about climate change, or a long-term strategy to survive and thrive in a low-carbon world, the OIES paper said, highlighting one of the key reasons why oil majors continue to consider oil and gas their core business:

“It remains to be seen whether higher than normal returns can be found in new energy technologies.”  

By Tsvetana Paraskova for Oilprice.com

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