Is the energy transition narrative losing its dominant position in the energy debate? It’s a question I’ve been asking myself and others increasingly over the course of this year, one that arose again Wednesday, when Shell CEO Wael Sawan announced his company will be joining its fellow integrated majors in refocusing on its core business of producing, refining and selling oil and gas.
In the wake of a punitive Dutch court decision two years ago, former Shell CEO Ben van Beurden announced a plan that would see the company not just limit the increase in its equity production to curb emissions, but to actively reduce production in real terms by 1-2% per year through 2030. Mr. van Beurden said the cuts would be accomplished through divestments in non-core properties and via natural decline in existing reserves. The announcement came as the energy transition narrative was being pushed out as a dominant messaging theme by governments, ESG investor groups and cooperative media in the wake of the Joe Biden election victory in 2020, placing tremendous pressure on management teams in corporate C suites to toe the line.
Shell certainly wasn’t the only major to move in the direction of de-emphasizing its core business operations in favor of making less profitable investments in “green” projects to send the correct virtue signals to the markets and governments. Until this year, BP, led by CEO Bernard Looney, had moved even more aggressively in the same direction, ExxonMobil took the step of establishing a major new business unit called Low Carbon Solutions in 2021 to manage its green ventures, and Chevron has also invested significant capital in non-oil and gas ventures.
When he assumed BP’s CEO position, Looney told the media and markets his company would embark on a plan to cut its equity oil and gas production by as much as 40% by 2030, with billions in capital being redirected to renewable energy investments. But, after his company’s profits lagged behind the competitors in 2022, Looney announced in February that BP would change course again with a major effort to increase investor returns with significant investments in raising its own equity oil and gas production. Neither BP nor Shell will be abandoning plans to invest in green ventures, but those ventures will now come under increased scrutiny related to profitability and their prospects for keeping the companies more competitive with their industry peers.
As I noted here in May, one senior Shell executive told company leaders in Shell’s renewables business that, in order to receive capital allocation within the company’s revamped budget, their proposed new projects would have to meet higher thresholds. The new, higher standards for profitability would apply to existing projects as well, and those unable to meet them would face potential defunding and divestment. In that same week in May, ExxonMobil noted in comments to the Securities and Exchange Commission its rejection of so-called “stranded assets” theory, reasserting its plans to continue growing its core oil and gas business.
This move by the majors back to a focus on their core oil and gas business has also been palpable during investor calls, presentations and other public statements. In the wake of the CERAWeek Conference in Houston in early March, I pointed out the remarkable shift in the discussions there away from climate change and ESG and back to matters related to energy security and the actual business in which these and other companies have been historically engaged.
The Financial Times reported last week that this de-emphasis on climate change and ESG also became apparent at each of these companies’ annual meetings. Votes on ESG-centric shareholder initiatives at every one of those meetings received a fraction of support attained by similar initiatives in recent years.
The Bottom Line
No energy transition in history has ever moved forward in a straight-line progression. Thus, a retrenchment back to a focus on core business investments by the big oil and gas companies was inevitable at some point. The higher commodity prices seen from mid-2021 through the end of 2022 was a key germinating factor, along with a rising awareness of the real limitations of the favored alternatives to the use of fossil fuels in transportation and power generation.
Whether this becomes more than a short-term phenomenon will depend on a variety of factors, including the outcomes of elections in the U.S. and other western democracies over the coming two years. The longer-term picture will be much more clear in 2025. Stay tuned.