European oil giants back away from renewables

BP began an ambitious transformation five years ago to become a low-carbon energy company.

The British company now tries to return to its origins as a major oil and gas player, with a growth narrative to match its rivals. It also wants to revive its share prices and calm investor fears about future profits.

Rivals Equinor and Shell, both owned by the Norwegian state, are also reducing their energy transition plans from earlier in this decade.

The change in direction is due to two major developments: the energy shock caused by Russia's invasion of Ukraine, and a decline in profitability of many renewables, especially offshore wind projects, because of spiraling costs, supply-chain issues, and technical problems.

Murray Auchincloss, CEO of BP, plans to invest billions in new oil and natural gas developments, especially along the Gulf Coast of the United States and in the Middle East. This is part his plan to boost performance and increase returns. BP also slowed low-carbon operations by halting 18 potential early-stage hydrogen projects, and announcing its plans to sell off wind and solar operations. Sources at the company said that it has cut its London hydrogen team by over half, to 40 employees.

Un spokesperson for BP declined to comment about the layoffs.

Shell CEO Wael Sawan pledged to be ruthless in his approach to improving performance and returns, and closing a huge valuation gap between Exxon Mobil (the largest U.S. competitor) and Chevron. Shell has reduced its low-carbon activities, including floating off-shore wind and hydrogen projects. It has also withdrawn from European and Chinese energy markets, sold refineries, and softened a target for 2030 to reduce carbon emissions.

Shell is looking for buyers for Select Carbon, the Australian company that it purchased in 2020 and specializes in developing agricultural projects to offset carbon emissions. Sources close to Shell confirmed this.

Shell's spokesperson declined to comment.

SKILL SHORTAGE?

Some BP staff wonder if the company has enough experienced and skilled staff to reestablish its position as a major oil and gas producer.

Four employees who were on the call said that they asked CEO Auchincloss a lot of questions during an online town hall in early October, as he explained some of his plans to turn the ship around.

He said BP could and would develop new oil production, reversing the strategy of his predecessor Bernard Looney to increase renewable generation assets and reduce emissions while reducing oil and natural gas output.

Some employees told BP that they don't think BP has enough engineers to boost oil and gas production after the company laid off hundreds of its employees in its upstream division since 2020.

The BP spokesperson refused to comment on this town hall discussion. Equinor has been Europe's largest natural gas supplier since 2022. It launched a review, internally called REN Adjust. This included scrapping early stage projects in order to focus on advanced offshore wind.

Equinor responded that it is adapting to the market. The goal is to improve competitiveness, and compete effectively after the current downturn.

The companies haven't abandoned their investments in low carbon energy. Executives said they were concentrating on biofuels and other areas that they felt could generate profits quickly.

Shell, BP, and Equinor continue to develop offshore wind projects that are already underway, and they say that if returns were competitive, they would invest more.

Hydrogen projects are being developed to reduce the carbon footprint of refinery operations.

Auchincloss said on October 29 that "we're finding in our transition growth business that we have to expect the same returns as our historic businesses" if we are to invest material capital.

TotalEnergies, a French company, has been the exception. It invests continuously in low-carbon technologies and outpaces Shell and BP on renewables.

BALANCING ACT

The companies' plans to transition to renewable energy are slowing down, and there have been warnings about the possibility of missing the U.N. target of limiting global warming to only 1.5 degrees Celsius before the end of this century. This is necessary to prevent the devastating impact of climate changes.

Rohan Bowater, an analyst at Accela Research, says that this means that companies are likely to miss their emission reduction targets or have them revised down.

While industry executives are focused on increasing their short-term profits by investing more in oil and gas the future of fossil fuel consumption looks increasingly uncertain. Last month, the International Energy Agency predicted that global oil demand would peak at the end of this decade due to the growth in electric vehicle sales.

Investors are still sceptical of the ability of European oil giants to maintain profits. Even though climate-focused investors are complaining about the move away from renewables, their shares have outperformed U.S. competitors.

Bowater stated that "to make transition plans stick companies need to have the right incentives for managers, a mandate from shareholders and a focus of demonstrating value."

BP, for example, is still struggling to balance shareholder expectations with low-carbon investments.

(source: Reuters)