Big Oil’s Shift in Priorities: A Return to Roots
The Rebirth of Oil Giants
Almost five years ago, BP set out to revolutionize itself from an oil company to a low-carbon power giant. However, the British energy behemoth is now reversing course, refocusing on its oil and gas roots to reignite growth, boost its share price, and alleviate investor concerns over future profits.
Rivals Follow Suit
Shell and Norway’s state-controlled Equinor are also scaling back their energy transition plans, citing two major developments: the energy shock triggered by Russia’s invasion of Ukraine and declining profitability in many renewables projects.
A New Era of Investment
BP CEO Murray Auchincloss plans to inject billions into new oil and gas developments, including projects in the U.S. Gulf Coast and the Middle East. This strategic shift aims to improve performance, boost returns, and revive the company’s growth story.
Low-Carbon Operations Take a Backseat
BP has slowed down its low-carbon operations, halting 18 early-stage hydrogen projects and announcing plans to sell wind and solar operations. The company has also significantly reduced its hydrogen team in London.
Shell’s Ruthless Approach
Shell CEO Wael Sawan has vowed to take a ruthless approach to improve performance and returns, closing the valuation gap with larger U.S. rivals Exxon Mobil and Chevron. The company has scaled back low-carbon operations, retreated from European and Chinese power markets, and sold refineries.
A Question of Skills
Some BP employees wonder if the company retains enough staff with the necessary experience and skills to reestablish itself as an oil and gas major. Employees have expressed concerns about the company’s ability to develop new oil and gas production after letting go of hundreds of upstream division employees since 2020.
Biofuels: A Profitable Alternative
While the companies have not abandoned low-carbon energy investments altogether, they are focusing on areas like biofuels, which they believe can generate profit quickly. They are also developing hydrogen projects to lower the carbon footprint of their refining operations.
The Balancing Act
The slowdown in energy transition plans coincides with warnings that the world is set to miss the U.N.-backed target to limit global warming to 1.5 degrees Celsius. Companies will likely miss or revise down emission reduction targets, said Accela Research analyst Rohan Bowater.
Uncertain Outlook
The outlook for fossil fuel consumption is increasingly uncertain, with the International Energy Agency expecting global oil demand to peak by the end of the decade as electric vehicle sales grow. Investors remain sceptical about European oil giants’ ability to sustain profits.
The Need for Incentives
“To make transition plans stick, companies need the right incentives for management, a clear mandate from shareholders, and a focus on demonstrating value,” Bowater said.
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