Europe should ensure it does not drive away oil and gas companies
▶ Shell has said it is open to moving the company’s primary listing from London to New York
‘You can be sure of Shell,” said a famous 1937 advertisement. But in recent years, the oil firm has been clouded in uncertainty. Now, chief executive Wael Sawan has said he is open to moving the company’s primary listing to New York – bad news for Britain, Europe and compatriot BP.
The European oil supermajors have struggled for years under a serious discount to their American rivals, notably Chevron, ExxonMobil and ConocoPhillips.
The three US corporations trade at an average multiple to free cash flow of about 16, compared to just 7.5 of the four big Europeans – Shell, BP, TotalEnergies and Eni. Given this underperformance, it is not surprising that Mr Sawan has looked at all angles to raise Shell’s valuation.
Shell has already moved once in recent years. In 2022, it undid 115 years of history by cancelling its dual listing in the Netherlands, dropping the “Royal Dutch” part of its name, and shifting its headquarters to London. Previous chief executive Ben van Beurden confirmed the company looked at a primary US listing in 2021.
The undervaluation of the European oil companies stems from three causes.
First, the general US market has strongly outperformed London’s FTSE, especially since 2016’s Brexit vote and the 2020 Covid-19 pandemic.
Second, investors have been deterred by a confused strategy from the European firms. They continue to be major oil and gas producers, but they may seek slowly to reduce output.
BP plans to see its production drop 10 per cent to 15 per cent by 2030, according to chief executive Murray Auchincloss.
However, this is still not considered to be in line with the Paris Agreement of 2015. Climate-focused investors and lenders will not finance oil and gas companies or projects in any case, no matter what green plans they have.
The European supermajors have yet to show they can make a financial success of low-carbon ventures in areas such as offshore wind power and electric vehicle charging. Areas where they should have an advantage, such as carbon capture and storage, sustainable aviation fuels, and advanced geothermal and hydrogen, suffer from inadequate, indecisive and unclear government policy across Europe.
Third, European companies face growing hostility from their host governments and legal systems.
In 2021, a Dutch court ordered Shell to cut its absolute greenhouse gas emissions – including those from fuels sold to customers – by 45 per cent by 2030. Last week, a group of Swiss climate campaigners won their case arguing that the government had breached their human rights by failing to tackle climate change adequately.
And Britain’s opposition Labour Party, forecast to win a probable election this year, has said it will introduce a “proper windfall tax” on oil and gas production in the country, even though petroleum prices are not at windfall levels.
These issues impose severe restrictions on the European companies’ ability to capitalise on their legacy businesses. They are hampered in their ability to grow. BP has said, for example, that it will not enter new countries – ruling itself out of hotspots such as Guyana and Namibia.
They are absent from US shale entirely, or, as in the case of BP, have a subscale presence there. BPX, BP’s onshore US arm, last year produced less than half as much as Pioneer, the US’s tenth-largest producer.
Shale and the deepwater fields of Guyana will be the two crucial motors of growth this decade for both ExxonMobil and Chevron – assuming its deal to buy rival Hess closes.
Their lower valuation means the Europeans cannot use shares as currency for acquisitions, as ExxonMobil did when it bought Pioneer for $64.5 billion in October, or Chevron in its $53 billion acquisition of Hess the same month.
Conversely, they can become takeover targets. There have been rumours about international interest in BP, while a Shell takeover of its smaller British rival seems an obvious deal but does not answer the bigger question.
The French authorities would certainly block any approach to acquire TotalEnergies. The British government might warn off any foreign purchaser of Shell or BP. But how could it do that while posing straight-facedly as a climate leader?
The European oil companies retain great strengths: their legacy assets, skilled people and worldwide relationships. Of non-state companies, Shell and TotalEnergies lead the global liquefied natural gas business. Shell and BP have extremely profitable trading units, a strategy ExxonMobil has failed to emulate.
It would be a calamitous own-goal for European governments to kill off their oil companies or force them to leave. This will do nothing to reduce emissions. The assets will either move to the US or another more oil-friendly jurisdiction, be bought up by international rivals such as Chinese or Gulf companies, or pass into private hands, less scrutinised over climate.
In the sphere of coal, a dirtier fossil fuel, Czech billionaire Daniel Ketinsky has built an empire by picking up unloved assets from others.
Private investors like him, as well as traditional private equity groups, will undoubtedly do the same as listed oil companies are compelled to downsize.
The Russia-induced energy crisis of 2022 shows the enduring importance of assets and expertise.
Europe is finding it hard to compete against China in the cleantech manufacturing space, and against US companies supercharged by generous tax incentives.
Destroying or driving away some of Europe’s longest-established, largest and most successful companies will not help build competitiveness, however unfashionable their business.
The elusive answer lies in a clearer bargain between the state and companies. European governments should clearly lay out their vision for their hydrocarbon companies in a net-zero world.
The oil companies then need to put their money where their mouth is, deliver on the low-carbon energies that they are best suited to, and leave the rest for other specialists.
European governments should clearly lay out their vision for their hydrocarbon companies in a net-zero world