Fossil fuel giants should give up their green dreams

BP and Shell would be better off returning cash to shareholders so that it can be reinvested in genuine renewables companies

BP boss Bernard Looney has one of the hardest jobs on the planet, transforming a sleepy oil giant into a serious force in renewable energy, or what he prefers to call “an integrated energy company”.

The sceptics think it is an impossible task but the Irishman makes it all sound so plausible, insisting that it “doesn’t need to be a choice” between prioritising green investment or returning cash to shareholders.

Yet the latest quarterly financial results from BP and Shell suggest it is precisely that. Despite forecast-beating numbers from both, payouts remain roughly half pre-pandemic levels despite a swift rebound in oil prices as the industry comes under severe pressure to spend greater sums on green projects.

Looney is walking a tightrope between keeping investors sweet with payouts and placating environmental campaigners who demand that BP retreats from oil-drilling and ploughs billions into wind farms, carbon capture, hydrogen and electric vehicle charging, and other low-carbon initiatives.

But the question isn’t just whether it can juggle conflicting interests on the path to net zero, it is a more fundamental one of whether BP can reinvent itself at all.

Looney took the helm in February 2020, just as the pandemic was about to send oil prices crashing to unthinkable lows of nearly $20 a barrel. It was the opportunity to present a radical plan to slash emissions to net zero by 2050 with spending on low carbon projects set to jump 10-fold from $500m (£359m) a year in 2019 to $5bn by 2030, while reining in fossil fuel output by 40pc.

Shell chief Ben van Beurden described improved payouts as a “signal to the market of the confidence that we have in our prospects and our cash flows”.

The stock market has had nearly a year to digest the plans of two of oil’s big beasts but it remains unconvinced. Shares in both Shell and BP remain roughly a third below pre-pandemic levels despite oil prices recovering to pre-covid levels.

You can understand why. After more than a 100 years of plundering the earth’s natural resources, the so-called supermajors are not just asking investors to believe that they can make the shift but that they are blessed with the skills and know-how to do it better than the specialists.

The trade-off for shareholders is essentially that they will continue to receive dividends, but they won’t be as generous as before, and the savings will be ploughed into wind turbines.

But what makes those responsible for building the old energy system best suited to building an entirely new one? There are literally thousands of companies with far greater green credentials than the fossil fuel dinosaurs.

The returns of green energy stocks are greater too, a recent study from Imperial College London and the International Energy Agency found.

Looney’s argument is that BP’S understanding of the broader energy landscape, together with its position as one of the leading gas, power and carbon trader, will enable it to do this effectively and achieve oil-like returns on capital of 8-10pc.

A more sensible move would be to run down the operations of Shell, BP, Exxon and others for cash, allowing shareholders to put the money into a new generation of genuine renewables companies without the same overwhelming conflicts of interest.

History has taught us repeatedly that even the biggest companies often don’t survive massive structural changes in the economy. Economists like to call it creative destruction.

The current era of technological change will be seismic. The internet has already decimated swaths of the high street. Some of the leading carmakers will struggle to survive the switch to electric cars. There are serious doubts too about how cigarette manufacturers move away from traditional tobacco. Why would it be any different for the oil sector and energy transition?

‘Even the biggest companies often don’t survive structural changes’

A new atomic age for Britain

There can be little doubt that new sources of energy are needed to power the needs of 21st century Britain.

While the costs of wind and solar have plummeted, renewable energy is too unreliable, we are becoming even more dependent on imports from overseas and our fleet of ageing nuclear plants is due to come off line.

Meanwhile, the decline of fossil fuels and the forthcoming electrification of transport and home heating will require a huge change in the energy mix. Without a solution, blackouts will become more commonplace as the grid struggles to cope with surging demand.

So what’s the answer? Not a new generation of sprawling nuclear plants, with their astronomical costs, outdated technology and huge safety risks, especially when we have to rely on an increasingly hostile Chinese state to help us build them.

The answer thankfully may well lie closer to home after a consortium led by industrial powerhouse Rolls-royce raised the funds needed to develop small modular reactors. Mini-nukes, as they’re better known, sound almost too good to be true. They are expected to be cheaper, safer and easier to build and, in a boost for Brexit Britain, will be British-designed and made.

It promises to be an entirely new export market, restoring our reputation as world leader in atomic power. And, more pertinently, it means we know longer have to rely on the brutal communist regime of China to keep the lights on.