Big Oil is copping out on green energy. Surprised?
If there’s an enduring truism about corporate promises to do well by doing good, it’s that believing them is a mug’s game.
Latest case in point: The promise by some of our largest fossil fuel companies that they would be in the forefront of the transition to renewable energy.
In the last few weeks, two of the companies that made the most grandiose promises, BP and Shell, have backed away from their pledges about investments in renewable sources such as solar and wind.
On Tuesday, for example, BP Chief Executive Bernard Looney revealed that the company now expects its oil and gas production in 2030 to fall about 25% below what it was in 2019; previously, the company projected a reduction by 40%. The company also scaled back its projection of emissions from its oil and gas production to a 20% to 30% reduction from 2019 levels by 2030, down from its earlier projection of a 35% to 40% reduction.
“We need continuing near-term investment into today’s energy system — which depends on oil and gas — to meet today’s demands and to make sure the transition is an orderly one,” Looney said in BP’s strategy update, published Tuesday.
At Shell, renewables advocates were cheered last month by the promotion of Wael Sawan, director of the company’s renewables business, to the CEO post.
Sawan promptly poured cold water on the expectation that Shell would continue to increase its investments in low-carbon fuels, given that the returns on those investments trail those in oil and gas.
Shell’s capital spending on low-carbon energy had risen by about 50% to about $3.5 billion in 2022 from its spending in 2021, up from $172 million in 2017 . But the firm said in a media call Feb. 2 that there would be no further increase this year.
“Let me be, I think, categorical in this,” Sawan told investment analysts Feb. 2. “If we cannot achieve the double-digit returns in a business, we need to question very hard whether we should continue in that business. Absolutely, we want to continue to go for lower and lower and lower carbon, but it has to be profitable.”
BP and Shell were among the companies with the most aggressive renewables projections. Other major companies such as Chevron and Exxon Mobil had been much more modest in their expectations.
All four companies, however, had ramped up their rhetorical commitments to the fight against global warming.
The reason that the fossil fuel industry is ratcheting back its commitment to renewables is easy to discern: These investments are anathema to Wall Street.
The very day that BP disclosed its slowdown in renewables investments, its stock rocketed higher by 8.35%. BP and Shell have been trading at much lower price-to-earnings multiples — a common indicator of what Wall Street expects from a company’s future earnings — than Exxon Mobil and Chevron. The p/e ratios are 4.17 and 5.18, respectively, for BP and Shell, and 8.6 and 9.31 for Exxon and Chevron.
It’s tempting to see the transition from oil and gas to wind, solar and other renewable energy sources as dependent on price — and therefore to assume that the declining cost of the renewables will allow them to keep gaining on oil and gas in terms of installed capacity.
For the big energy companies, however, it’s profitability, not price, that matters. And their traditional businesses have been spectacularly profitable lately — to the point that it’s become a political scandal. That’s largely because the companies have been notching record or near-record profits while prices at the pump have soared, driving the worst inflation in decades.
There’s nothing new in the reluctance of the incumbent energy producers to move into new technologies. History teaches us that when a major technological transition is underway, big legacy companies end up ceding leadership to small, nimble startups.
The main reason that fossil fuel companies are reluctant to plunge full-hog into the renewables business has much to do with the fundamentally different economic incentives in those two categories of energy production.
Oil and gas is a highly concentrated industry with high barriers to entry — not everyone can set up as a major integrated fossil fuel company. As a result, the returns on investments are high — 15% or more, in the reckoning of Nick Butler of Kings College, London, a former BP executive.
It’s much easier to enter the solar or wind business, which is fragmented and competitive, and where returns are much lower, typically less than 10%.
Moreover, the payback from fossil fuel investments is consistent and long term. From the standpoint of oil and gas producers, fossil fuel power plants are the gift that keeps giving, as their fuel supplies need constantly to be topped off,
Swedish researcher Brett Christophers observed in 2021.
When a big corporation decides where to invest, the key metric is return on investment. Under the circumstances, it shouldn’t surprise anyone that Big Oil still sees its traditional products as the key to profits. Indeed, it should have been clear to anyone paying close attention to Big Oil’s pledges on renewables investment that they were always hedged.
For instance, Shell’s pledge in its 2019 annual report to reduce the net carbon footprint of its own emissions and those of its customers using its products “by around 20% in 2035 and by around 50% in 2050” carried the qualifier, “assuming society aligns itself with the Paris agreement’s goals.”
(The Paris agreement of 2015 aimed to limit the rise in mean global temperature to less than 2 degrees Celsius, or 3.6 degrees Fahrenheit, and preferably less than 1.5 degrees C.)
The realities of corporate finance have kept investments in renewable technologies from rising beyond half the level estimated to be needed to meet the Paris goals, according to the International Energy Agency. Of the $1.9 trillion in global energy investment in 2021, the IEA estimated, only about $367 billion was devoted to renewable power. The rest largely went to fossil energy.
The implication of energy finance is that government investment through public subsidies will remain crucial for years, even decades, into the future. That’s what makes the $370 billion in clean energy initiatives in the Biden administration’s Inflation Reduction Act, signed in August, so important — they signal that the U.S. government, at least, is on board.
None of this means that the big fossil fuel companies won’t eventually increase their investments in wind and solar, or recognize that the oil and gas era will come to an end, so their survival depends on transitioning to new technologies.
At the moment, though, the big companies are still hooked on oil and gas. That’s why they’ve been resistant to shareholder demands that they move away from their traditional businesses, and why even the companies that positioned themselves as farsighted avatars of the energy transition are backing down. No one should have taken their promises at face value to begin with.