Why the oil giants are beating a hasty green retreat

Why the oil giants are beating a hasty green retreat
Why the oil giants are beating a hasty green retreat

Ben van Beurden, the former chief executive of Shell, often made the point that, however much his company invested in renewable energy, he’d have one group of investors saying it was too much and one group saying it was too little. Similarly, when he reduced oil and gas production, shareholders would be split between those chiding him for moving too fast and those berating him for being too slow.

His successor, Wael Sawan, has clearly taken the view that ensuring everyone is unhappy might be a good definition of compromise but isn’t the best way to run a multinational company. Since he took over at the beginning of last year, Shell has dialled back on renewables and put a great emphasis on oil and gas.

Over at BP, Murray Auchincloss, another new arrival in the chief executive hot seat, is now making very similar noises. Little wonder; the company’s shares have underperformed rivals to such an extent in recent months that there’s even been speculation it could become a takeover target. Something had to give.

In response, Anchincloss has said he’s slowing down investments in big budget, low-carbon projects, particularly in offshore wind, and prioritising investing in and maybe even buying new oil and gas assets, particularly in the Gulf of Mexico and shale basins in the US.

Both van Beurden and Bernard Looney, Auchinloss’s former boss, strongly argued that oil giants were the companies best placed to manage, and possibly even catalyse, the energy transition. While the US firms ExxonMobil and Chevron have ploughed on with fossil fuels, seemingly oblivious to climate concerns, Shell and BP made big bets on renewables. They were rewarded with big hits to their earnings.

Their successors have taken the view that the companies they now run are better off sticking to their knitting. This is, let’s not forget, a fiendishly difficult job. Energy giants have to greenlight incredibly complex geological projects, which is always a roll of the dice, while managing the commodity cycle, which can go from boom to bust in the blink of an eye.

At the same time they have to be mindful of the volatile political situation in the tricky parts of the world in which they operate, and the volatile fiscal situation in the supposedly stable parts of the world in which they’re based. Trying to navigate the energy transition at the same time has often seemed like one flaming sword more than the juggler could realistically handle.

Consequently, Big Oil has, on both sides of the Atlantic, instead decided to focus on starting new oil and gas projects, cutting costs, and returning lots and lots of money to shareholders. Executives are all singing from the “return on capital employed” hymn sheet, figuring that one way to stop investors ditching your shares is to shower them in cash.

A few things have helped them come to this conclusion. The first was, of course, the energy price spike following Russia’s invasion of Ukraine. But the bottom has also fallen out of the market on renewables. Wind had a torrid time in 2023 thanks to higher interest rates, supply chain inflation and engineering challenges; biofuels are struggling this year.

Oil demand has also held up much better than most people expected. There’s been a huge amount of focus on sales of electric vehicles, but this has somewhat distracted attention from the fact that there are now more vehicles powered by internal combustion engines on the roads than ever before.

The International Energy Agency predicted that 2019 represented peak gasoline. But that level was surpassed last year and 2024 looks likely to break a new record. Similarly, the fact that there are more fuel-efficient planes in the skies has been offset by travellers taking more and longer flights.

None of this means that Big Oil can’t make money from renewables. One company that appears to be managing the transition well is France’s TotalEnergies. Its trick has been to put its pedal to the metal on fossil fuel production and use the proceeds to finance increased renewable capacity.

That might seem like an obvious strategy but it’s actually been quite rare. Most energy executives seemed to believe you could be green or black but not both. They modelled their strategies on Dong, the Danish oil and natural gas company, that fully switched to generating renewable energy, changed its name to Ørsted and watched its share price rise more than five-fold between 2016 and 2021.

But Dong was relatively small (and its share price has since fallen back to earth). Total is a much better model for BP and Shell to adopt (and for politicians to encourage). Last year, the French company’s return on average invested capital came within a hair’s breadth of 20pc – better than any of its peers. In the decade since Patrick Pouyanné took the helm, Total’s total return (including dividends) has matched that of Exxon and Chevron and been double that of BP and Shell.

How’s he done it? Pouyanné operates in Europe and is subjected to just as much climate activism and investor divestment as his rivals in the UK. True, he’s dropped hints about moving his company’s listing to New York (much as Shell’s Sawan has) where he believes his shares would be better valued (he’s almost certainly right).

Pouyanné is clearly very good at his job. On his watch, Total has avoided any large write-downs on expensive projects that failed to come off. He also hasn’t wasted money on foolish acquisitions. When energy prices slumped during the pandemic, Total was the only European oil and gas company that didn’t slash its dividend.

One senior industry executive makes another interesting (and slightly envious) observation: as well as being Total’s chief executive, Pouyanné is also the company’s chairman. That’s not best corporate governance practice, of course. But others in the industry believe it may have helped Pouyanné to resist pressure from his board to transition too fast and in the process demonstrate it is possible to be both green and black.