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Responsible spotlight - March 2023

one year ago
Roundel Responsible Spotlight

How committed are energy companies to the transition? 

The oil majors reported record earnings in 2022, as energy markets were driven higher by the invasion of Ukraine and sanctions on Russian oil & gas exports. BP, for example, generated profits that were the highest in its history. Yet alongside its results, the market’s attention was drawn to the scaling back of BP’s ambitious plans for its transition to renewable sources of energy. Management’s new strategy calls for a 25% reduction in oil & gas output by 2030, compared with the previous 40% target. This means that emissions will fall between 20% to 30% by the target date, compared with the original goal of 35-40%. BP’s apparent
U-turn was criticised by environmentalists, already concerned that the global commitments to reach net zero by 2050 “fall far short” of what is required according to the UN.

Adjusting to shifting near-term priorities

BP’s transition goals were originally more ambitious that its peers, and so closest to the targets of the Paris Agreement. This seeks to limit the rise in global temperatures to 1.5°C above pre-industrial levels. A 45% cut in global emissions by 2030 is viewed as a necessary milestone to the goal of 0% net emissions globally by 2050. BP’s decision to adjust its targets downwards is an acknowledgement of the post-Covid global economic rebound supporting higher oil prices, as well as war in Ukraine, which has forced western governments to alter their energy policy. While indicating no change in BP’s longer term energy transition goals, governments’ aim to prioritise energy security will necessarily mean a focus on oil and gas projects. The reality is that renewables cannot currently provide sufficient capacity to replace the fossil fuel shortfall created by sanctions. 

Energy transition for Big Oil on hold? 

BP is not the only target for the anger of those concerned about a weakening of the shift to renewables by energy companies. Shell has also eased back on its capital expenditure on low carbon energy. Admittedly this had risen from $172 million in 2017 to $3.5 billion in 2022, but management has stated there will be no further increase this year. Exxon’s aim to make biofuels from algae has also been scaled back. Instead, many industry watchers are predicting oil companies will return to their core business, supported by a cyclical upswing for the sector. The Organization of the Petroleum Exporting Countries (OPEC) raised its forecast for global oil demand this year and upgraded its global growth forecast to 2.6%, sounding more optimistic about China’s reopening.

Against such a backdrop, oil company shareholders would argue that it makes sense for oil companies to maximise earnings when the crude oil price is high, rather than invest in expensive renewable projects with long lead-times to profitability.

Roundel 1

Architas view

The path to net zero was never likely to prove linear. The energy industry is highly cyclical and sensitive to a wide range of inputs, including high capital investment requirements, political interference and geopolitical volatility. BP and its shareholders will be painfully aware that the praise it won for its earlier renewables commitments has not been rewarded by the financial markets and the stock had underperformed peers with less ambitious energy transition targets. It remains unclear how energy companies can satisfy ambitions for cleaner, renewable energy when the global economy continues to demand cheap energy. 

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