Is the energy transition narrative losing its dominant position in the energy debate? It’s a question I’ve asked myself and others more and more over the course of this year, and it came up again on Wednesday when This was announced by Shell CEO Wael Sawan his company will join its fellow integrated majors and refocus on its core business of producing, refining and selling oil and gas.

In February 2021, Shell’s former CEO Ben van Beurden announced a plan in which the company would not only limit equity production growth to curb emissions, but also actively reduce production in real terms by 1-2% per year by 2030. van Beurden stated, that the reduction will be achieved through the sale of ancillary properties and the natural attrition of existing inventory. The announcement comes as governments, ESG investor groups and cooperative media push the energy transition story as the dominant news story following Joe Biden’s 2020 election victory, putting enormous pressure on management teams in corporate C suites. line.

[Corrected June 16: A previous version of this article stated that Shell’s February 2021 announcement “came in the wake of a punitive decision by a Dutch court.” That court decision in fact did not happen until May, 2021, three months later.]

Shell was certainly not the only company to move towards de-emphasizing its core business operations in favor of less profitable investments in “green” projects in order to send the right virtue signals to markets and governments. Until this year, BP, led by CEO Bernard Looney, was moving even more aggressively in the same direction, ExxonMobil took the step of creating a major new business unit called Low Carbon Solutions in 2021 to manage its green businesses, and Chevron
CVX
it has also invested significant capital in non-oil and gas businesses.

When Looney took over as BP’s CEO, he told the media and markets that his company would embark on a plan to cut oil and gas production by up to 40% by 2030, with billions of dollars in capital redirected to invest in renewable energy. But after his company’s 2022 earnings lagged rivals, Looney announced in February that BP will change course again with a great effort to increase the return of investors with significant investments in increasing its own production of oil and natural gas. Neither BP nor Shell will abandon plans to invest in green businesses, but those businesses will now come under increased scrutiny over profitability and their prospects for keeping the companies competitive with their industry peers.

As I noted here in May, one senior Shell executive company officials said in Shell’s renewables that in order to receive a capital allocation under the company’s revised budget, their proposed new projects would have to meet higher thresholds. The new, higher standards for profitability would also apply to existing projects, and those that failed to meet them would face potential forfeiture and sale. That same week in May, ExxonMobil noted in comments to the Securities and Exchange Commission that it rejected the so-called “stranded asset” theory, reaffirming its plans to continue growing its core oil and gas business.

This shift by major companies back to focusing on their core oil and gas business was also palpable during investor calls, presentations and other public statements. After the CERAWeek conference in Houston at the beginning of March I poked out a remarkable shift in the discussions there away from climate change and ESG and back to matters related to energy security and the actual business in which these and other companies have historically engaged.

The Financial Times reported last week that this decline in emphasis on climate change and ESG has also been reflected in each of these companies’ annual meetings. Votes on ESG-focused shareholder initiatives at each of these meetings received a fraction of the support achieved by similar initiatives in recent years.

Bottom Line

No energy transition in history has ever moved forward in a straight line. A cut back to focusing on the major business investments of major oil and gas companies was inevitable at some point. Higher commodity prices seen from mid-2021 to late 2022 were a key factor, along with growing awareness of the real limitations of the preferred alternatives to using fossil fuels in transportation and power generation.

Whether this becomes more than a short-term phenomenon will depend on a number of factors, including the outcome of elections in the US and other Western democracies over the next two years. The longer term picture will be much clearer in 2025. Stay tuned.

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