Big Oil and the energy transition: it’s not them, it’s you
8 September 2023
When it comes to business, scale can be an inhibitor, but more often than not size tends to win out. Over time, it’s the largest that endure. “Big” is a simple moniker we use to acknowledge this in ode to the leading firms in a sector: Big Four (accounting), Big Pharma, Big Ag (farming), Big Car, Big Tobacco and the most dominant of all in the 21st century; Big Tech.
Perhaps the most influential though is Big Oil, a group of energy supermajors that dominate the non-electricity, non-coal energy world and continue to strongly influence global affairs. Supermajors, both state and public, extract and sell the majority of the oil and gas consumed around the world. In carrying out this business they also fulfil another critical function; providing attractive returns to their shareholders which comprise governments, institutions and individuals the world over. It’s a reasonable guess to say that your corporate pension is probably partly invested in an oil or gas company. Because of this ubiquity, their financial performance has a very meaningful impact on the prosperity of nations and individuals alike.
Prior to the advent of climate change awareness and the energy transition, the mission of Big Oil had been clear; find oil, extract and refine it then sell it at a profit thereby creating dividends for the shareholders. However nowadays their role as contributors in what threatens to be the greatest natural disaster of modern time has come under intense scrutiny, and so have their strategies for the future. Responses have been varied; from some players continuing to question climate change and thereby frustrating the energy transition, to planning a full scale reorientation to low carbon solutions. By and large the most progressive have been the main listed European ones: Shell, BP, Total and, more quietly and steadily, Norway’s Equinor. Many have focused their transition credentials to date disproportionately on offshore wind as this offers the scale and complexity Big Oil is used to.
However despite lower oil prices of late the recent earnings season has seen some of these parties, whose more progressive views had become beacons of hope for those seeking rapid decarbonisation, significantly step back from their clean energy ambitions; BP for example now focuses on decarbonising their own activities. Awkwardly, this trend coincided with BP and Total winning offshore wind concessions in Germany with very aggressive bids. As a result, for those of us in the alternative investment world, our news feeds and inboxes have been awash with criticism of Big Oil. Shell, BP and Total have taken the strain, in my inbox at least.
Big Oil has been regularly portrayed as (one of) the enemies of climate change; just refer to Al Gore’s recent TED talk for a recent example. Ultimately though the recent criticism from the renewable energy industry has been somewhat misguided, and I want to set out three reasons to help rebalance the discussion. This is not a defence of Big Oil but a want to ensure we remain objective.
Firstly, energy transition assets already in supermajor’s hands will not in general become stranded; despite shifts in strategy, we do not need to be concerned that assets will be shelved or delivered at a slower rate than the wider industry. In fact they are delivering even in cases of extreme headwind (Total’s journey in Taiwan being a strong case in point) and where assets are no longer in vogue internally oil majors are exiting in a timely manner, giving others the chance to deliver them. Equinor is a long term diligent player in the market.
Secondly, to recent tender activity, BP has made market disrupting bids in the UK and Germany, the latter where they were accompanied as winners by Total. These bids went well beyond what the market felt feasible. BP has been clear that they believe they can secure adequate returns for these assets at these bid prices by integrating the power supply internally to decarbonise their activity. In such case, we shouldn’t blame the player for playing its best hand in the game where the rules are set by others. I concur the auction systems used in the UK and Germany recently are not good for long term stability of the sector and energy bills, but governments are to blame for those designs, not Big Oil.
I can also understand these bids irked the wider market as they somewhat undermine wider market messaging, being macro-economic and supply chain constraints are driving LCOEs up, not down and that governments need to be accommodating to asset owners. It is also fair to say that these assets do have a higher risk of being stranded because it’s unlikely anyone else can build them in the current market conditions; but let’s not pre-emptively blame BP in this instance for blocking the deployment of renewables while they do plan to deliver the sites in a timely way. I would ask this though; if the focus is on decarbonising their own activities, why not ‘just’ sign PPAs like many other corporates are?
Thirdly, and most critically, it is probably naïve to play the moral conscience card, at least with the companies themselves; the supermajors are simply filling the function of maximising value for shareholders by responding to the demand for a commodity (such demand being created by consumers including us). One can argue that over the long term value is created by diversifying away from a (hopefully) declining industry but try telling that to BP’s shareholders who recently voted overwhelmingly against their plans to diversify further into clean energy or those of Shell whose shares rallied when they dialed back their climate strategy. Serving vocal stakeholders is nice but in the cold blooded light of day shareholder capitalism still prevails for now. Where long term change can come from is shareholders and voters forcing Governments to enact regulation. The environmental lobby will continue but as we’ve seen it is Big Oil making profits for shareholders whilst playing within the rules that ultimately count. So to bring about change a tri part combination is required; less demand for oil and gas alongside top down regulatory change and long term robust and attractive returns in the energy transition. That way hopefully the huge volumes of cash supermajors are returning to shareholders through dividends and share buy-backs will be funneled into more climate friendly businesses.
Ultimately, the recent criticism of Big Oil’s actions is somewhat misplaced. It’s not the supermajors we should be solely agitated about when it comes to the energy transition, it’s their shareholders and ourselves the voters. The more effective way to bring about change is to use less of their product, both oil and plastic, and to actively vote for environmental friendly policies. It’s slower and harder than sending an angry e mail but more likely to work. Finally, let’s ensure we have an objective rather than emotive debate about tender outcomes and the like and focus our attention on working hand in hand with governments to optimise policy. The UK’s recent CFD auction outcome being a great case in point, for offshore wind in any case.