Big Oil is fashionable again in London and Paris.
After a year of record profits, Europe’s supermajors are shifting their focus back to fossil fuel production despite the implications for their pledges to reduce CO2 emissions. It’s an approach already familiar to American giants Exxon Mobil Corp. and Chevron Corp., whose vision of the future has always stayed close to their oily core.
Shell Plc, BP Plc and TotalEnergies SE have spent the last few years trying to convince investors about the merits of net-zero carbon and investment into renewables. But in 2022 they switched to showering them with tens of billions of dollars earned from pumping oil and gas, just like their US peers.
The change of course was triggered by Russia’s invasion of Ukraine, which shifted governments’ focus back to energy security and created a huge gap in Europe’s oil and gas supplies that the majors are well placed to fill.
“Oil production will be back above 2019 levels,” said BP Chief Executive Officer Bernard Looney, a change in tone from 2020 when he suggested that peak demand may already have been reached. “Demand for this product is strong.”
Shell has said it will pause the growth in spending at its renewables unit while expanding gas output. BP slowed the planned decline in its fossil fuel production and scaled back its target for emissions reductions. TotalEnergies is opening new liquefied natural gas import terminals in Europe so it can keep growing a business that expanded by 15% in 2022.
Investors have been voting with their wallets since the European and US majors began their strategic divergence a few years ago. The American companies have earned consistently higher valuations as their focus on oil and gas delivered better returns. Chevron alone promised last month to give $75 billion to shareholders through share buybacks, dwarfing similar programs at the European companies.
Pressure for a change in direction has been building for some time. In 2021, activist investor Dan Loeb’s Third Point LLC fund took a sizable stake in Shell and began pressuring the company to refocus on oil.
It’s not just petroleum where the Europeans are starting to chase American-sized returns — it’s lower-carbon energy too.
In recent years, Shell and especially BP had plunged into the lower-margin renewable power business, making big moves in offshore wind. Now they’re highlighting other areas like biofuels and electric-vehicle charging, which offer better returns and a clearer competitive advantage.
Chevron and Exxon never made major efforts to become renewable electricity producers, a business dominated by utilities. Instead they have pursued biofuels and could expand into carbon capture following the passage of President Joe Biden’s climate bill last year, which provides generous subsidies for the technology.
These processes are a more natural fit for Big Oil’s expertise in running complex engineering projects and dealing with volatile liquids and gases.
The European majors are sticking to their 2050 net zero pledges, but even a short-term focus on returns over climate could be detrimental to the environment. Preventing the worst impacts of global warming will require the deepest emissions cuts to happen soon, not just in three decades from now.
“We really need to think about what the value of a net-zero strategy is” if short-term goals are pushed back, said Shu Ling Liauw, co-founder of Accela Research, a climate transition research and advisory group. “It’s been a pretty somber week.”
The criticism from environmental groups sits in contrast to the response from investors. BP was rewarded with a gain of as much as 8.4% in its share price on Tuesday, the biggest intraday jump in more than two years.
“BP’s scaling back of its energy-transition pace represents a significant deviation in strategy,” said Will Hares, senior industry analyst at Bloomberg Intelligence. The shift will “drive enhanced returns and shareholder payouts.”
The Europeans may now be able to start narrowing the trans-Atlantic valuation gap. Analysts at Barclays Plc said revitalized earnings growth could double the company’s value in a year.
However, the Europeans majors’ ability to catch up with their US peers will depend on access to petroleum resources that can be quickly ramped up.
“They’re all pivoting back into oil and gas, but the question is how much volume growth do they have in the sense of acreage, low-cost barrels and opportunities,” Christyan Malek, global head of energy strategy at JPMorgan Chase & Co., said by phone. TotalEnergies and Shell are ahead of BP, but the Americans are out in front of them all and speed is crucial.
“This is a race to deliver growth ahead of structural deficits in oil and the supercycle that’s in the process of taking hold,” Malek said.