Insights into the Decline of Western Oil and Gas Majors: The Impact on Energy Transition
The recent war-triggered commodity crisis in Ukraine has not only affected global politics and security but has also had a significant impact on the oil and gas sector. Western majors such as ExxonMobil, Chevron, Shell, TotalEnergies, Equinor, and Eni have all reported a decline in their second-quarter earnings, signaling a turning point for the industry. This article explores the repercussions of the crisis, sheds light on the future of the sector’s energy transition plans, and provides unique insights into the evolving landscape of the oil and gas industry.
The Boom and Its Dwindling Glow
In the aftermath of the Russian invasion of Ukraine in February 2022, oil and gas prices skyrocketed, leading to record profits for major companies in the industry. However, as the crisis recedes, earnings have started to normalize, causing a decline in profits. ExxonMobil, Chevron, Shell, TotalEnergies, and BP collectively earned $238 billion in the five quarters between January 2022 and March 2023, returning substantial sums to their investors. While second-quarter earnings this year are still strong compared to historical levels, the Russia-led earnings boom appears to have come to an end.
The decline in earnings has raised concerns and sparked renewed scrutiny of Western oil and gas majors’ energy transition plans. As the immediate energy security concerns diminish, the focus is shifting towards decarbonization and sustainable solutions. This article delves into the plans of major companies such as Eni, BP, and Shell, providing an in-depth analysis of their strategies to navigate the energy transition and reduce their carbon footprint.
Eni’s Energy Transition Plan: Stability in an Ever-Changing Landscape
Eni, one of the key players in the industry, has maintained a steadfast commitment to its energy transition plan throughout the upheavals of the past 18 months. The company’s strategy focuses on increasing the share of gas in its production and introducing renewable energy sources. In an interview with the Financial Times, Eni’s CEO Claudio Descalzi emphasized that their plans remained unchanged, stating, “We kept our legs straight.” This section explores Eni’s journey towards decarbonization and the challenges they face in aligning their business with sustainability goals.
BP’s Strategic Shift: Balancing Profitability and Sustainability
BP, another major player in the industry, has made significant strides in its decarbonization efforts while carefully managing its profitability. Earlier this year, BP unveiled plans to increase spending on its “transitional” businesses, focusing on biofuels, convenience, charging infrastructure, renewable energy, and hydrogen. This section explores BP’s cautious approach to the energy transition, analyzing the company’s investment decisions and their implications for the future.
Shell’s Progressive Stance: Shaping the Clean Energy Landscape
Shell stands out among European energy majors with its progressive approach towards the energy transition. With the appointment of new CEO Wael Sawan, the company has committed to devoting a greater percentage of its spending to oil and gas, prioritizing investment in clean energy projects. This section delves into Shell’s transition strategy, exploring the factors that motivated the shift and the potential impact on the industry.
The US Perspective: A Slow and Steady Approach
The United States, despite its significant role in the global oil and gas market, lags behind Europe in terms of renewable energy adoption and decarbonization efforts. This section examines the contrasting approaches of Exxon and Chevron, two US supermajors that have focused primarily on low-carbon initiatives such as carbon capture, hydrogen, and biofuels. It also addresses shareholder activism and the challenges faced by the US oil and gas industry in aligning with sustainability goals.
The Path to Net Zero: A Marathon, Not a Sprint
For all major oil and gas companies, achieving net-zero emissions by mid-century is a long and complex journey. This final section sheds light on the challenges faced by the industry as it strives to embrace renewable energy sources and reduce its carbon footprint. It discusses the importance of collaboration between governments, companies, and consumers to drive meaningful change and create a sustainable future for the energy sector.
Summary:
The war-triggered commodity crisis in Ukraine has had a significant impact on the oil and gas sector, leading to a decline in earnings for major Western companies. As the crisis recedes, energy transition plans are back in the spotlight, with companies like Eni, BP, and Shell navigating the evolving landscape. Eni remains committed to its energy transition plan, focusing on increasing gas production and introducing renewable energy. BP has accelerated its plans to invest in transitional businesses, while Shell is reshaping its investment strategy to prioritize oil and gas, alongside selective clean energy projects. US supermajors like Exxon and Chevron have taken a cautious approach, focusing on low-carbon initiatives rather than a full-scale transition. The industry’s path to net zero by mid-century is a challenging marathon that requires collaboration and sustained effort. As the sector evolves, it is crucial for companies to balance profitability with sustainability and embrace renewable energy sources to create a sustainable future for the industry.
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Western oil and gas majors are expected to face fresh scrutiny of their energy transition plans as the war-triggered commodity crisis in Ukraine that has overloaded profits for five straight quarters is receding.
ExxonMobil, Chevron, Shell, TotalEnergies, Equinor and Eni each reported second-quarter earnings declines this week of about 50% from the record levels achieved during the same period last year. BP is due to announce results on Tuesday, with analysts expecting a similar drop.
The Russian invasion of Ukraine in February 2022 sent oil and gas prices soaring, pushing sector profits to record highs and focusing the last 18 months on security of supply rather than decarbonisation.
The five supermajors — Exxon, Chevron, Shell, TotalEnergies and BP — collectively earned $238 billion in the five quarters from January 2022 to March 2023 and returned record sums to investors in dividends and share buybacks.
Compared to historical levels, this year’s second quarter earnings were still strong. Exxon’s $7.9 Billion in Net Income, announced on Fridayit was higher than any quarter between September 2014 and October 2021. However, the Russia-led earnings boom has come to an end.
“I don’t think we will go back to 2022 [levels]”, Eni’s CEO Claudio Descalzi told the Financial Times.
The boom was driven first by a rebound in demand in late 2021 as economies eased coronavirus-related contractions, which was then exacerbated by the disruption to energy markets due to the war.
“The two things together have created these kinds of results, but I think it’s over,” said Descalzi.
As immediate energy security concerns diminish and profits normalize, investor and policymaker focus on the sector’s decarbonization plans is likely to return, Descalzi added.
Despite the upheavals of the past 18 months, Eni’s energy transition plan, focused on increasing the share of gas in its production and introducing renewable energy, remained unchanged, he said. “We kept our legs straight.”
BP slowed the pace of its pullout from oil and gas production earlier this year but has largely left its decarbonisation strategy intact.
In February, it announced plans to increase spending on its five “transitional” businesses, biofuels, convenience, charging, renewable energy and hydrogen, from 30% of the group’s capital spending in 2022 to 40% by 2025. and 50% by 2030.
Among European energy majors, Shell has made the most recognizable change during the crisis, analysts say, with new chief executive Wael Sawan commitment last month devote a greater percentage of spending to oil and gas and be more selective about the types of clean energy projects it supports.
Investor focus on the energy transition in the US, where Republicans have attacked the voting behavior of asset managers, still lags behind Europe. Exxon and Chevron shareholders flatly rejected proposals on climate change this year, reducing support from previous votes.
The two US supermajors have steered clear of any turn to renewables, instead proposing to slowly ramp up spending on other low-carbon initiatives, such as hydrogen and carbon capture.
“We have . . . from the beginning, I’ve stayed on what I would say is the molecule side of the equation . . carbon capture, hydrogen and biofuels,” Exxon Chief Executive Officer Darren Woods said Friday, adding that it would also consider expanding the production of lithium for use in batteries.
Exxon has previously said it will invest $7 billion in its low-carbon business unit by the end of 2027, though critics have noted that this is only a fraction of spending on hydrocarbons.
Similarly, Chevron chief Mike Wirth said his company will remain focused “on things where we can leverage our unique capabilities.”
“That’s why we haven’t gotten into wind and solar on a merchant basis because there are others who can and we don’t really bring anything unique there,” he told analysts on Friday.
Renewable energy and other low-carbon energy solutions make up about 30% of total capital spending by European majors, but less than 10% in the United States, according to Pavel Molchanov, an analyst at investment bank Raymond James.
“For all of Big Oil [groups]the path to net zero by mid-century will be a marathon rather than a sprint,” he said.
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