Majors Rework Transition Approaches

Western majors continue to evolve their energy transition strategies in terms of portfolio balance and pace of execution, as they try to maximize both short- and long-term shareholder returns.

• Market realities forced BP to pare back the industry’s boldest transition strategy. The UK major still boasts ambitious 2030 goals (e.g. 20%+ oil and gas output reduction, 50 gigawatts of renewable electricity to FID), but last week’s strategy update included material changes to its medium-term plans. Initially anticipating lower-for-longer oil and gas prices and a potentially accelerated transition (including peak demand), BP had sought to cut output by over 40%, significantly curtail refining and deliver competitive returns from a massive renewable power buildout — all while growing shareholder payouts. The post-pandemic rebound and Ukraine crisis instead accentuated the returns gap between oil and gas and renewable power, and deepened investor skepticism. BP will now invest up to $8 billion more in oil and gas this decade and shrink only via divestments. It will also spend up to $8 billion more in low carbon, weighted toward higher-return bioenergy, EV charging and hydrogen. BP will favor “develop and sell” for solar and an integrated approach for offshore wind. Refining will remain as a platform for biofuels and hydrogen.

• Europe’s other majors are exploring new models. As renewables businesses mature, European majors are again reshaping corporate structures as they seek to maximize returns and advance integration. But the wide variety of plans and iterations illustrates the challenge of plotting untested strategies for an uncharted future. After seven years of integrating renewables with gas, Shell has switched to bundling renewables with downstream to advance its customer-centered and integrated strategy. Eni’s Plenitude affiliate unifies retail and renewable energy, but not refining. TotalEnergies is keeping gas and power together given legacy gas-fired generation and a more mature renewables business, but is separating financials for transparency. Equinor is reorganizing within renewables to bolster returns via more specialized project management and regional accountability.

• US majors have more space to pursue their more cautious strategies. The energy crisis and wide oil-renewables returns gap has quieted remaining pressure on Exxon Mobil and Chevron to diversify into renewable electricity and supported their strategies, for now. Both majors will fund oil and gas production growth through at least 2027, while cautiously investing in bioenergy, carbon capture and hydrogen. This approach has commanded equity multiple premiums over European peers. But the nascent nature of their low-carbon investment plans presents questions around actual returns and viability at scale, and leaves them exposed if demand declines more rapidly than expected.

• Majors are diversifying, but renewable electricity still tops their low-carbon list. Our Low-Carbon Investment Tracker shows renewable power still central for European majors, despite recent changes. The group announced or approved a record $57 billion of renewable power generation investments last year, up over 25% from 2021. With US majors, renewable electricity comprised 68% of majors’ low-carbon investments in 2022 — down from 80% in 2021, but far ahead of hydrogen, biofuels and CCS. That said, non-electricity investments are attracting growing acquisition and development dollars. BP and Shell have leapfrogged Chevron in biogas, and integrated hydrogen is gaining traction. All in, the majors’ announced low-carbon investments totaled $84 billion in 2022, up 48%.

• Experimentation will continue as companies and investors assess the best approach. The energy crisis has further complicated the majors’ challenge of delivering the best shareholder returns over multiple time horizons and possible transition trajectories. Oil and gas disruptions could keep returns well above low-carbon alternatives through this decade, but building scale in those alternatives — seen as essential to future returns — will take years of ever-increasing capex. We expect investors to remain open-minded as this plays out. As different approaches advance, we will be watching for any pause or reversal in other European majors’ plans to pivot away from oil and then gas, acceleration of their low-carbon investments and/or adjustment of emissions targets. We will also monitor (1) majors’ pathway to sustainable profitability for CCS, hydrogen, biogas and EV charging investments; (2) profitability of different corporate models as expanded financial reporting allows better comparison; (3) government policies that could bolster low-carbon returns; and (4) proof that integration (including in trading/marketing) offers a true competitive advantage.