Oil majors to face energy transition scrutiny as war profit boost fades

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Western oil and gas majors are expected to face renewed scrutiny of their energy transition plans as the commodity crisis sparked by the war in Ukraine that supercharged profits for five consecutive quarters recedes.

ExxonMobil, Chevron, Shell, TotalEnergies, Equinor and Eni each reported drops in second-quarter earnings this week of about 50 per cent compared with the record levels set in the same period last year. BP is set to announce results on Tuesday, with analysts forecasting a similar decline.

Russia’s invasion of Ukraine in February 2022 sent oil and gas prices soaring, pushing profits in the industry to record levels and focusing attention for the past 18 months on security of supply rather than decarbonisation.

The five supermajors — Exxon, Chevron, Shell, TotalEnergies and BP — collectively made $238bn in the five quarters from January 2022 to March 2023 and returned record sums to investors in dividends and share repurchases.

Compared with historical levels, this year’s second-quarter earnings were still strong. Exxon’s $7.9bn in net income, announced on Friday, was higher than any quarter between September 2014 and October 2021. However, the Russia-driven profit boom has drawn to a close.

“I don’t think we go back to 2022 [levels],” Eni chief executive Claudio Descalzi told the Financial Times.

The boom was driven first by rebounding demand in late 2021 as economies eased coronavirus-related retractions, which was then exacerbated by the disruption in energy markets because of the war.

“The two things together created these kind of results but I think that is finished,” Descalzi said.

As the immediate concerns around energy security recede and profits normalise, the focus from investors and policymakers on the sector’s decarbonisation plans was likely to return, Descalzi added.

Despite the upheaval of the past 18 months, Eni’s energy transition plan — focused on boosting the proportion of gas in its production and rolling out renewable power — had remained unchanged, he said. “We kept straight our two legs.”

BP slowed the pace of its retreat from oil and gas production earlier this year, but has broadly left its decarbonisation strategy intact.

In February it announced plans to increase spending on its five “transition” businesses, biofuels, convenience, charging, renewables and hydrogen, from 30 per cent of group capital expenditure in 2022 to 40 per cent by 2025 and 50 per cent by 2030.

Among the European energy majors, Shell has made the most recognisable shift during the crisis, analysts said, with new chief executive Wael Sawan pledging last month to devote a higher proportion of spending to oil and gas and be more selective about the types of clean energy projects it backs.

Investor focus on the energy transition in the US, where Republicans have attacked asset managers’ voting behaviour, still lags Europe. Shareholders at Exxon and Chevron roundly rejected climate change proposals this year, scaling back support from previous votes. 

The two US supermajors have steered clear of any pivot towards renewables, proposing instead to slowly increase spending on other low carbon ventures, such as hydrogen and carbon capture.

“We have . . . since the very beginning, stayed on what I would say is the molecules side of the equation . . . carbon capture and hydrogen and biofuels,” Exxon chief executive Darren Woods said on Friday, adding that it would also consider expanding into lithium production for use in batteries.

Exxon has previously said it will invest $7bn in its low carbon business unit by the end of 2027, although critics have noted this is only a fraction of spending on hydrocarbons.

Chevron boss Mike Wirth similarly said his company would remain focused “on things where we can leverage our unique capabilities”.

“It’s why we’ve not gone into wind and solar on a merchant basis because there’s others that can do that and we don’t really bring anything unique there,” he told analysts on Friday.

Renewables and other low carbon energy solutions make up about 30 per cent of total capital expenditure at European majors but less than 10 per cent in the US, according to Pavel Molchanov, an analyst at investment bank Raymond James.

“For all of the Big Oil [groups], the path towards net zero by mid-century will be a marathon rather than a sprint,” he said.