Climate of uncertainty

Author Konstantin Rozhnov

Should big oil firms focus on maximising shorter-term profits and shareholder returns at all costs, even if it includes sizable new investments in attractively priced oil and gas assets?

Or should they boost green spending and decisively walk away from a significant chunk of undeveloped oil and gas resources to align with the Paris climate agreement goals? The answer, if you believe what oil executives say they hear from different investor groups, is both.

The complexity of the situation, and the challenges oil companies face in interpreting the mixed messages they are getting from investors, are underlined by the results of this week’s Argus Twitter poll. Half of those who voted said the firms should take advantage of the oil price downturn and make buying cheap oil and gas asset their strategic priority, while just over a quarter want to see green investment increases instead.

Of course, a poll like this presents an overview, an unscientific but still intriguing insight into industry and investor sentiment. In reality, the feelings of specific investors sub-sets and consequent corporate strategy choices may be somewhat clearer.

US companies, for example, are arguably under less pressure than their European peers to reposition their businesses to be Paris compliant and prepare for the energy transition. That certainly felt the case when the chief executive of US major Chevron, Mike Wirth, was asked about the rationale for his company’s $5bn acquisition – actually $13bn including debt – of US independent Noble Energy.

The deal will make Chevron a more gas-weighted company, and many oil firms see gas as a transition (and less polluting than oil and coal) fuel which should help them align with the world’s move towards a lower-carbon future. But Wirth did not feel the need to talk up the importance of environmental, social and corporate (ESG) considerations when asked about the transaction.

“I will not tell you that we are driving at a particular type of asset in order to satisfy an ESG objective,” Wirth told analysts. “We are looking for quality assets that are going to be reliable, low-cost supply into strong markets. Then we are looking through an ESG lens to be sure that it is consistent with our commitments on greenhouse gas intensity reduction and other dimensions of ESG, which I think are well-aligned.”

Even Total, one of the leading European oil and gas companies in terms of green investments and ambitious carbon reduction goals, made a counter-cyclical upstream acquisition in April, buying the entire Ugandan operations of its joint-venture partner, London-listed independent Tullow Oil, at a knockdown price of $575mn. Total, however, balanced the Uganda deal with several lower-carbon energy investments this year.

Shell, another European major with ambitious energy transition plans, says lower-carbon investments are still “scrutinised as hard as possible” in terms of their profitability compared with upstream projects. “But if we do find that we have projects that make sense but the affordability constraints make us make choices, we will probably give preference to the project that will serve us better in the long-term future than the projects that we believe are going to eventually curtailed in the long term,” chief executive Ben van Beurden says.

How big oil firms decide on strategic priorities in this climate may define their place in the energy transition. Many of them want to be seen as responsible energy producers and providers, rather than just oil and gas companies. Buying new upstream assets sold at discounted prices could well help them generate more money for increased green investments going forward. But it may also leave them struggling to attract investment and talent, and wrestling anew with social license pressures that have abated to a modest degree during the Covid-19 pandemic, leaving the sector further behind the curve as the climate debate accelerates.

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