Net-zero and energy transition in oil & gas: The early signs


BP was the first oil major to announce its ambition to become a net-zero company by 2050, meaning that the company will either eliminate or offset carbon emissions from its operations.

Shell followed shortly after along with Eni, Total, Equinor and Repsol. Their American counterparts, Exxon and Chevron have been less active with regards to energy transition and emissions having no strict targets set.

At first BP was accused of “greenwashing” i.e. conveying false impression that the company would become environmentally friendly-given the fact that in the end it is still an oil company. And the accusations had a valid ground. This has been the second diversification effort of BP after the failure of transforming British Petroleum to Beyond Petroleum in the early 2000’s. Moreover, following BP’s 2020 announcement of net-zero, no concrete action plan was set to explain how the company would achieve its target.

What followed was an announcement regarding the reorganization of the company and a headcount reduction of 15% which is roughly 10,000 jobs. All that after already having cut its dividend by 50% in Q2-2020. The market was not happy. BP lost almost 50% of its market cap since January 2020. None of the announced radical actions seemed to have persuaded the investors that BP has a feasible way out to net-zero.

And then came the strategy…

The strategy came a few months later in August where BP announced its net-zero strategy laying out a set of actions, portfolio shifts and targets. The market was still not impressed.

An aggressive reduction of 40% by 2030 in oil production, 50GW of renewable energy capacity by 2030, 5-fold growth in biofuels production and investment in hydrogen and CCUs.

Ambitious - maybe even far-fetched targets that didn’t help BP’s share price recover at the slightest, with questions regarding returns from renewable investment and income generation remaining unanswered.

Americans keeping the dividends high

On the other side of the Atlantic, the energy transition “laggards” Exxon and Chevron are keeping the dividends at pre-COVID levels with 6.3% and 9.4%, respectively.

Are the energy transition ambitions and dividend payouts connected? Well let’s see:

BP, Shell, Eni and Equinor are considered the energy transition leaders among oil companies. All of them have cut their dividend by 50-66% in 2020. Total did not cut its dividend but has offered shareholders scrip dividends instead. After all, the energy transition might be taking its toll on the shareholders dividends from oil companies.

But why are Chevron and Exxon still high dividend paying and not moving into new energies?

One would think due to the EU regulations, the former group of companies would have to act faster as carbon pricing paired with the declining oil prices will deem part of their assets stranded and uneconomical.

This is a fair point. The United States does not have a carbon price or regulation in place apart from tax credits for carbon sequestration which provides some cushion for oil companies to keep pumping more hydrocarbon out of the ground.

But if we leave policies and regulations aside, the reality is that Chevron and Exxon have a larger and cheaper resource base than their European counterparts. To put it simply, the US is full of oil while Europe is running out of it. The Permian basin in the US is expected to yield significant production growth for both companies at a low-cost base. Both have well established and optimized LNG facilities tied with long term contracts providing secure cashflows. Guyana and Kazakhstan are also some areas that will provide growth for Exxon and Chevron respectively in the long term.

With multiple growth engines, there is simply no incentive for US companies to commit to any shift in their strategies other than investors pressure which is partly offset by the high dividends.

Maybe the net-zero way is a way out of low returns from oil & gas rather than a paradigm shift for the oil companies. The oil price crash has played a role in accelerating the net-zero trend, but in the end, hydrocarbons will still be around for many years to come. And that’s where the fittest will survive…

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