Explained: Why crude oil companies are walking back from green energy

Investors are rewarding oil giants that did not embrace wind and solar

By Rebecca F Elliott 

When oil and gas firms made ambitious commitments four years ago to curb emissions and transition to renewable energy, their businesses were in free fall.

 

Demand for the fuels was drying up as the pandemic took hold. Prices plunged. And large Western oil companies were haemorrhaging money, with losses topping $100 billion, according to the energy consulting firm Wood Mackenzie.

 

Renewable energy, it seemed to many companies and investors at the time, was not just cleaner — it was a better business than oil and gas.

 

“Investors were focused on what I would say was the prevailing narrative around it’s all moving to wind and solar,” Darren Woods, Exxon Mobil’s chief executive, said in an interview with The New York Times last week at a United Nations climate conference in Baku, Azerbaijan. “I had a lot of pressure to get into the wind and solar business,” he added.  Woods resisted, reasoning that Exxon did not have expertise in those areas. Instead, the company invested in areas like hydrogen and lithium extraction that are more akin to its traditional business. Wall Street has rewarded the company for those bets. The company’s stock price has climbed more than 70 percent since the end of 2019, lifting its market valuation to a record of nearly $560 billion in October, though it has since fallen to about $524 billion.

 

The firm’s performance stands in contrast with BP and Shell, oil and gas firms based in London that embraced wind, solar and other technologies like electric-vehicle charging. BP’s stock has fallen around 19 per cent in that time, based on trading in London, while Shell’s has climbed about 15 per cent.

 

The market’s acceptance of fossil fuels underscores one of the core challenges of curbing global emissions: Climate change poses risks that compound over decades. “If we want to combat climate change, we need to make it in the firms’ and consumers’ self-interest to produce and buy the low-carbon alternatives,” said Christopher Knittel, a professor of energy economics at the Massachusetts Institute of Technology.

 

The difference in profits that firms can make from extracting oil and gas and what they can earn from harnessing wind and solar had already swung sharply in favour of fossil fuels in recent years. The median return on capital among some of the world’s biggest investor-owned oil companies, a key measure of profitability, topped 11 per cent last year, up from negative 8 per cent in 2020, according to an analysis by S&P Global Commodity Insights. The median return over that same period for the top renewable energy companies has stayed around 2 per cent.

 

“If you look at the relative shareholder returns, the market’s been sending a very clear signal that it wants energy companies to focus on their core competencies,” said Mark Viviano, a managing partner at Kimmeridge, an energy investment firm.  BP pledged in 2020 to cut its oil and gas production

 

40 per cent by the end of the decade. Less than three years later, it backtracked and said it would increase spending on fossil fuels. The company wrote off $1.1 billion in offshore wind investments last year and recently said it wanted to sell other wind assets, though it continues to invest in renewable energy. Shell has softened or discarded some of its emissions-reduction targets, as it scaled back growth expectations for its renewable power business.

 

In the US, where environmentally conscious investing has become increasingly politicised, investors have gone from regularly quizzing oil and gas executives about their energy transition plans to zeroing in on projects that are more likely to lift the bottom line soon, executives said.

 

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