Oil Companies Ponder Climate Change, but Profits Still Rule

Source: By Stanley Reed, New YorkTimes • Posted: Tuesday, October 8, 2019

They are caught between investors who want greener energy and those who simply want a strong return on their investments.

A Shell wind farm near Palm Springs, Calif. The company has begun to allocate up to $2 billion per year for new energy investments as it diversifies its approach.
Beth Coller for The New York Times

Two decades ago, John Browne rocked the oil industry by saying that the “possibility cannot be discounted” of a link between man-made carbon emissions and global warming, and that it was time for “action.” In 1997, Mr. Browne, then chief executive of BP, the London-based oil company, was a lonely voice among his peers.

How much has changed since his speech? Most large oil companies no longer deny the connection between burning fossil fuels and climate change. In fact, they are scrambling to position themselves to be seen as part of the solution to what is increasingly seen by worried citizens as a major threat.

Royal Dutch Shell, the European oil company, France’s Total and others are putting substantial funds into clean-energy investments. Several companies have formed the Oil and Gas Climate Initiative to invest in low-carbon technologies and reduce the powerful greenhouse gas, methane.

The companies are trying to deal with what is shaping up as a major threat to their businesses: societal demands, especially in Europe, for a sharp curtailment of the consumption of the oil and gas that are the lifeblood of these organizations. “Climate change poses an existential risk to the oil and gas industry,” wrote Neil Beveridge, an analyst at Bernstein, a Wall Street research firm, in a recent note to clients.

Yet about a third more oil is being burned than in the late 1990s, mostly because increasing numbers of consumers in countries like China and India have the means to drive cars, fly on airplanes and buy products made of oil-based plastic.

And there is skepticism among people familiar with the industry about whether the world will be able to phase out fossil fuels like oil, gas and coal as would seem to be required to maintain global temperatures within what are deemed safe limits. “Trillions of dollars would be needed” to replace current energy systems with wind and solar, Mr. Beveridge said in an interview.

He noted the peculiar situation in which the oil and gas industry finds itself. It is close to being shunned by environmentalists and some investors, but, at the same time, “pretty essential to making the world go around,” he said.

Confronted with these dilemmas, oil companies are taking quite different approaches. Shell, for instance, is putting money into alternative-energy investments, especially in electricity.

Shell has put together the beginnings of an electricity business in recent years, buying pieces like a small British utility, a Dutch electric-vehicle charging start-up and investing in offshore wind generation. These investments aim to position Shell for a new energy age that may be anchored in clean electric power for vehicles and other uses rather than fossil fuels.

In an interview, Ed Daniels, executive vice president for strategy at Shell, said the company recognized that to achieve the goals of the 2015 Paris Agreement on climate “enormous change was needed in the energy systems,” which are responsible for a large proportion of greenhouse gases. Shell, he said, wanted to help lead that shift, a role he said was “fundamental for the long-term success of the company.”

Shell seems to be edging away from being an oil company. Chevron, the American company, is not. Instead, it seems to be focusing on making its oil and gas operations more efficient and less emissions intensive. Chevron argues that it would be a mistake to force well-run companies to reduce their oil and gas production. Indeed, there may be scope for the most efficient producers to increase their oil and gas output, while still meeting climate change goals, the company says.

“You can increase your fossil-fuel production, deliver superior returns for your shareholders, and still be compliant with Paris, “ said Michael Rubio, Chevron’s general manager for environmental, social and governance engagement.

Critics say that oil companies are not backing up their talk of concern about climate change with dollars. While companies are making green-energy investments, a much larger proportion of most oil companies’ spending is going into oil and gas projects that produce greenhouse gas emissions.

“We have yet to see their capital spending match their words and reflect a recognition that they need to embrace the transition,” said Fred Krupp, president of the Environmental Defense Fund, which has worked with the industry to reduce greenhouse gases.

Analysts say that Shell is already a leader among the major oil producers in moving toward low-carbon energy, yet from some perspectives the industry, and even Shell, are moving too slowly to head off what environmentalists fear may be global calamity with higher temperatures wiping out crops, generating powerful storms and creating other dangers.

Valentina Kretzschmar, an analyst at Wood Mackenzie, a market research firm, figured that from 2016 to 2018 seven major oil companies, including Shell and Exxon Mobil, spent $5.8 billion on alternative-energy acquisitions, about 5 percent of their outlays on oil and gas deals and new ventures in these emissions-producing fuels. Shell said it planned to spend $1 billion to $2 billion a year on what it called new energy investments, a small amount compared with $25 billion or more in overall capital outlays.

Why the relatively paltry sums? Ms. Kretzschmar said the companies were still feeling their way in what was unfamiliar territory for them.

In making such deals, oil companies have their eyes on several constituencies. There is a growing body of shareholders wary of investing in oil companies, either because they disapprove of the role that their products play in climate change or they worry that oil will not be used in the future. If so, it follows that the troves of oil and gas that companies own rights to will be stranded in the ground.

The companies, though, think they will alienate some investors and see their shares pummeled if they are perceived as wasting money or putting it into businesses that do not produce satisfactory profits and the cash to pay generous dividends. “Any larger investment would probably be difficult for shareholders to digest,” Ms. Kretzschmar said. Alternative energy ventures are viewed as a less profitable business than oil and gas.

Mr. Daniels said Shell was aiming for 8 percent to 12 percent profits on the company’s new energy investments. Stuart Joyner, an analyst at Redburn, a market research firm, said there were not many large-scale alternative energy projects that could absorb the very large investments that oil companies were in the habit of making.

One area that does seem to be working in this regard is building enormous wind farms for electricity generation. Government subsidies helped lift this business off the ground in Northern Europe and it is spreading to the United States and Asia.

The investments required for offshore wind can be very large, and some of the oil companies are starting to play. Norway’s Equinor, the former Statoil, was part of a joint venture that won a preliminary deal on Sept. 20 to build what will be the world’s largest wind farm in Dogger Bank in the North Sea off eastern England at an overall cost of 9 billion pounds (about $11 billion).

Some investors conceded that oil companies will need time to shift.

“I am very conscious that this is a multidecade-long transition,” said Adam Matthews, head of ethics and engagement at the Church of England Pensions Board, which supports retired church personnel. However, Mr. Matthews, who has talked with oil companies to push them toward greener practices, said there were “a large number of laggards” in the oil business “that have yet to move.”

The distance between oil companies and what investors, environmentalists and, electorates expect from them seems destined to widen.

Stanley Reed has been writing from London for The Times since 2012 on energy, the environment and the Middle East. Prior to that he was London bureau chief for BusinessWeek magazine. @stanleyreed12Facebook