REM: European oil majors scale back climate ambitions and shift back to hydrocarbons

European oil majors are scaling back their ambitions in green energy and returning more focus to higher profit-yielding hydrocarbon projects in response to the energy crisis, aligning themselves more closely with their US counterparts.

When the global energy system was far more stable in 2019, BP, Shell and TotalEnergies set out ambitious plans to grow their renewables and other clean energy businesses, seeing greater opportunity in these markets in light of increased climate commitments. When oil and gas  prices plunged as a result of the COVID-19 pandemic, those targets were only raised higher. In contrast, Chevron and ExxonMobil took a different path. While responding to shareholder pressure to do more to address their ambitions, they remained far more bullish on long-term prospects for oil and gas demand, and maintained their focus on lower costs, increased efficiency and shareholder returns. Unlike the Europeans, the US majors also refrained from committing to reduce Scope 3 emissions, relating to the end-use of their products.

The US major also cautioned that the energy transition would be slow in pace, and that efforts to move away from oil and gas too quickly would have unwelcome consequences. As Chevron CEO Mike Wirth said in 2022, “the reality is [fossil fuel] is what runs the world today … it’s going to run the world tomorrow and five years from now, 10 years from now, 20 years from now.” They also criticised the International Energy Agency (IEA)’s Net Zero Emissions by 2050 scenario, which stated that no investment in new oil and gas projects was needed if the world was to remain on track to reach net zero by the middle of the century. They warned of the detrimental impact that such a policy would have on global standards of living.

In contrast, the European majors embraced the energy transition more actively, outlining plans to invest heavily in renewables and low-carbon projects, while scaling back oil and gas production. BP, for example, declared in 2020 that it aimed to cut its oil and gas production by 40% by 2030, though this year it revised this target to only a 25% reduction. In some cases European major’s bold plans to cut emissions were not viewed as bold enough. Shell had to revise its Scope 1, 2 and 3 targets under a Dutch court ruling, in a case lodged against the company by environmentalists. Pressure from such activist groups, as well as governments, is far more significant in Europe than in the US.

However, in the last two to three years, the US strategy appears to have paid off, with those majors consistently outperforming their European counterparts in terms of share price. After the start of the COVID-19 pandemic, for example, the average valuation of US majors was around 70% higher than that of European majors, but the gap has now expanded to more than 100%.