TThe world has started talking more seriously about transitioning to low-carbon options to help slow the rate of global warming. This has put certain sectors in a precarious position, notably the energy companies which supply oil to the world. However, the integrated European energy giants BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS.B), and Total (NYSE: TOT) change over time. And as they do, the whole notion of what it means to be an energy company is likely to change forever.
Oil has been a major engine of growth for a very long time, and there is a complex value chain upstream (drilling), through the half-way (pipelines), at downstream (chemicals and refining). While there are companies that focus on each of these industries, the biggest names energy industry include them all in their businesses. This is where the term “integrated” comes from. These colossal companies have helped energize the world and will continue to do so for years to come.
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While some would like to see a rapid transition to renewables and electricity, replacing oil and natural gas is a colossal undertaking due to their integrity in the economy. It is therefore likely that the world will continue to use these vital fuels for decades to come. that’s why ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) have largely avoided making major changes to their operations. Yes, they have clean energy efforts on the sidelines, but nothing central to their operations. In fact, investors are so worried about it that dissident shareholders ESG focus recently won two seats on the Exxon board of directors.
In Europe, things are more than a little different. In 2020, BP and Shell used the low oil price environment resulting from coronavirus economic shutdowns to cut dividends and redefine their future. Total is working in the same direction, but has chosen to maintain the line on its dividend, which it considers an important component of investor returns. While it’s too early to say which of their three approaches is correct (in the end, they could all work), it’s clear that Europe’s integrated oil majors are trying to keep up with their time.
Some new figures
In an effort to change from within and ensure continued activity in a post-carbon energy world, BP has set itself the goal of reducing its hydrocarbon activity by 40% between 2020 and 2030. This is a massive drop, with a 20-fold increase in the company’s renewable energy production capacity and a 10-fold increase in electric vehicle charging stations as key pieces of the puzzle. In 2030, oil and natural gas will still be very big businesses for BP, but the company’s clean energy operations will be increasingly important. The big goal, however, is for oil to help finance this transition.
Shell’s objectives go in the same direction. He wants to achieve net zero carbon emissions by 2050, with a 20% reduction by 2030 and a 45% reduction by 2035. He wants to double the amount of electricity he sells by 2030, increase the low-carbon fuels it produces (hydrogen and biofuels) eight times more, let its oil production drop to 2% per year, and boost the production of natural gas (considered a transitional fuel) to 55% of its hydrocarbon mix. Once again, management is the key factor, with higher carbon energy sources helping to finance the transition to a cleaner corporate future.
That said, a recent loss in court could throw a wrench into Shell’s plans, as it forces the company to meet the 45% reduction target by 2030. Shell intends to tackle the order, but it is not known what will be the end result or when such a decision will be made. Yet even if Shell loses, it just means its clean energy plans are forcibly accelerated. The direction in which the company is moving will therefore not change. A loss, however, could impact the plans of other businesses if it triggers a legal trend. This case doesn’t change anything yet, but should probably be watched.
Total takes a slightly different approach, notably with the intention of maintaining its dividend while expanding its own energy footprint. By 2030, it wants to triple the size of its “electron” business, with electric vehicle charging stations, renewables, and ownership of electric utilities all playing a part in history. However, it also strives to increase its energy activities. The key, however, is that oil is expected to drop from 55% of the company’s operations to 35% (including biofuels), with natural gas dropping from 40% to 50%. The remainder of its sales are expected to come from growing electron mining, which will see capital spending double by 2030. This is more of a middle-of-the-road approach, considering the path that Exxon and Chevron are taking. are currently.
The new energy majors
Basically, this trio of European energy companies are looking to broaden the definition of energy to include electricity. This could be the first step in a long-term business model change that will ultimately make electricity the most important part of the business. However, they are actually addressing the very real problem of the cost of transition by using their oil operations to finance their travel. Don’t underestimate the power BP, Shell and Total have to effect change in the world. They could turn out to be some of the biggest clean energy companies at some point, and maybe sooner than many realize.
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