Big Oil Companies Scale Back Energy Transition Projects Due to Lack of Profitability

 

     Big Oil companies have long been major investors in the renewable energy and alternative fuels required for the energy transition. That will not change but there has been significant scaling back of those projects in the last couple of years and the trend continues with new announcements by BP and Shell to scale back and halt some projects. These projects allow these capital-heavy companies to hedge their investments toward the future while also increasing their ‘social license to operate’ in a climate change-aware world. However, many of these projects are not very profitable compared to their oil and gas exploration and development projects. It is hard to blame them. They are compelled by investors to keep investing in these energy transition projects so they will remain invested in many projects but the ambitious projections from the late 2010s and early 2020s proved to be too much for the companies’ bottom lines.

     The Financial Times reports that alternative energy companies are undervalued in public markets. Investors are avoiding clean energy due to a lack of profitability. This is slowing some wind and solar development. Inflation and the high cost of borrowing have stricken offshore wind and solar projects. Cheap Chinese competition, particularly for solar panels, has also affected the viability of projects. These projects also still require robust government subsidization. That won’t go away but it likely won’t grow either. Tech improvements can aid profitability but have been offset in recent years by inflation.

     BP CEO Murray Auchincloss stated recently that BP is lowering its investments in renewables, particularly offshore wind projects, and instead refocusing more on oil & gas. They and Shell are most vulnerable to lower profits than other Big Oil companies like ExxonMobil and Chevron who have much less invested in renewables. Shareholders are often divided, with some favoring more renewables investment and others less. An article in The Telegraph notes that demand for oil, gasoline, and jet fuel has not slowed as predicted but is now at record levels:

 

“The International Energy Agency predicted that 2019 represented peak gasoline. But that level was surpassed last year and 2024 looks likely to break a new record. Similarly, the fact that there are more fuel-efficient planes in the skies has been offset by travellers taking more and longer flights.”

 

The article also notes one exception to the trend, France’s Total, which has shown profits consistent with those of ExxonMobil and Chevron while investing significantly in selected renewable projects.

     BP implemented a hiring freeze and is laying off renewable project workers. They are reassigning teams to work more on oil & gas projects in the Gulf of Mexico and in U.S. shale basins.  

     Shell recently announced they were pulling out of constructing one of Europe’s largest biofuel plants. The plant was expected to make sustainable aviation fuel (SAF) to enable low-carbon flights.

 

“The facility was designed to produce 820,000 tonnes of biofuels a year, half of which was to be used for sustainable aviation fuel (SAF) made from waste cooking oil and animal fat.”

 

The project in Rotterdam, Netherlands, is now in doubt. It is a rare move for a company to stop construction that has already been initiated. Thus, it is a serious issue and likely lack of profitability is a key reason for the pullout. Shell’s return to higher investments in oil & gas and less in renewables projects, beginning in 2023 has already resulted in a higher share price. The project is halted but may return to viability if market conditions improve. According to an article in Oil & Gas Journal:

“Temporarily pausing on-site construction now will allow us to assess the most commercial way forward for the project,” said Huibert Vigeveno, Shell’s director of downstream, renewables and energy solutions.”

 

Along with SAF, the project is/was expected to make renewable diesel and to employ carbon capture and sequestration in wells in the North Sea. Shell is now looking at impairment options. The project, announced in 2021, had originally planned to start production in 2024.

     While Big Oil companies are still well situated to tackle big renewables projects, the lack of profitability will continue to hinder a significant portion of those investments. Both Shell and BP say they are still committed to net-zero by 2050 but again the compromise is to downsize those investments in the near term.

 

References:

Shell halts construction of giant biofuel factory. Jonathan Leake. The Telegraph. July 2, 2024. Shell halts construction of giant biofuel factory (msn.com)

BP Shifts Focus to Oil and Gas, Halts Renewables Expansion. David Love. Nasdaq.com.  June 27, 2024. BP Shifts Focus to Oil and Gas, Halts Renewables Expansion | Nasdaq

Shell halts construction of Rotterdam SAF, renewable diesel plant. Robert Brelsford. Oil & Gas Journal. July 2, 2024. Shell halts construction of Rotterdam SAF, renewable diesel plant | Oil & Gas Journal (ogj.com)

Wind And Solar Are In Huge Trouble. Douglas McIntyre. Climate Crisis 247. July 9. 2024. Wind And Solar Are In Huge Trouble (msn.com)

Why the oil giants are beating a hasty green retreat. Ben Wright. The Telegraph. July 9, 2024. Why the oil giants are beating a hasty green retreat (msn.com)

BP halts offshore wind projects. Jonathan Leake. The Telegraph. June 27, 2024. BP halts offshore wind projects (telegraph.co.uk)