European oil companies slow down the energy transition

In recent years, international Big Oil has generally accelerated the pace of the energy transition. However, what can be noted recently is that geopolitical conflicts have led European Big Oil to issue successive stances to return to fossil fuels.

For example, Shell plc recently announced that they will increase their liquefied natural gas (LNG) production and maintain oil production until 2030.

This is the company's response to the strong global demand for fossil energy, but it seems somewhat out of place at a time when global pressure to decarbonize is enormous.

Wael Sawan, Shell's chief executive who took office in January, told an investor briefing at the New York Stock Exchange that Shell will shift capital to its gas business, where it has an advantage. To do so, Shell will invest in LNG factories in Canada and elsewhere, increasing its capacity by 11 million tons by 2030. That increase is equivalent to 15 percent of demand from Japan, the world's largest LNG importer.

Shell currently produces about 1.5 million barrels of oil per day. This level will be maintained by continuing to develop offshore fields in the Gulf of Mexico through 2030. Shell will produce about 1.9 million barrels of oil per day in 2019. The current 1.5 million barrels of oil per day are the result of voluntary cuts, but Shell is clearly unwilling to continue cutting fossil energy production.

Previously, major European energy companies committed to reducing fossil energy production while expanding solar and wind power and their electricity retail businesses. Shell was originally more positive about decarbonization than the U.S. energy giants. However, Shell still adjusted its energy policy due to favorable factors such as strong global demand for fossil energy after the Russia-Ukraine conflict, high profit margins, and the high concern of countries for energy security.

In February, British Petroleum (BP) also announced that it would produce 25% less oil and gas by 2030 than it did in 2019. This is a narrower decline than the company's previously announced official target of a 40% year-on-year reduction.

At present, fossil energy margins are still higher than those of new energy businesses, which is why Shell is slowing down its energy transition.

Previously, market analysts feared that crude oil and natural gas holdings would temporarily become "stranded assets" due to flow restrictions caused by the COVID-19 pandemic and the general trend of decarbonization. Accordingly, European giants have strengthened their power businesses in preparation for decarbonization.

However, the power business is less profitable than the fossil energy business and does not have high synergies with existing businesses. On May 14, Shell announced that it would "reduce the scope of its power business investments" and that the company's goal of "becoming the world's largest power company", which it had been advocating for several years, had actually been cancelled.

The adjustment of Shell's energy policy also includes its withdrawal from the electricity and gas retail business in Europe, Wael Sawan said, adding that solar and wind power are growth areas, but Shell has no advantage in this area, so it should strengthen the business in which the company excels.

Shell is not alone in making changes to its energy policy.

U.S. oil giant ExxonMobil has made LNG, offshore fields, and shale development its three pillars of growth and continues to make "reverse investments" to steadily develop fossil fuels amid the decarbonization trend.

Financial markets are also bullish on ExxonMobil. Compared with January 2022 before the outbreak of the Russian-Ukrainian conflict, the share prices of Shell and BP have risen by 40%, while ExxonMobil has risen by 70%. Against this backdrop, oil companies could lose their main source of revenue if they ignore the strong demand for fossil energy and abandon their main business. However, if companies do not keep up with the general trend of energy transition, the operation will also be at a dead end. Oil industry operators are carefully assessing the best time to move toward decarbonization.

Wael Sawan emphasized that Shell's goal of achieving "net-zero greenhouse gas emissions" by 2050 remains unchanged. Shell will invest in new businesses that rely on fossil energy expertise, such as CO2 recovery and hydrogen, to prepare for the coming wave of energy transition.