Only a minority of institutional investors in oil and gas seem to believe that Big Oil will be able to pull off a green transition, the Financial Times has reported, citing research from Procensus.
The company surveyed 64 institutional investors with some $11 trillion in assets under management and found that only 17 percent of them believed that Big Oil could become Big Energy with its pivot to renewables.
"Big Oil's greening efforts have moved into overdrive but investor consensus remains unconvinced about their ability to reinvent themselves," the FT quoted the chief executive of Procensus, Alastair Walmsley, as saying.
Going green has become the leitmotif for Big Oil majors under growing pressure from environmental activists and investors, and ambitions by national governments to build an energy future that is less reliant on fossil fuels.
However, while this pressure has certainly spurred Big Oil in the direction of diversification, the question remains whether it is worth it if investors remain largely unconvinced that they can indeed swing it.
"Invariably, some companies will make the transition while others will not," said Fiona Reynolds, CEO of the Principles for Responsible Investment-an investor network backed by the UN-as quoted by the FT. "Investors need the right information and data from companies about their net zero commitments and how these will be achieved so they can make informed decisions about whether to hold these companies in their portfolios over the longer period."
Yet some non-ESG investors who have been with Big Oil for years may still be wary of whether it will actually pay to diversify. When BP announced its green plans, for instance, its stock fell sharply. Then, this quarter, Big Oil reported a string of solid results but not because it has started to diversify into renewables but because oil prices were higher and this, in turn, meant higher dividends for shareholders. There seem to be sound reasons for investor skepticism, whether investors want or do not want Big Oil to diversify away from its core business.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
The first thing oil supermajors did with their bumper profits in the first quarter of this year was to buy back shares and raise dividends to shareholders rather than rush to invest in green assets. This isn’t a sign of somebody wanting to truly play a part in the global energy transition.
High oil prices and resurgent reserve nationalism have exacerbated Big Oil's ability to replace the reserves.
Whilst IOCs such as Total, BP, Shell, Chevron, ENI, ConocoPhillips, ExxonMobil, Equinore and Repsol have reserve to production (R/P) ratios ranging from 8.0-10.5 years according to CitiBank research, the NOCs of countries like Saudi Arabia, Iraq, UAE, Venezuela and Kuwait to name but a few have access to proven reserves whose R/P ratios range from 66-91 years at the 2019 production levels.
Overall average IOCs’ reserves in place have fallen by 25% since 2015 with less than 10 years of total annual production available. For instance, oil supermajor Shell expects to have produced 75% of its current proven oil and gas reserves by 2030, and only around 3% after 2040.
Resource nationalism has been on the rise around the world underpinned by governments wanting to fully control whatever hydrocarbons and mineral resources they have in order to maximize their revenues, growing global demand for these resources and also growing influence of the NOCs. That is why resource nationalism has become a major threat for the IOCs.
Some analysts have already claimed that the current reserve crisis is no real issue, as most IOCs are going through an energy-transition phase. However, to invest in the energy transition these companies need plenty of cash to cope with the planned multi-billion-dollar wind, solar, and hydrogen projects, while also keeping investors and shareholders happy. Almost 80% of this cash flow is generated from oil and gas. As one chairman of an IOC put it succinctly “Black pays for Green”.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London