The mammoth profits of the world’s oil and gas giants will pass £200bn when Saudi Aramco unveil their record results next month – with the state-backed energy titan on course to post the most lucrative results in the history of business.
Closer to home, BP and Shell unveiled their own mega earnings, announcing record annual profits of £23bn and £32bn respectively, fuelled by soaring fossil fuel prices and rebounding post-pandemic demand last year.
When pressured over their bumper profits, the energy giants position themselves as major players in the UK’s drive for energy independence and for reaching its ambitious climate goals.
BP and Shell have pledged to spend £18bn and £25bn respectively over the current decade on domestic energy projects, with an emphasis on zero and low carbon energy developments.
This is an appealing commitment, with Downing Street desperate to reduce the UK’s reliance on overseas vendors to meet its energy needs following Russia’s invasion of Ukraine, and instead boost domestic energy generation – especially renewables such as offshore wind, solar and hydrogen.
The question is whether BP and Shell’s green spending matches those aspirations.
The massive annual profits of the world’s energy giants are closing in on £200bn
Energy giants wary of windfall tax regime
BP has agreed deals to develop offshore wind in the Irish and North Sea to power six million homes, alongside spending commitments for blue and green hydrogen in Teeside and a £1bn pledge to ramp up electric vehicle charging nationwide.
Shell is backing multiple UK-based offshore wind and blue hydrogen schemes including 5GW of floating offshore wind turbines and a blue hydrogen project with Uniper in the Humber region.
These future ambitions, however, seem poorly served by present day spending.
BP is utilising around 30 per cent (£4.1bn) of its capital expenditure worldwide for low carbon and renewable projects last year. It is targeting 40 per cent of total spending to be on green energy projects by 2025 and aim for it to be around 50 per cent – or £5.9bn to £7.5bn – in 2030.
Shell is calculating it has spent £6.7bn – £8.4bn this year on renewable projects this year worldwide.
To aggravate matters, BP has rowed back some of its key climate pledges such as easing plans to slash the amount of oil and gas it produces over the current decade to meet global demand.
Meanwhile, Shell has revealed that new UK energy projects will be a ‘case by case’ issue after Chancellor Jeremy Hunt toughened the windfall tax last November.
Shell and ScottishPower have joined forces to develop the MarramWind offshore wind farm, which could deliver up to 3 gigawatts of cleaner renewable energy.
However, Andy Mayer, energy analyst at free market think tank, the Institute of Economic Affairs, argued it was unfair to criticise BP and Shell for their hesitancy to invest in an unstable market where the regulatory regime has changed repeatedly in recent years.
“We currently have three supertaxes on the North Sea, the rates of which have changed eight times in the last 21 years, including twice in the last year.
“These are the tax and spending policies of banana republics not stable investment regimes. They signal that investments made today can be plundered tomorrow, whether in oil and gas, or wind farms, hydrogen, and carbon capture,” he said.
Industry body Offshore Energies UK highlighted that as part of the North Sea Transition Deal between the industry and government to decarbonise the sector, fossil fuel producers have pledged to spend £14-16bn in new energy technologies by the end of the decade.
Energy policy manager Will Webster argued this plan was being undermined by the hiked windfall tax – now set at 35 per cent on top of the 40 per cent special corporation tax rate.
He said: “There’s still a disconnect between the green energy future government is working towards and the uncertain fiscal regime implemented through initiatives like the Energy Profits Levy, which we are working to address.
“Companies need long-term confidence in the tax system to ensure the renewable investment decisions they are making now are still viable five or ten years later, when the projects come to fruition.”
Show me the money: Wait and see, say critics
Both Rishi Sunak and Jeremy Hunt in their time as Chancellor have seen the industry as an opportunity to harness bumper North Sea profits to boost support packages for households – when easing off levies and backing companies during the transition from fossil fuels to renewables could have been a more effective long-term method for driving down bills.
Nevertheless, investor activist group Follow This argues the fossil fuel industry including BP and Shell has not done enough work to justify being given the benefit of the doubt on renewable commitments – having routinely fought against more stringent environmental plans in line with Paris Climate Agreement.
Founder Mark van Baal explained: “If the bulk of your investments remain tied to fossil fuels, and you even plan to increase those investments, you cannot be Paris-aligned, because you will not achieve large-scale emissions reductions by 2030.”
Companies that have been enriched by their fossil fuel legacy, and continue to do so, have an obligation to do all that they can to help deliver net zero. That requires transparency on levels of investment, and accountability for a failure to transition as quickly as possible.
Darren Jones, Labour MP and chair of the BEIS Select Committee
Meanwhile, Heather Plumpton, policy analyst at environmental think tank Green Alliance, argued that energy giants lack a long-term vision to achieve their goals.
She said: “BP’s decision last week to scale back its climate goals and spend far more on shareholder pay-outs than investments in renewables are symptoms of chronic short-sightedness in the oil and gas industry. Renewables are the cheapest form of energy and will dominate the future energy system. If the oil and gas majors want to be part of that system, they need an economic reality check.”
Darren Jones, Labour MP and chair of the highly influential BEIS Select Committee, argued that renewable spending was the real litmus test of BP and Shell’s commitment to renewables – with the numbers exposing any excuses made by the energy giants.
He told City A.M.: “Companies that have been enriched by their fossil fuel legacy, and continue to do so, have an obligation to do all that they can to help deliver net zero. That requires transparency on levels of investment, and accountability for a failure to transition as quickly as possible.”
With BP and Shell so integral to the UK’s energy aspirations, it remains to be seen whether they can rise to the challenge of boosting the country’s green ambitions – which will be the only way to silence their critics.
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To avoid a UK windfall tax, BP and Shell have pledged to spend £18 and £25 bn respectively over the current decade on domestic low and zero-emission energy projects. The important question is whether their commitments will be ever fulfilled or they will find ways to wriggle out of most of them.
That is why I suggest that the UK government should impose a windfall tax upfront year after year and refund the companies at the end of each year for the amount they spent on green projects until their full commitments are fulfilled. This will be an insurance policy for the government against BP and Shell reneging on some of their pledges.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert