The World’s Largest Oil Companies Are At A Crossroads
The global oil and gas market was once dominated by a select group of Western energy companies called “The Seven Sisters”. The unparalleled influence of these International Oil Companies (IOC) was broken in a wave of nationalism in the Middle East and South America. The birth of the National Oil Companies (NOC) was a significant gamechanger that has had a lasting impact on the global oil and gas market. The energy transition, however, does not have the same priority for these companies due to their inherent differences.
Recently, it was made public that several Dutch conglomerates, including Shell, provided funding to a climate change denier in the nineties to organize a global network. The current political environment in Western societies would, most likely, exclude a similar chain of events. Activist shareholders have become a force to reckon with. For three consecutive years, an activist investor group filed resolutions pressing Shell to increase its renewables portfolio. The success of this group led to the (temporary) withdrawal of a similar resolution in 2019.
Another important reason why the energy transition is on the minds of IOCs is the potential reputational damage. Especially in Europe continuation of ‘business as usual’ is not an option anymore. European IOCs are gradually shifting towards a business model where income from renewables eventually should overtake fossil fuels. Western IOCs, however, are not unified in their approach towards the energy transition due to another factor.
The size of proven oil and gas reserves can also influence the necessity to diversify and invest in renewables. For IOCs with large relative reserves, such as Exxon and Chevron, an alternative business model is not a pressing issue. The reserves of most NOCs, however, dwarf those of the largest IOCs. IOCs, therefore, have to choose between spending precious resources on renewables or exploration and production activities for which profitability is under growing strain from regulations and new technologies such as EVs.
Thirdly national interests strongly drive the respective strategies of NOCs. Countries with large proven oil and gas reserves have an interest to maximize income from sales for the benefit of their society and the state’s coffers. Energy wealth is a major asset and advantage. Therefore, the strategies of these countries are focused on maximizing the income from oil and gas sales. The only exception being Equinor, which is largely owned by the Norwegian state.
The alternative is diversification which means competing with more experienced IOCs. Some energy-rich countries, especially in the Gulf region are investing in renewables, but not under the umbrella of their NOC which is left to focus on oil and gas. Saudi Arabia and the UAE have set ambitious goals to increase the share of solar power in the energy mix. However, these ‘green goals’ are not a change of strategy but are to be attributed to the drop in costs of solar PVs.
The partial IPO of energy behemoth Saudi Aramco is another sign of the oil-rich country’s strategy. Riyadh’s goal is to maximize the revenue from its massive domestic oil fields before it’s too late. The energy transition and rising sales of EVs are a threat to fossil fuel based business models. According to some analysts, the IPO is already too late because the oil business is in retreat.
Another country that is highly dependent on the export of fossil fuels is Russia. Moscow relies heavily on its oil and gas sector for the necessary funds to fuel the economy. Therefore, national champions such as Gazprom and Rosneft are doubling down to maximize the value of their oil and gas fields. Instead of an energy transition strategy, Moscow intends to develop its Arctic region where significant undeveloped resources are located.
The energy transition will continue regardless of the fossil fuel based strategy of NOCs. However, the speed of the transition is not determined by the willingness and investments of IOCs but largely by external factors such as regulations and the price of fossil fuels. The EU’s increasing pressure on car manufacturers to reduce CO2 emissions and existing carbon schemes such as ETS have a bigger impact. Furthermore, sustained low prices for oil, natural gas, and coal could lengthen the use of fossil fuels due to the financial advantage for consumers.