Does a company’s transition to wind power herald a changing landscape for oil companies?
The world’s largest developer of offshore wind farms, Ørsted, was formerly known as DONG—Danish Oil and Natural Gas. Founded in the 1970s to develop and manage oil and natural resources in Denmark, the company expanded into the electricity sector in the 2000s. The fuel of choice for most of that power is coal.
But times are changing. In the late 2000s, climate regulations in Denmark and the EU began to improve. Strong community opposition has attempted to complete a new coal-fired power station in Northern Germany. In 2009, a bold step was taken by the management of DONG. They see that the world is heading in a new direction, and instead of swimming against the tide, they decide to prepare for a world where green investments will pay off and brown investments will be stranded.
DONG’s “85/15” vision seeks to flip the company’s activities from 85% fossil to 85% green. In the following years, the company was renamed Ørsted (after the Danish scientist Hans Christian Ørsted) and quickly became a wind power superpower.
It has been called the “Tesla of offshore wind,” although CEO Mads Nipper still stopped short of calling his company the first “clean energy supermajor,” despite a substantial annual investment in renewable energy—his ambition is to reach the investment budget of traditional oil and gas supermajors—ten billion dollars per year.
Is Ørsted’s case a harbinger of things to come for other oil companies? Undoubtedly, they feel pressure from the financial markets to change how they operate and what they invest in, but the response is subtle and varies for each supermajor. Ørsted is, of course, a bit of a special case. The company is controlled by a stable and predictable government with strong climate ambitions, already has experience with offshore wind in the 2000s, and does not face much shareholder pressure despite a radical change in strategy.
Independent oil companies (IOCs) face a different set of incentives and reach a different set of conclusions — so far, at least. European IOCs, such as BP and Shell, have begun to invest large sums in low-carbon projects. In 2020, BP announced that it wants to be carbon neutral by 2050 and cut oil and gas production by 2030. Shell has bought electric car charging companies and is an active player in offshore wind in the North Sea.
As such, most of their investments are still in fossil fuels or other fuels with a non-zero carbon footprint. Basically, though, the European IOCs are likely to see themselves as green supergiants a few decades from now. They argue that they have the scale and financial strength, and the experience of many infrastructure projects with many contractors and stakeholders, to succeed in the entire energy transition. They have a highly skilled workforce with transferable skills and strong government ties.
American IOCs such as Chevron and ExxonMobil are less powerful. They see themselves as mostly experts in the production and distribution of oil and natural gas products, with no clear competitive advantage in the power sector. While they may be better positioned for biofuels, carbon capture, and hydrogen, these are small and uncertain markets. In addition, they argue, investors can diversify themselves and buy shares in specialized green energy companies.
This difference in segment philosophy can be explained by the companies’ home markets. European IOCs face increased regulation, litigation, and pressure from investors and employees. European carbon markets and other climate policies continue to be tightened, and a Dutch court ruling held Shell “partially responsible” for climate change and ordered the company to reduce carbon emissions. Have we reached a tipping point where BP and Shell will announce an Ørsted-style change?
Recent developments suggest the answer is “never.” When the oil majors started announcing record profits earlier this year, BP responded that it should “help provide the energy the world needs,” and dialed back its target of reducing internal emissions from 35% to 20%-30% by 2030. Other companies also suggested that it would be difficult to convince shareholders to stop the most profitable investments in oil and gas.
This episode explains that investor pressure can go in different directions. There is increasing evidence that climate risks are priced into financial markets and investment decisions. But if, despite such perceived risks, the core business looks more profitable, there is also pressure on companies to stay with the status quo.
Climate risk for oil companies is mostly regulatory risk. Low-carbon policies can change the profitability of brown vs. green. If we really want financial markets to push the oil majors to become green superpowers sooner, there is no magic trick — we need more ambitious climate policies.
Provided by the University of Pennsylvania
Citation: How much green pressure do oil companies feel from the financial markets? (2023, July 24) retrieved 25 July 2023 from https://techxplore.com/news/2023-07-green-pressure-oil-companies-financial.html
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