European oil giants face a dilemma in their energy transition

【发表时间 2024-12-04 11:49:42】

BP recently announced that it will suspend 18 hydrogen energy projects that are still in the early stages. Coincidentally, two other European oil giants - Shell and Equinor (Norway's national oil 

company) - are also gradually reducing the scale of their energy transition plans formulated ten years ago.

Shortage of funds and high costs

In 2020, BP released a report stating that it would reduce oil and gas production by 40% by 2030 and accelerate the development of renewable energy such as solar and wind power, achieving 

the transformation from an oil and gas company to a comprehensive energy company. In 2021, BP proposed in its financial report to accelerate its transformation into a green energy company. 

By 2025, BP plans to increase its investment in energy transformation business to over 40% of capital expenditures, and to around 50% by 2030.

Shell, another industry giant, had previously planned to reduce its carbon intensity by 20% from 2016 levels by 2030. Equinor also announced its first energy transition plan in 2022, with the goal 

of achieving 12-16 gigawatts of renewable energy generation capacity by 2030, primarily in the form of offshore wind power.

However, since the beginning of this year, the shortage of funds has also constrained the development of renewable energy. The International Energy Agency's (IEA) 2024 World Energy Investment 

Report predicts that global energy investment will exceed $3 trillion for the first time this year, with approximately $2 trillion going towards clean technologies such as renewable energy. However, 

the main source of funding still relies on traditional oil and gas businesses. However, since the beginning of this year, due to the decline in oil prices and refining profit margins, BP's basic reset cost 

profit in the third quarter has decreased by 31% year-on-year, Shell's adjusted profit in the third quarter has decreased by 3% year-on-year, and Equinor's adjusted profit in the third quarter has 

decreased by 25% year-on-year. The difficulty in ensuring the "economic foundation" for developing renewable energy in a weak market environment is the primary challenge that oil giants face in 

continuing to advance their energy transformation plans.

At the same time, the problem of high costs is becoming increasingly prominent. The Nihon Keizai Shimbun reported that the combination of long-term high inflation, high interest rates and rising 

labor costs in Europe has led to the cost of energy development exceeding expectations. According to Soren Larson, head of offshore wind research at Wood Mackenzie, an energy consulting firm, 

the average cost of offshore wind farms worldwide is currently $230 per megawatt hour, which has increased by 30% to 40% in the past two years. The National Renewable Energy Laboratory of the 

United States estimated in August that the cost of offshore wind power in the United States is expected to be $0.125/kWh, a year-on-year increase of 45%. Equinor Chief Financial Officer Torgrim 

Ritan said, "The inflation rate in the renewable energy industry is very high, and the supply chain is facing challenges

European oil giants are considering withdrawing

Lack of funds and high costs have led oil giants to choose to sell some new energy assets in order to save expenses. Starting from the middle of this year, Shell has sold its floating offshore wind 

farm in Scotland, suspended its 820000 ton/year biofuel production facility in the Rotterdam Energy and Chemical Park in the Netherlands, suspended its blue hydrogen project in Norway, adjusted 

its emission reduction target to reduce carbon intensity by 15% to 20% from 2016 levels by 2030, and announced its withdrawal from the Chinese electricity market and household energy businesses 

in the UK and Germany. In addition, Shell is seeking buyers for its 2020 acquisition of Australian company Select Carbon, which specializes in developing agricultural projects to offset carbon 

emissions.

Equinor also announced in August that it will no longer invest in offshore wind power projects in countries such as Spain, Vietnam, and Portugal. Shell CEO Vail Sawan said, "Reducing global oil and 

gas production is irresponsible and poses a danger to the global energy system, as demand for oil and gas continues to grow

BP announced in October the sale of its onshore wind power business in the United States, including 10 operating wind farms with a total net installed capacity of 1300 megawatts. At the same 

time, BP has decided to abandon its plan to reduce oil and gas production by 2030, reduce investment in renewable energy, increase investment in oil and gas production, and increase oil and gas 

production in regions such as the Gulf of Mexico and the Middle East, in an attempt to refocus on its oil and gas business. We see enormous growth potential in the oil and gas sector over the next 

decade, "said Murray Auchincloss, CEO of BP

The development prospects of oil companies' business are unclear

Although European oil giants such as BP are turning back to the oil and gas business for profit reasons, they still face many problems. According to a recent report by Reuters, some BP employees 

have expressed doubts about whether there are enough reservoir engineers to achieve their oil and gas production growth targets. They stated that since 2020, in order to develop renewable 

energy and reduce costs, the company has laid off hundreds of employees in its upstream departments. In order to achieve the goal of reducing structural costs by $3 billion by the end of 2025 and 

meet investors' demands for dividends and stock buybacks, Shell also plans to achieve a 20% layoff in upstream industries this year through the merger of its technology department and other 

means. Both companies are facing the same problem of needing experienced employees and cutting costs through layoffs.

In addition, Shell also faces complex legal issues. In 2021, the Dutch environmental organization Friends of the Earth sued Shell, demanding that it change its business practices, consider climate 

issues, and reduce carbon emissions in accordance with the Paris Agreement, equivalent to reducing Shell's carbon emissions by 45% by 2030. The Hague Court of Justice in the Netherlands stated 

that Shell should reduce its carbon emissions by 45% from 2019 levels by the end of 2030. Recently, the Dutch appellate court rejected this ruling, but it is uncertain whether Friends of the Earth 

will continue to appeal in the context of increasing oil and gas investment. If Shell loses the lawsuit in the future, it will still need to achieve its goal of reducing carbon emissions by 45% by 2030, 

which will contradict its current strategy of shifting back to oil and gas production.

Balancing low-carbon investment with meeting shareholder demands is difficult

In addition, the outlook for fossil fuel consumption is full of uncertainty. The International Energy Agency predicts that global oil demand will peak in 2028. BP previously predicted that oil demand 

would peak in 2025. But OPEC believes that global oil demand will not peak in the short term, as economic growth in India, Africa, and the Middle East will drive oil demand, and the speed of 

shifting from traditional fuels to electric vehicles and clean energy is not as fast as expected. ExxonMobil also expects oil demand to remain above 100 million barrels per day by 2050, similar to 

current levels. The vastly different predictions for the future consumption prospects of fossil fuels have made it difficult for European oil giants to make the determination to vigorously develop 

renewable energy or completely return to the traditional oil and gas industry, especially in the market environment of weak refining profit margins this year.

Despite facing challenges, these companies have not completely given up investing in low-carbon energy. Shell, BP, and Equinor are still developing offs