Will BP and Shell be able to close the gap with US peers Exxon and Chevron in 2024?
Unlike in 2022 where all the oil majors could be classed as ‘winners’, 2023 hasn’t been quite as straightforward.
On the European side, BP and Shell have both pivoted away from emission reduction and net zero strategies in favour of the higher shareholder return potential in fossil fuels, the latter doing so emphatically stating cash returns to investors would be its highest priority.
Profits for both have fallen since the eye-watering heights of 2022 but under Wael Sarwan, Shell has arguably steadied the ship more convincingly.
A millstone round the neck of BP
Low carbon strategy has become something of a millstone round the neck of BP this year, much of it down to former chief executive Bernard Looney.
In his three-and-a-half-year tenure, he committed to a specific long-term cut in oil and gas output; albeit retreating as a result of shareholder pressure to 25 per cent by 2030, rather than the 40 per cent reduction announced earlier.
But following his departure in September, the company’s low-carbon mission may well now be abandoned to bring stability to a beleaguered corporation, and, above all, convince the market to buy the shares.
BP has undoubtedly faced the biggest challenges over the past decade. The constant payouts from the Gulf of Mexico spill, its shift away from fossil fuels and Looney’s departure have all thrown a cloud of uncertainty over the company’s future.
S&P Global Commodity Insights’ executive director of upstream equity research, Lysle Brinker has labelled BP as “the most challenged of the majors and therefore the least likely to survive intact this decade.”
The outlook for Shell
Shell has unashamedly stepped back from a renewable focus and returned to pleasing shareholders the best way it knows how; returns.
The company’s investment in renewables and low-carbon energy has paled in comparison to the amount of capital it has dedicated to fossil fuels and shareholder payouts.
Research from environment think tank Common Wealth shows the firm spent 5.6 times more on fossil fuels than on its ‘Renewable and Energy Solutions Division’ during the three months from April to June this year.
The company also quietly walked back its prior commitment to spend up to $100m a year to build a pipeline of carbon credits, part of the firm’s promise to zero out its emissions by 2050.
Gone too is the plan to harvest 120m carbon credits annually by the end of the decade from projects that sequester carbon with trees and other plant-based carbon absorption; projects that would have accounted for about 10 per cent of the company’s emissions annually.
No such alternative plan for large-scale emission reduction has so far come to light.
For Shell, 2023 has been its bad boy era, reprising and thriving in its role as the European energy company people love and live to hate. But it’s far from a ‘loser’.
BP on the other hand seems to have self-inflicted some wounds from trying to change its operations for the good but it may have to take a leaf out of Shell’s book to return to health.
London vs New York
Across the pond, US oil majors are in rude health.
In part, this has been down to a renaissance in the country’s standing as a global oil power.
Inventories hit a record high in October and with drilling activity and output showing no signs of abating, it could be argued that the US rather than OPEC+ is calling the shots.
From company perspectives, Exxon and Chevron have continued the now-several-year trend of outperforming their European counterparts.
As of last month, market caps of the four stood at $113bn for BP and $220bn for Shell, while Chevron’s was $318bn, and Exxon’s was $440bn, the second largest of the world’s oil companies some way behind Saudi Aramco at $2.1tn.
Such is the gulf in performance that talks of one or both of the US majors making overtures to BP and Shell started up again earlier in the year.
But on closer inspection, neither Shell nor BP would make an attractive purchase for the US giants.
For one, both have recently announced huge domestic deals; Exxon said it would pay $59.5bn to buy Pioneer Natural Resources in October and Chevron followed suit with its $53bn purchase of Hess.
Then for either Chevron or Exxon to acquire Shell and/or BP, the US majors would have to navigate complex regulatory and anti-trust procedures and be landed with significant green energy projects which neither seem to have an interest in right now.
Exxon is making grand overtures in the carbon capture and storage environment in lieu of concrete green energy proposals. It recently committed to spend $20bn on carbon capture through 2027. This was the third increase since it launched its lower carbon energy platform three years ago and $3bn above its prior target.
Chevron also this year announced plans to invest $10bn into low-carbon projects in the next eight years, alongside its purchase of a 78 per cent stake in the hydrogen-based Advanced Clean Energy Storage (ACES) project in Utah.
In terms of direction of travel, Chevron and Exxon’s are pretty clear; make oil while the sun shines.
They will likely appeal to more long-term investors thanks to their exposure to multiple geographies and their oil well-to-gas pump integrated model, which includes refineries, chemical plants and trading, not to mention strong balance sheets which offset oil price volatility and fat dividends.
Shell is unlikely to make similar moves with Wael Sarwan saying the company was likely to be “boring” from an M&A perspective next year and BP still lacks a chief executive, though an internal shortlist has been circulated.
Whatever the case, two of the UK’s most globally significant companies are entering the new year deeper in the shadow of their American counterparts.