Energy majors hold back on renewables, focus more on fossil fuels: research report

ENERGY giants – such as BP, Shell, TotalEnergies and Equinor – are holding back on renewable energy commitments and focusing more on fossil fuels to secure higher short-term returns, said a report by research outfit BMI.

“The primary drivers behind these strategic pivots include rising costs and supply chain disruptions of renewable projects, as well as the need to enhance energy security,” said BMI in the Feb 24 report.

Many energy majors had set ambitious goals to invest in renewable energy and achieve net-zero emissions, but are now weakening or dropping targets, BMI noted.

For instance, BP had aimed to cut oil and gas output by 40 per cent by 2030, but was last year reported to have abandoned the target. Equinor has halved its low-carbon investment from US$10 billion to US$5 billion. Shell has weakened its 2030 carbon-reduction targets and is investing in an oil and gas project in Nigeria.

The shift comes even as profit margins in the oil and gas business are expected to narrow, said BMI, which is bearish on oil and gas prices this year.

Prices may be hit by the anticipated supply increase from producers outside the Opec+ alliance, which comprises the Organization of the Petroleum Exporting Countries and other major producers such as Russia. The unwinding of the Opec+ production cut agreement is another risk factor.

“Despite this outlook, companies are betting on oil and gas investments to yield better returns than renewable projects in the short term,” BMI explained.

Challenges

The pivot towards fossil fuels comes as the wind and hydrogen power segments face challenges, BMI noted.

Wind power projects have been frequently divested over the past year due to higher costs that undermine their competitiveness, the research firm said. The rising costs are driven by supply chain disruptions, higher material costs and logistical issues.

“The offshore wind sector is more affected due to its complex engineering requirements and longer project timelines compared to onshore wind projects,” BMI said.

Many developers also operate under fixed-price contracts, “which fail to adequately hedge against these rising costs, further squeezing the thin profit margins”, it added.

Many governments are slow to adjust tariffs that reflect the higher costs. Some recent European auctions, such as in Sweden, failed to attract any bids due to “unappealing” price caps, BMI pointed out.

Another challenging segment is hydrogen power, which is seeing high costs and a lack of offtakers.

BMI noted that Shell divested from the Aukra Hydrogen Hub in Norway due to insufficient market demand. The oil giant has also paused construction of a biofuel plant in the Netherlands to control costs. “The facility was designed to produce sustainable aviation fuel and renewable diesel, but current market competitiveness challenges, given the cost and delivery issues, prompted a reassessment,” said BMI.

Focus on some segments

That said, the energy majors are still focused on some segments of the renewable market.

BMI said that some players are expanding their European renewable capacity while monetising assets in the US, where market conditions are “unsupportive”.

For instance, TotalEnergies sold a 50 per cent stake in a 2GW US solar and energy storage portfolio and acquired German renewable energy developer VSB Group, while Equinor has acquired a 9.8 per cent stake in Danish offshore wind leader Orsted.

In addition, BP has formed a London-based joint venture with Japan energy player Jera to develop offshore wind with a 13GW potential net generating capacity.

Energy majors are also expected to continue with solar energy and electric vehicle (EV) charging projects, which are “viewed as scalable and more profitable within the renewable sector”.

Profit margins in these two segments “generally exceed those of some traditional oil and gas ventures”, said BMI, noting that BP has acquired Europe’s largest solar developer, Lightsource. “Solar energy projects are commercially attractive due to advancements in photovoltaic technology, reduced costs, and favourable policy incentives, enhancing the return on investment,” it added.

Meanwhile, EV charging infrastructure is gaining traction as EV adoption rises, supported by government subsidies and a growing fleet of vehicles.

Bioenergy is another key segment. BP, Chevron, Shell, TotalEnergies, ExxonMobil and Eni, are increasing investments in bioenergy plants, with 43 biofuel projects to start by 2030 due to the “bullish outlook” for uptake, said BMI.

Companies are also stepping up on distributed renewable energy applications in frontier markets to diversify their portfolios, noted BMI. It added that BP, Equinor, Shell and TotalEnergies have jointly committed US$500 million to improve electricity access in sub-Saharan Africa and South-east Asia. This is by providing solar, mini-grid and energy storage solutions at household scale.

Overall, however, BMI still sees oil and gas remaining “dominant” in energy majors’ capital expenditure allocations. This is due to the fossil fuels’ consistent demand and profitability, as well as companies’ “strategic interest in maintaining energy security and market influence”, said BMI.

The research firm added that in 2022, leading energy firms only allocated US$20 billion to clean energy projects, representing 2.5 per cent of total capital expenditure, according to the International Energy Agency.