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So far, oil and gas companies have largely sat on the sidelines of the energy transition. Could they take on a bigger role? That, at least, is what the International Energy Agency hopes.
In its latest research, the IEA points out that only 1 per cent of the investments that go into the energy transition come from the oil and gas industry. Clean energy accounted for just 2.5 per cent of their overall investments in 2022. The vast majority still go into oil and gas. And that is a shame, thinks the agency, given that oil and gas production needs to fall sharply to meet net zero scenarios.
In this context, European integrated oil and gas companies are ahead of the pack. They currently put 15 per cent of their capital expenditure into low carbon technologies, up from only 3 per cent in 2019. That should rise to 25 per cent by 2030, according to Bernstein analysis. That leaves US peers and national oil companies far behind.
While renewable energy is not their traditional stamping ground, oil and gas companies do have a few competitive advantages. For one, they tend to run strong balance sheets with little debt. They have not faced the financing cost increase that renewable developers do. Given their scale and skills on large projects, they have the ability to develop carbon capture, hydrogen, offshore wind and biofuel projects.
That helps explain why more oil and gas companies appear in offshore wind projects. TotalEnergies has recently won a provisional offtake agreement from the State of New York. Norway’s Equinor is one of the developers of the UK’s Dogger Bank, the world’s largest offshore wind farm.
Despite some bad headlines, their investments in renewables are starting to yield a reasonable return. Disclosure across the space is still patchy. But TotalEnergies’s integrated power unit has reported return on capital employed of almost 10 per cent in the 12 months to the end of September.
That is about in line with the long-term average return for oil and gas projects — but with a lot less price volatility. Incentives are aligning for energy companies seeking to accelerate their green efforts.
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