Over the past five years, some of Europe’s larger oil and gas companies have twice changed the way they supply energy. Previously, the oil and gas giants aspired to become the renewable energy industry leader. But now, as renewable energy is less profitable than expected, European oil and gas giants also follow the footsteps of the U.S. oil and gas giants. Scaling back new energy investments.
In 2019, European oil and gas companies decided to become major players in the renewable energy sector. with a view to achieving a reduction in oil and gas production by 2030. At that time, many large oil companies competed to announce a major strategy to shift from conventional to green energy. This strategy lasted for about two years until the Russia-Ukraine conflict hit the energy market hard.
The subsequent financial shock of inflation and rising interest rates upended the oil and gas industry. In addition, oil and gas giants saw meager returns in the renewable energy business before the energy and inflationary shocks in 2022. After these shocks, the soaring cost of renewable energy made investments unprofitable. European energy giants Shell, British Petroleum (BP) and Equinor have taken multi-million dollar cuts to projects in Europe and the US in 2023. Meanwhile, the production and trading of oil and natural gas has yielded high returns. Profits at major oil companies soared to record levels.
To shore up their share prices and close the gap with the US energy giants, BP and Shell changed their strategy. They decided to return to the business of extracting and trading traditional energy. They believe that providing energy to consumers is even more critical as the world moves forward with the energy transition.
European oil and gas giants haven’t abandoned all the renewable energy projects they started in 2020 and 2021. But they have started to scale back their investments. Only France’s Total Energy continues to focus on expanding renewable energy capacity through global acquisitions. Shell, BP and Equinor are all reviewing their clean energy businesses.
For example, BP said in June this year that it was scaling back plans to develop new sustainable aviation fuel (SAF) and renewable diesel biofuel projects at existing sites, suspending planning for 2 potential projects. While continuing to assess progress on three projects, BP said, “This is consistent with BP’s efforts to simplify its portfolio, focusing on value and returns.”
A few weeks later, Shell said it would suspend construction work on a biofuels plant in Rotterdam due to market weakness. It also took a $780 million impairment charge in the second quarter. The company said it was suspending construction of the 820,000-tonne-a-year biofuels plant at the Shell Energy and Chemicals Park in Rotterdam, Netherlands, “to address project delivery issues and to ensure future competitiveness in the current market conditions.” Shell also sold its retail home energy businesses in the U.K. and Germany.
In the summer of 2023, Shell unveiled its new strategy: to continue to invest in oil and gas production. and selectively put capital into renewable energy solutions. This angered climate activists and some institutional investors. However, Shell’s chief executive, Wael Sawan, said it would be “dangerous and irresponsible” to reduce global oil and gas production. Because the world still needs them.
Earlier this year, Shell reaffirmed its ambition to become a net-zero energy company by 2050. However, it has relaxed its carbon emissions target for 2030 as it has shifted from clean power sales to retail customers. Commenting on the company’s focus on its core business during a recent earnings call, Shell CEO Sawan said, “Our strategy is to approach the energy transition from the perspective of believing that oil and gas have a key role to play in the future for the energy transition, believing that the energy transition will be a decades-long journey.” According to Sawan, the world needs multiple forms of energy to navigate the energy transition, and contexts such as geopolitical changes and supply and demand cycles must be considered.
BP is also scrapping previously set targets to reduce oil and gas production by 2030. The company is also considering selling a minority stake in its offshore wind business to reduce investment in project development in the sector. In its third-quarter results presentation, BP Chief Executive Murray Auchincloss said, “In oil and gas, we see the potential for growth over the next decade, with a focus on value rather than volume.”
Norway’s Equinor is also reviewing its renewable energy business. Though in the long run it will continue to bet big on offshore wind.Torgrim Reitan, Equinor’s chief financial officer, said on the third-quarter earnings call, “Equinor believes that the time will come when green energy will lead the way, but for the time being, we need to make a number of changes in our business, focus on business development activities, reduce cost levels and prepare for the long term in this endeavor.”