As the largest international oil companies carve out businesses in renewable energy and make net-zero carbon pledges, a question arises: Does the energy transition mean the end of the oil supermajors as we know them?

As a group, at least, the answer would seem to be yes. While European majors BP, Shell and Total boost spending on renewable energy — and become increasingly benchmarked to the utilities sector — their US counterparts ExxonMobil and Chevron remain committed to their core businesses.

BP chief executive Bernard Looney has pledged to reduce the company’s oil and gas production by 40% within 10 years and to avoid exploration in new countries.

Shell chief executive Ben van Beurden has said his company’s oil production peaked in 2019, although it will grow its natural gas output for the foreseeable future.

And Total chief executive Patrick Pouyanne has said the French giant will maintain its current level of oil production, but like the other so-called "Euro Majors", Total has also signalled a major boost in renewable energy spending as part of its strategic shift to cleaner, lower-carbon fuel.

Fundamental change

Renewables will fundamentally transform the Euro Majors' financial structure.

ExxonMobil and Chevron, meanwhile, will continue striving for low gearing, higher risk and high returns from the businesses they have been mastering since their origins in the 1870s.

The Euro Majors, however, are determined to seize energy transition as a growth opportunity.

This can make them less exposed to the unpredictable price risk of the cyclical oil and gas industry.

However, their gearing will rocket, and they can probably expect no better than single-digit returns on investments from their new ventures.

Vegard Wiik Vollset, vice president for renewables at Norway's Rystad Energy, says Total and BP will spend $5 billion to $6 billion every year on renewable energy investments until 2030.

“This then equates to $35 billion for BP and $42 billion for Total Energies in off-balance debt," he says, using the French company's announced upcoming name change.

This represents a substantial increase in debt compared to their current net debt levels, he says.

Tom Ellacott, senior vice president for corporate analysis at Wood Mackenzie, says the Euro Majors will likely be increasingly benchmarked against utilities as their energy portfolios expand, in contrast to their US peers.

“I believe it is a good thing that the (integrated oil companies) have chosen different strategies in the energy transition. It is healthy that they all are not just following each other,” he says.

Ellacott says it is too early to pick winning strategies but points out: “Equinor has showed it is possible to generate double-digit returns from offshore wind through executing a playbook that includes project financing and partial sell-downs of assets.”

However, one Equinor source tells Upstream there is growing concern in the Norwegian company about low bids in recent offshore wind rounds and the possibility of increased interest rates in coming years, which could impact large offshore wind power projects.

An Equinor spokeswoman says the company has taken measures to reduce the risk of interest rate increases but declines to discuss further details.

If interest rates do go up, projects with returns of 6% to 10% and high gearing might be regarded less attractive to European energy companies.

Last week, Norwegian bank Sparebank 1 Markets told clients, in a note seen by Upstream, that with higher risk-free interest rates, the discount rate for risky cash flows increases.

“Our base case weighted average cost of capital for Equinor’s offshore wind business is 5%. If we increase that by 1 percentage point, the fair value of the portfolio declines more than 40%. That highlights the interest rate sensitivity of long life and low risk assets in general and offshore wind assets in particular,” the note said.

Ellacott points out that all the supermajors' strategies carry a degree of associated risk.

“All of these companies must have flexibility in their strategies. Strategies will have to adapt in response to future developments,” he says.

However, he does not believe the Euro Majors will step back from their green ambitions as Shell and BP did early in the 2000s.

“This time it’s different," he says. "Diversification into low-carbon growth streams is only heading in one direction. They are committed.”

Vollset says that ExxonMobil’s and Chevron’s heavy exposure in the US shale complicates comparisons with their European peers, with the challenge of comparisons likely to grow given the fundamental differences of renewables and oil and gas in terms of risk and return.

New growth areas

Virendra Chauhan, oil analyst at Energy Aspects, suggests another reason why the Euro Majors are broadening their energy portfolios.

Over the past 10 years, he says, “these companies have not been very successful in exploration, and they need to find new growth areas”.

The scale of the energy transition and the time required to get there likely mean some good years yet for oil and gas, Chauhan says.

“Put simply, oil is not being displaced anytime soon," he says.

"The market can philosophise about net zero and what happens over the next 20 years, but risks missing out on what is coming down the road in the next 20 months.”

Chauhan believes the case for a supply crunch is building and estimates spending among the supermajors “will be flat year-on-year in 2021, 30% below 2019 levels".

However, he adds: "Industries as large as the energy industry rise and fall over time. Seldom do they disappear.”

That is something worth keeping in mind as talk of transition amps up, Chauhan says.

“The new thinking in the energy world assumes the clearing mechanism of oil is $20 and the 2030 value of oil is zero because renewable energy companies are seeing rapidly falling costs, which will quickly replace oil demand.

"Such polarised views are creating a stark imbalance in future supply and demand, and we think this could play out in higher oil prices over the coming years,” he says.

Energy Transition

What is the future for supermajors? Big Oil bloc disperses as growth strategies diverge