The record profits announced by several oil and gas majors for last year were hardly a surprise given the price impacts of Russia’s war on Ukraine — nor were the renewed calls for windfall taxes heard in some countries — but the quarterly earnings season has also fired up a fresh debate over what, to some, looks like a retreat by European oil majors from aspects of their stated energy transition agendas.

Oil profits were probably more robust because the new cycle of high prices followed a long cycle of rationalisation.

Emerging from two deep price troughs — one attributed to the US shale boom and the other to Covid-19 lockdowns — capital discipline has been a virtual mantra for many companies.

After five or six years of this, companies receiving these mega profits are leaner and meaner than when the price of Brent crude last soared way above the $100 per barrel mark, about a decade ago.

European gas prices also did their bit, hitting record highs last August when it looked like the continent would struggle to replenish its storage facilities.

Predictable though the profits were, their scale has also poured fuel on the debate about the role that big oil can and should play in the energy transition.

This debate is particularly shrill in Western Europe, where oil companies have been promising to redeploy revenue from fossil fuel assets into renewable energies but have so far failed to deliver in terms of energy capacity.

In their pledges at least, the Europeans go further than in the US, where big oil companies tend to focus decarbonisation efforts on mitigating technologies such as carbon capture and storage (CCS), and overall commitments in this category tend to be lower.

But, with Italy’s Eni as the only European major yet to report fourth quarter earnings, the results posted by TotalEnergies, BP, Shell and Equinor were not only notable for the record oil and gas profits, they also showed poor returns on renewables and significantly lower share valuations for European oil companies than their US peers.

Buyback bonanza

Taking stock: Investors have responded positively to BP’s revised energy transition goals given the returns on offer in oil and gas. Photo: REUTERS/SCANPIX

Companies on both sides of the Atlantic have been dishing out cash to shareholders, and clearly intend to carry on doing so.

California-based Chevron, for example, posted a profit of almost $36 billion and announced plans to spend a remarkable $75 billion in share buybacks.

But the pressure on undervalued European giants to do so is arguably greater.

Shell chief executive Wael Sawan admitted as much when he told reporters at an earnings event last week, “I believe that we are undervalued. This is partly why we are continuing with robust buybacks.”

In 2022, Shell distributed $26 billion to shareholders — more than 35% of total cashflow from operations — and a large portion of this came from buybacks.

Highlighting an upstream business that is “performing excellently” and a “world leading integrated gas business”, Sawan said Shell would would continue to build a company he described as “resilient for the future of the energy transition” and said he expected to see valuation improve “as a result of this strong performance”.

Putting on the brakes

Faced by such pressures, it was hardly surprising that there was also the unmistakable sound of brakes being applied on former pledges to redeploy capital toward renewable energies.

The strongest evidence for such a shift was on show at BP. The UK supermajor caused waves with a 2020 strategy relaunch that promised to cut hydrocarbons output by between 35% to 40% by 2030 and reinvest profits from declining oil and gas production in building up a renewables portfolio offering 50 gigawatts of renewable power in the same time frame.

But investors remained unimpressed by renewables projects promising returns in the 6% to 8% range, and even less so during the price rallies seen for oil and gas.

Last week BP finally responded by softening its decline curve for hydrocarbons — there will now be a 25% fall from the 2019 baseline.

Additional investments were announced, and made available in equal $8 billion portions, to the upstream and energy transition businesses but, for the latter, there was also a shifting away from standalone renewables projects, such as wind, and toward bioenergy, services for electric vehicles and integrated green hydrogen projects.

Cheered by a $28 billion annual profit, investors responded by snapping up BP stock in a way not seen for ages, increasing market value by 10% in two days and hitting a high last seen before the Covid-19 pandemic.

New thinking

Ambitions: BP chief executive Bernard Looney speaks during an event in London in February 2020, where he declared the company’s intentions to achieve “net zero” carbon emissions by 2050. Photo: AFP/SCANPIX

Heightened concerns about energy security and energy affordability seem to have made the idea of a “mixed” approach to energy transition more acceptable, among investors at least.

BP chief executive Bernard Looney said: “We are leaning further into our strategy. We are planning to invest more into our transition growth engines and…at the same time, investing more into today's oil and gas system. A plan that we expect will materially increase [earnings before interest, taxes, depreciation, and amortisation].”

Shell posted an even bigger annual profit of nearly $40 billion but kept capital expenditure levels roughly the same as last year, when an allocation of $3.5 billion to its renewables and energy solutions (RES) division was about 14% of total capex.

Shell had not set out its renewables stand as prominently as BP but chief executive Wael Sawan refuted claims that the company is falling short on energy transition spending and “greenwashing” its integrated gas investments.

He argued that Shell’s energy transition activities span more than the RES segment, with biogas and EV charging sitting within its marketing area and carbon capture and storage often straddling the ‘chemicals and products’ and the upstream segments of the company.

Sawan pointed out that the $2 billion that Shell spent on acquiring Nature Energy Biogas in 2022 was accounted to the marketing reporting segment. “We have been very transparent about that,” he said.