By Rebecca F. Elliott
When oil and gas enterprises made bold pledges four years ago to reduce emissions and pivot to renewable energy, their operations were experiencing a downturn.
As the pandemic took its toll, the demand for these fuels diminished. Prices fell dramatically. Large Western oil firms faced massive financial losses, exceeding $100 billion, as reported by the energy consulting agency Wood Mackenzie.
For many companies and investors at that time, renewable energy didn’t just appear cleaner — it also seemed a more lucrative venture than oil and gas.
“Investors were captivated by what I would term the prevailing sentiment around the shift to wind and solar,” Darren Woods, CEO of Exxon Mobil, mentioned in an interview with The New York Times during a United Nations climate conference in Baku, Azerbaijan. “I faced considerable pressure to venture into the wind and solar sector,” he continued.
Woods held firm, reasoning that Exxon lacked expertise in those fields. Consequently, the company opted to invest in hydrogen and lithium extraction, areas more aligned with its traditional operations.
Wall Street has rewarded the company for these strategic decisions. Exxon’s stock price has surged over 70% since late 2019, boosting its market valuation to an unprecedented nearly $560 billion in October, although it has since dropped to approximately $524 billion.
In contrast, the U.S. oil giant’s performance diverges from that of BP and Shell, London-based oil and gas firms that embraced wind, solar, and other technologies like electric vehicle charging. BP’s stock decreased around 19% during this period, based on London trading, while Shell’s rose roughly 15%.
The market’s renewed favor for fossil fuels highlights a significant challenge in tackling global emissions: Climate change introduces risks that build up over decades. Scientists assert that even minute increases in warming from fossil fuels heighten the dangers posed by lethal heatwaves, wildfires, droughts, storms, and species extinction. However, investors remain concentrated on generating profits in the short to medium term.
“To effectively combat climate change, we need to align the interests of firms and consumers to produce and purchase low-carbon alternatives,” stated Christopher Knittel, an energy economics professor at the Massachusetts Institute of Technology.
The election of Donald Trump, who has inaccurately labeled global warming as a fabrication, has fostered even greater optimism regarding the oil and gas sector.
The profit disparity between companies extracting oil and gas versus those capitalizing on wind and solar has notably shifted in favor of fossil fuels in recent years.
The median return on capital for some of the largest publicly traded oil companies, a crucial profitability metric, exceeded 11% last year, a rebound from a minus 8% in 2020, according to an analysis by S&P Global Commodity Insights. During the same timeframe, the median return for top renewable energy companies remained around 2%.
“Examining the relative returns for shareholders, the market has sent a clear message that it prefers energy firms to concentrate on their core strengths,” remarked Mark Viviano, a managing partner at Kimmeridge, an energy investment firm located in Denver and New York. “This doesn’t imply a complete abandonment of the energy transition, but rather a more pragmatic approach to it.”
BP committed in 2020 to a 40% reduction in its oil and gas production by the decade’s end. Less than three years later, the company reversed course, announcing an increase in investments in fossil fuels. Last year, it wrote off $1.1 billion in offshore wind investments and recently expressed intentions to divest other wind assets, although it still invests in renewable energy.
“We will maintain a strong focus on returns, ensuring that new ventures compete effectively with traditional businesses for limited capital,” the company’s CEO, Murray Auchincloss, stated during a recent financial analysts’ call.
Shell has eased or abandoned some of its emissions-reduction targets while reducing its growth projections for its renewable power sector.
“We do not perceive ourselves as having an edge in renewable generation to achieve meaningful returns compared to others,” Wael Sawan, Shell’s CEO, recently remarked to analysts. “Thus, you will see us taking a step back.”
In the United States, where environmentally conscious investing has become highly politicized, investors have shifted from regularly pressing oil and gas executives on their energy transition strategies to concentrating on projects more likely to enhance profitability in the near term, according to executives.
“Some entities rushed into paths that ultimately proved detrimental to their financial performance,” Toby Rice, CEO of Pittsburgh natural gas producer EQT, noted in an interview. “They’ve returned to a more balanced approach now.”
That being said, the oil and gas sector is subject to extreme price fluctuations that can swiftly create and destroy fortunes. Prior to the COVID-19 pandemic, investors distanced themselves from domestic producers after suffering significant losses while these companies pursued production growth. Conversely, renewable energy typically offers a more stable business model.
Investors still widely anticipate oil and gas companies to minimize their emissions by, among other strategies, sealing methane leaks, a potent greenhouse gas. Furthermore, globally, nearly double the amount of capital is devoted to clean energy as opposed to fossil fuels, as reported by the International Energy Agency, an organization based in Paris with members that include the United States and other industrialized nations.
“The ultimate objective here seems broadly accepted,” commented Dan Pickering, chief investment officer at Pickering Energy Partners, an investment firm in Houston. “We’re fluctuating around a positive trajectory.”
