The idea that the oil and gas majors will drive the clean energy transition was tested to destruction in 2024. In a difficult year for action on climate change, a number of the world’s largest and best-capitalised companies have torn up ambitious plans to invest in renewables. This raises questions for policymakers and investors about the likely shape of the clean energy transition, and what will be needed to slow and reverse climate change.
Back in June, BP’s new boss put the brakes on new offshore wind projects and placed “a renewed emphasis” on oil and gas, Reuters reported. Within a few months, it had abandoned its target to reduce oil and gas production by 2030.
Shell has confirmed it will no longer lead new offshore wind developments, after abandoning its 2035 net zero target and weakening its 2030 goal. This, its CEO said, was a reflection of plans to invest more in oil and gas production and to downgrade its ambitions to sell electricity.
A focus on shareholder value
Other oil giants have recalibrated their strategies. Norway’s Equinor has cut back the size of its renewables unit, while acquiring a 10% stake in Ørsted, the Danish government-controlled energy firm. Equinor seems to have decided that building a stake in the world’s largest developer of offshore wind farms is a less risky means to increase its exposure to renewables and offers better value to its shareholders than developing its own projects. However, while Equinor can now count its share of Orsted’s 10.4 GW of renewables towards its clean energy goals, it effectively cuts their own development target by this amount, reducing expansion of renewables.
For Shell, BP and Equinor, offshore wind seemed to offer the ideal fulcrum on which to pivot their businesses towards a low-carbon future. It offered the scale these enormous businesses need, and an opportunity to deploy their existing skills in operating in harish maritime environments.
Why the majors have struggled
But they have struggled for a number of reasons. They have often over-bid to win offshore leases and failed to anticipate the risk of supply chain inflation. In common with the rest of the offshore industry, they are facing policy reversals, not least the re-election of Donald Trump, who has a particular antipathy towards offshore wind.
They are also operating in an environment where fossil energy prices have risen since their 2020 nadir, following the end of the Covid pandemic and Russia’s invasion of Ukraine. This has contributed to the key headwind – resistance from their shareholders.
Typically, investors in oil and gas companies are looking for the high (if sometimes volatile) returns that can be made extracting, refining and selling oil and gas. They are less interested in the lower, albeit more predictable, returns that renewable energy projects offer. They have severely punished Total Energies, which allocated 35% of its capex budget to low carbon investments in 2024 versus Exxon Mobil that allocated 8%.
The share price performance of the oil majors that have focused more investment into renewables have seriously lagged the more fossil fuel-focused ExxonMobil, which was up 8.3% in 2024 and 24% in 2023.
Crossing the valley of death
The problem is, many of those institutional investors who are concerned about the long-term risks posed to the energy sector from climate change are reluctant to invest in oil and gas companies until they are significantly more committed to the energy transition. This creates what one energy CEO dubbed “the valley of death” between their traditional shareholders and ESG investors.
Overall, this means less capital is being directed towards the low-carbon transition. Research from RBC Capital Markets reported by the FT found that, across a basket of nine US and European oil companies that it tracks, low-carbon spending fell to 10% of capital expenditure. This is “well below what expectations may have been a few years ago”, RBC says.
The oil majors are not alone. Across the corporate world, companies are watering down targets to reduce emissions, increase renewables and cut plastics use. In a difficult economic and geopolitical environment, executives are taking a hard look at sustainability initiatives and are often wielding the knife.
What does this mean for the energy transition and policymakers keen to address climate change? Most climate scientists and many economists would argue that companies are trading near-term savings for longer-term term costs. Climate change is estimated to have cost $600 billion in insured losses over the last two decades – a figure that is set to rise as the world continues to warm.
Paying up for the energy transition
But it also underscores the fact that the energy transition is going to be costly, and difficult, and that the general trend towards falling clean energy costs does not guarantee that it will take place as rapidly as needed to avert climate change. It is telling that many utilities have shifted their focus towards grid investments to address a key constraint to renewables growth. Policymakers need to act to address bottlenecks created by infrastructure.
They also need to ensure that investors can make competitive returns from investing in renewables. Contracts for difference can socialise risk – often at a low cost to the taxpayer. Market reforms, such as location-based pricing, can help ensure investments in renewables take place where they are most valuable.
But there is also political risk to be addressed. Right-wing populists across mainland Europe and the Anglo-Saxon world have the net-zero transition in their sights. Clean energy advocates need to work harder to sell the advantages of clean energy – in terms of energy security, job creation and health benefits – to often sceptical parts of the electorate. Because what the last year has made clear is that, at present, the economics alone aren’t persuading incumbent energy companies to invest in the transition.