The route to decarbonisation

During 2019 the 15 O&G majors in our sample invested roughly 3.6% of their total budget in energy transition. That compares with 2.9% in 2018, and represents a striking jump in clean investment in just one year. Much of that increase was driven by two European majors - Eni and Total – who recorded a rise in the percentage of their investments going to renewables to 17% and 10% from 4% and 3%, respectively.

Overall capital investment for the sample was $247.1bn in 2019, up 8.4% on 2018. Of that total, $8.8bn was invested in renewables, compared with the 2019 figure of $6.6bn. The largest single investor in renewables in absolute terms was Royal Dutch Shell with $2bn, followed by Total ($1.7bn) and Eni ($1.6bn).

These leading companies clearly intend to go further. Eni has pledged to raise its renewables investment to 21% of capex between 2021-25, and Royal Dutch Shell is targeting 26% by 2030. In fact, of the 15 majors in the survey, 10 had announced net zero emissions pledges by the end of 2020, compared with just one (Repsol) at the end of 2019.

10 majors in our sample have made net zero pledges as of early 2021, up from one at end-2019

Many of the majors have announced further, and more ambitious, targets for 2021, and this has translated into a steady increase in investment as a proportion of overall capex, despite the data showing that the total level of new investments by oil & gas companies across their entire businesses falling by circa 22% since 2019. In 2020, investment in the energy transition by O&G majors is estimated to have accounted for 4.2% (8.1bn) 1 Based on research carried out by CMS. of their overall capex based on available data, which compares to 3.6% (8.8bn) in 2019 and 2.9% (6.6bn) in 2018. Overall, this shows the resilience of renewables and 23% increase in energy transition investment compared to levels seen in 2018. We anticipate that this trend will continue and, as initial development commitments made in early-stage projects enter construction / development phases, necessarily increase very significantly over the coming years.

M&A can also be a route to transformational change. Some O&G majors have chosen to gradually build up an offshore wind portfolio through auctions, but another solution could be a major acquisition of an established company.

“O&G majors need to get closer to the electricity and clean energy markets,” says CMS’s Kraft. “The challenge is to apply their deep O&G expertise to these new areas. The majors have been experts in energy price risk for decades, and that is very much applicable to contracts for offshore wind although it is a different regulatory framework. This is an opportunity for them to use their knowledge of energy pricing in new spheres.”

Venture capital-type investments and private fund-raising can also allow O&G majors to participate in new start-ups focusing on renewables. For example, in 2020 Petronas made a second venture capital investment in a solar energy company that strengthens its commitment to renewables.

But the potential impact of the O&G majors goes beyond investment and capex commitments. They can also work to create collective momentum and engage with interested stakeholders, as well as governments and consumers, on issues like carbon pricing. Partnerships with universities can support the move towards low-carbon technologies. Exxon Mobil has been spending over $1bn a year on R&D and has agreements with universities in the US, Singapore and India for research in areas including biofuels and low-emissions technology.

Total capital investment in renewables as a share of a sample of 15 oil and gas major’s capital expenditure

The O&G majors are using a variety of structures for their investments. One approach is to invest in SMEs whose business or technology is aligned to a major’s strategy, such as bp’s purchase of Chargemaster (now called bp Pulse). Another is to buy large stakes in particular renewables projects from renewables businesses, such as Total’s acquisition from SSE Renewables of a 51% interest in the Seagreen offshore wind farm project. We are yet to see an O&G major involved in the large-scale acquisition of an entire renewables business.