Capital allocation for the transition

While it is one thing to corporately embrace the drive to energy transition, a significant focus of investors and the population as a whole will be on whether the companies are themselves diverting capital from fossil fuel activities to energy transition, to meet those aims.

Despite strong profits in 2022, the combined total capital expenditures (CAPEX) reported by the companies in our analysis was US$223.6 billion, about 5.5% lower than total CAPEX in 2019 but only 0.7% lower than in 2018.

Among the publicly traded companies, CAPEX in 2022 was largely within or slightly better than the guidance they presented early in the year. This is in strong contrast to 2020 when companies did not meet their CAPEX targets as a result of the pandemic and associated slowdown in global economic activity.

Given the increased focus on energy security and affordability which has been highlighted by the invasion of Ukraine, company CAPEX for maintaining and even increasing their oil and gas production has taken on a greater importance. Thus, in the absence of another significant global slowdown, CAPEX for their own operations, as well as that for their climate goals, is likely to remain on track.

Across the companies in our sample, there is not a uniform way of how capital is being allocated to their various activities towards the energy transition. Some companies provide very clear breakdowns between these and their other activities but some do not. Furthermore, definitions of what goes into the energy transition category varies widely across companies as well.

Our previous analysis reported on CAPEX for renewables. However, it is not possible to focus only on renewables spending because of the way that companies are now reporting their investments relative to their energy transition. In addition, several companies do not provide include enough detail for us to extract their spending on the transition that does not include other core activities, so we have not included them in this list.

For 2022, CAPEX allocated to the energy transition, as reported by the companies, totalled USD16.5 billion, representing an average 7.4% of total CAPEX for these companies.

While the chart above provides information on the overall outlays on the transition, the companies do vary in size and total capital budgets so a total value figure can be misleading as to their focus on their energy transition. The chart below shows the share of each company’s CAPEX for the transition relative to its total CAPEX.

Although the average expenditure among these companies is 7.4% of total CAPEX, there are large variations in the share each company devotes to its energy transition. To some extent, the variation is explained by each company’s trajectory for the energy transition.

Companies in the “diverse portfolio” trajectory (dark blue fill) are clearly spending a higher proportion of their capital on their transition activities, averaging 22% in 2022. The companies are also more likely to be committing to future targets for this CAPEX allocation.

In this section we set out investment information derived from company reports (annual reports, sustainability reports and similar) originated from the companies themselves.

TotalEnergies had previously stated targets for CAPEX on renewables at 11% during 2021-2025.  It now reports its CAPEX to “low carbon energies”, which includes renewable power generation, EV charging, biofuels, and polymers recycling in this CAPEX spending. In its most recent climate and sustainability presentation, it has set a target of allocating around one-third of its CAPEX to these low carbon activities.

Repsol is one of the companies which is very specific about reporting its spending on renewable power separately from the rest of its CAPEX. In 2022 that spending accounted for roughly 24% on a US dollar basis. Its most recent investor outlook for 2023 indicates it plans to devote 24% of CAPEX to renewables in the coming year.

Eni had previously stated a target for their spending on renewables at an average of 21% for the 2021-2025 timeframe. In its 2023 Capital Markets Update, however, the company has stated a target for CAPEX on its Plenitude renewable power division along with its “sustainable mobility” activities – which include bioenergy, fuels and convenience – of about 20% of total CAPEX through to 2026. So, the company appears to be relatively close to achieving that aim already.

We note that Equinor reports its capital expenditures as renewables and low carbon solutions at 14% of its gross CAPEX in 2022. It defines low carbon solutions as hydrogen and CCS. In its most recent sustainability report, it plans to spend over 50% of total gross CAPEX on these activities.

Shell previously had a target of investing 26% of its CAPEX in renewables by 2030. Shell’s Renewables and Energy Solutions business includes renewable power generation, investments in CCS, hydrogen and its carbon removal activities, as well as trading natural gas and power. In 2022, excluding the trading activities, CAPEX on renewables and energy solutions, excluding trading activities, accounted for 11.7% of the company’s total cash CAPEX.

Spending by bp on its “low carbon fuels” – renewables plus hydrogen –amounted to 6.1% of its total CAPEX in 2022. The company plans to devote a range of 21% to 28% of CAPEX to this activity by 2030. 

Petronas is a “national champion” but has a high expenditure on renewables due to its national mandate for net zero by 2050. Its Gentari division is dedicated to investing in both decarbonisation and clean energy and it focusses on three solutions – energy, hydrogen and green mobility. Its main expenditures in 2022 were on electric vehicle charging and renewable power. As it expands its plans for generating electricity from renewable power, its CAPEX share to renewables is likely to remain above the average for this peer group.

PetroChina noted in its most recent annual report that it would be growing its capabilities in renewable generation as well as other low carbon activities.

Pemex has completed a redrawing of its corporate strategy through 2023-2027 so formulation of its future expenditures is still in progress.

Chevron is the only “core focus” company that provided detail on its “lower carbon” CAPEX. Their investments include those which are focussed on increasing renewable fuels production capacity.