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Global oil majors reach ‘inflection point’ on cleantech spending: IHS Markit

02 June 2021 Kevin Adler

Organic investments by the world's global integrated oil companies (GIOCs) on low-carbon projects held stable in 2020 at $6 billion, despite a 30% year-on-year downturn in total capital spending due to COVID-19 cost-cutting. Low-carbon spending from this peer group is expected to accelerate to $15 billion/year by 2025, according to IHS Markit.

"Organic spending" is expenditure on existing operations and company-developed new projects, in contrast to merger-and-acquisition (M&A) activity. IHS Markit noted that some of the GIOCs, particularly TotalEnergies, have been aggressive in low-carbon M&A as well.

"Furthermore, given rapidly changing developments within this area, the balance of risks is skewed toward higher organic spending," said Chris DeLucia, director; Franca Davila, associate director; and senior analysts Claudia Belahmidi and Alyssa Coelho in a presentation on 19 May.

Identifying BP, Chevron, Eni, Equinor, ExxonMobil, Shell, and TotalEnergies as GIOCs, IHS Markit said these companies continued to maintain their low-carbon investments last year despite sharp overall capex reductions. These decisions mark "an inflection point" that shows "the rising prominence of low-carbon portfolios" in their strategies, IHS Markit added.

However, the companies in the peer group are taking different spending approaches in their low-carbon investments:

  • BP and Eni have been reallocating capital most heavily to the low-carbon space, with IHS Markit forecasting it will represent 20-30% of their total organic spending by 2025.
  • Equinor, Shell, and TotalEnergies are expected to direct 10-20% of their annual capital to this segment by 2025.
  • Chevron and ExxonMobil will spend about 3% of capex on low-carbon activity through the medium term, and IHS Markit said those investments will "align with or are complementary to the core oil and gas business."

TotalEnergies' commitment to the energy transition has continued strongly this year, and it's reflected in an announcement at its 28 May shareholders' meeting that it is rebranding from Total to TotalEnergies. "Energy is reinventing itself, and this energy journey is ours," Chairman and CEO Patrick Pouyanne said in a prepared statement. "Our ambition is to be a world-class player in the energy transition."

Currently, oil products represent about 55% of TotalEnergies' revenue, but its goal is to reduce that to 30% by 2030, Pouyanne said, on the road to a net-zero carbon status for its own operations by 2050.

On the M&A side, IHS Markit observed that some companies are building broad-based portfolios with investments in several types of renewable technology, while others have pursued more targeted strategies in one or two technologies. "Meanwhile, some of these companies have engaged in only limited M&A activity, opting instead to pursue development and new clean energy technologies organically, via partnerships and venture capital, or through research and development."

Europe has accounted for about 60% of low-carbon M&A investment from the seven GIOCs in the last five years, followed by the US at 23%. TotalEnergies' acquisitions in solar generation and in power distribution have been the largest acquisitions to date among the GIOCs. Its most recent acquisition was in offshore wind, with the April purchase of a 23% share in Yunlin Holding, a 640-MW wind farm being developed off the coast of Taiwan.

BP also has a 2050 net-zero pledge, and its latest renewables investment is the acquisition, announced 1 June, of US solar developer 7X Energy. "The acquisition represents a significant step towards BP's target of growing its net developed renewable generating capacity to 20 GW by 2025 and aim to increase this to 50 GW by 2030," BP said of the $220-million deal.

Low-carbon M&A activity by the GIOCs "is expected to remain robust, particularly in the renewable generation segment, with M&A likely required to achieve aggressive renewable generation targets announced by several of these companies," IHS Markit said. "Such a trend could have implications for the returns potential of these portfolios, with growing competition, new entrants, and surging capital flows already causing rising valuations in the renewables segment."

Of the seven GIOCs, all but Chevron and ExxonMobil have made net-zero commitments for their emissions profiles. "IHS Markit expects that investors will be looking for greater clarity on the low-carbon strategies of these companies, a demonstrated ability to execute and compete within new business lines, and sufficient materiality within the low-carbon portfolio, before attributing credit to these segments of the portfolio," it said.

Indeed, investors in both Chevron and ExxonMobil did signal their expectations recently.

At ExxonMobil's shareholder meeting on 26 May, two nominees with strong backgrounds in renewables were elected to the board of directors, with the backing of activist investor Engine No. 1. Shareholders also passed two climate-related proposals on the proxy, one asking ExxonMobil to report on how its climate lobbying aligns with the goals of the Paris Agreement and the other seeking disclosure of the climate change risks the oil major faces.

Also on 26 May, Chevron's shareholders voted at their annual meeting to force the company to reduce its Scope 3 GHG emissions, which are emissions generated by end-use of fossil fuels.

Posted 02 June 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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