The Self-Assurance of Supermajors

With quarantines, business closures and travel bans keeping vehicles off the roads and planes out of the sky, big oil is seeing its sharpest decline in demand in history. The industry was already ailing before the pandemic. Rising concern for climate change and growing willingness on the part of other businesses and consumers to lessen their environmental impact have led some investors to seek their fortunes elsewhere. In four out of the past six years, the energy sector was the weakest performer in America’s S&P 500.

Despite such foreboding indications, the oil and gas supermajors do not see doom and gloom in their future. Many of them came out of the downturn of 2014 stronger. Forced to slash costs and cull all but the most profitable projects, many of the big oil companies found new cost efficiencies which have stuck. Goldman Sachs estimates that the breakeven oil price for the seven biggest firms, including ExxonMobil, Shell, Chevron, Total, BP, Equinor and Eni, is about half what it was in 2013.

Keenly aware of their public image and under pressure from governments, consumers, activists and shareholders, many oil companies are investing in renewable energy and adopting greener business practices. Repsol of Spain has pledged to reach net zero emissions from its operations and product sales by 2050. Similar announcements have come from BP, Shell, Eni and Total.

In April, when Shell was forced to slash its dividend for the first time since World War II, CEO Ben van Beurden acknowledged “an energy transition underway that may even pick up speed in the recovery phase of the crisis”, adding “we want to be well positioned for it.”

Still, the supermajors are a long way from transitioning to a more climate-conscious energy sector. American firms ExxonMobil and Chevron have not set goals for curbing carbon emissions from the sale of their products. A vote against splitting the roles of chairman and chief executive at ExxonMobil’s May 27 shareholder meeting suggests a disinclination to change the status quo. The European supermajors are proving only slightly more willing to commit to sustainability goals.

Ultimately the oil and gas industry could be transformed by competition. There are smaller, less entrenched energy companies, willing to devote more resources to renewable energy. Norway’s Equinor, for example, allocated about 8% of capital spending last year to renewables, versus Shell’s 2%. Renewables themselves could come to pose real competition. As The Economist reports, “At $68bn, the market value of Iberdrola, a Spanish utility that develops solar and wind farms, has overtaken Eni’s and Equinor’s, and is chasing BP’s.”