Returns vs Emissions: The Big Oil Shareholder Fight
- Oil majors are struggling to find a balancing point between the pro-return shareholders and the pro-emissions ones.
- BP has toned down its renewables agenda this year.
- Oil majors are increasingly focusing on profitability when it comes to greenlighting renewable energy projects.
Big Oil is in the middle of a war no one could have seen coming just a few years ago. On one side are investors that like the supermajors’ recent record profits generated thanks to higher oil and gas prices. On the other are climate activist investors focusing on emission reduction as the only priority of significance.
BP emerged from one battle three weeks ago at its annual shareholder meeting. The meeting was disrupted by protests that have become more or less a fixture of any event involving oil companies in Europe. It was also made challenging by investors who demanded an explanation on why they were not allowed to vote for BP’s new emission reduction targets.
These targets, by the way, are in fact oil and gas production cut targets, to go with a boost in low-carbon energy investments. The supermajor had planned to cut oil and gas output by 40% from 2019 by 2030 but earlier this year reduced this target to 25%. It also reduced its Scope 3 emission cut targets to 20-30% from 35-40%.
Naturally, this did not sit well with activist shareholders. When asked by a large investor why there was no vote on this matter, BP chairman Helge Lund said that “extensive engagement” with investors had suggested there was “little appetite” for a vote on emission reduction plans, per the FT.
Indeed, investors in Big Oil seem to be quite happy with the record profits their companies are bringing in and would like to see this state of affairs continue. At the same time, as the WSJ reported earlier this year, BP’s chief executive had suffered disappointment at the lower-than-expected returns of the company’s renewable energy business. This had led to a decision to dial back on BP’s wind, solar, EV, and hydrogen push.
Again, activist investors did not like this. The rest, however, who are the majority, did like it. Because, like the majority of Shell’s shareholders, who are meeting for their annual gathering this week, they want their dividends rising not falling because the company is spending billions on wind and solar. It may be a truth difficult to stomach but this does not change its nature.
Reuters reported last week, in anticipation of Shell’s AGM, that Shell will have quite a plateful this week as it seeks to find a balancing point between the pro-return shareholders and the pro-emissions ones.
In other words, this week’s meeting will likely see a clash between shareholders that want the company to keep doing what it’s doing with oil and gas, and reap the benefits, and those who want Shell to focus on reducing its emissions, with returns a distant second priority.
Per the Reuters report, the emissions-first camp is a small but loud one. It appears to be becoming louder, too, as the majority of investors stray from the righteous transition path.
It would be difficult not to stray when the Big Oil majors collectively ended the first quarter of this year with combined cash of some $160 billion, part of it ready to be distributed to shareholders. Because that’s what Big Oil does: it pays dividends. It buys back shares when the going is good. It rewards its shareholders to keep them on board.
Meanwhile, European Big Oil has one more problem to deal with and this is the problem of stock valuation. The situation is quite ironic but only to be expected. European supermajors are subjected to a lot more shareholder pressure than their peers in the U.S. As a result, their foray into renewables has been massive compared to what Exxon and Chevron are doing. And their stock valuations have reflected this by dropping.
Some have questioned the validity of this causal relationship by noting that stock trade is a lot more active in the U.S. than in Europe but these days nobody really trades physically on the floor of the NYSE or the London Stock Exchange via a broker. Millions, however, trade online, so trade volume shouldn’t really be a factor. Business strategy, on the other hand has always been a factor.
BP’s stock plunged three years ago when CEO Looney announced the company’s new strategy with a lot more investments in low-carbon energy at the expense of oil and gas growth. It recovered relatively quickly but that initial drop spoke volumes about shareholders’ thoughts on the company’s planned transition. And the reason the stock recovered? Oil prices.
It’s the same with all the Big Oil majors. A minority of shareholders with various degrees of financial clout insist that the companies prioritize emission reduction by virtually any means necessary. The majority would like to keep things quiet and chugging along, and the money coming in, not least because all the supermajors have already made commitments in the emission reduction department.
These are quite ambitious and most shareholders appear to be happy with them. The few that aren’t happy will likely continue to pressure the companies into making even more ambitious commitments. The problem they probably did not expect to encounter is the majority that wants its returns.
By Irina Slav for Oilprice.com
(Image: Core Power)
