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Transition of Big Oil to a greener future could see investors well rewarded

They need to help enable the global economy to successfully transition – sustainably and quickly – towards reduced global emissions targets.

This can be achieved by companies successfully managing a sustained decline in the output of oil and gas, while maximising cashflows for investment in new low-carbon energy businesses.

See also: Could increased recycling be good for oil and gas companies?

Investing in oil companies that set out to achieve these objectives – and holding them accountable – is entirely consistent with true responsible investing.

Oil be damned

‘Big oil’ companies have long been vilified as exploitative businesses that have literally fuelled global warming. A view that has understandably had increasing resonance of late.

Whatever the moral burden that should be borne by UK-listed companies such as BP and Shell for their historical actions, what is important for investors is how oil companies fit into global industry now. What will their impact be on industry and society going forwards, and what role will they play in the future?

For the world to achieve net zero emissions in 2050, it ultimately requires reform of demand and not just supply.

Supply in the industry closely mirrors demand (the easiest place to store oil is still in the ground). It is worth noting that the global publicly quoted US and European oil companies only account for around 12.3 million barrels per day (mb/d) out of total current production of approximately 100 mb/d, with US privately owned production around a further 8 mb/d. Put another way, state-owned oil production (including Saudi Aramco) accounts for almost 80% of global production.

The reality is that any cuts in production by the publicly quoted oil majors does not in itself affect global oil demand. Cuts to supply are supportive of short-term pricing, but demand will simply be met elsewhere.

BP turning the taps off tomorrow would have a negligible effect on global carbon emissions. The same emissions will still be made but fuelled by another supplier who is less accountable to investors.

Low-carbon alternatives

Responsible oil companies do have a significant role to play in accelerating a sustainable transition to low-carbon alternatives that can reduce demand for fossil fuels by providing a viable substitute.

For example, BP and Royal Dutch Shell are both promoting the transition through defined strategies that look to maximise cashflows from existing carbon resources, and then re-allocate to low-carbon alternatives.

Because of the many and varied uses for oil as a fuel, the process of transition is likely to be gradual.

Given the moral and business pressures on the industry not to grow their hydrocarbon businesses, it is likely that normal market mechanisms will be disrupted and high prices will not be sufficient to stimulate supply.

By 2030, BP expects to have reduced its hydrocarbon production by 40% (Company Capital Markets Day, September 2020), at the same time it expects to continue to reduce its cost per barrel, enhancing the profitability and cash generation from this area.

The company generates significant cashflow from downstream activities such as refining and convenience retail. As we move into the next decade we will likely see an upwards inflection in the cashflows from the company’s renewable investments where it plans to invest in 60 gigawatts of generating capacity, while also returning cash to shareholders through dividends and share buybacks.

Responsible shareholders

An investor in BP, Shell, or any other Big Oil company, who is willing to support, encourage and also hold the company to account during its transition period is, we believe, able to be well-rewarded financially through dividends and share buybacks. Also, the prospect of owning a new ‘low carbon’ and retail business whose growth has been fully funded from existing company resources is very attractive.

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