French oil and gas giant Total SE announced it would invest $2.5 billion to buy 20% of the world’s largest renewable energy developer, the “Adani Green Energy” group. The money from this investment will expand the Adani group’s operation throughout India.
Total SE joins oil giants like Shell, BP, and Chevron that have begun to diversify their investment portfolio into renewable energy, partly under pressure from increasingly stringent regulations on fossil fuels and partly from new market conditions imposed by the pandemic.
According to several analysts, the pandemic has helped accelerate the transition from fossil fuels to cleaner energies such as solar and wind. In its latest report, the International Energy Agency (IEA) shows that investment in oil and gas fell to record figures, decreasing by 35% in 2020. The companies of extraction of shale gas in the United States were the hardest hit with a decrease in investment of 45%; several had to declare bankruptcy.
With air traffic down by as much as 93% during the first months of the pandemic, and with the imposition of severe restrictions on local mobility, the price of oil even reached negative values, strongly affecting oil companies’ profitability. Analysts say that business travel will take years to recover, affecting the income of oil companies.
The need to diversify
Some oil and gas companies respond to the situation by intensifying diversification efforts, guided by new long-term emissions targets. While these vary in scope and ambition, several European companies have increased capital guidance for low-carbon projects. Investment commitments are most visible in renewable energy, where oil and gas companies invested $3.5 billion in 2020, two-thirds more than their non-core capital spending in 2019.
In September 2020, British oil giant BP announced an aggressive transformation plan, where it will reduce 40% of its oil and gas-based revenues to be replaced by renewable energy sources.
Another company that has joined the conversion effort is Shell, which has proposed a $4 billion cost-saving plan that will be reused to transition the company to renewable energy development. The company will focus on oil and gas development in just a few key areas.
The power of market forces
One company that has been particularly penalized, even by investors, for its refusal to diversify into renewable sectors was Exxon Mobile, the largest oil company in the United States.
During 2020, Exxon lost more than $2.4 billion, adjusting – for the first time in 138 years of history – three consecutive quarters of losses. In August, the company was booted out of the Dow Jones Industrial Index after more than a century. The main reason Exxon’s stock was expelled from the Dow Jones is that the index’s weightings would be skewed by the oil company’s “poor performance” when Apple’s shares were split “four to one” at the end of August.
Since 2018 Exxon’s market capitalization has fallen by 60%, showing one of the most dramatic declines in the industry. Exxon has had to cut more than 30% of its capital investments and has laid off some of its staff to stay afloat.
Exxon executives have been slower than many of their industry peers to recognize concerns over climate change, and the company’s annual outlook for oil consumption is generally more optimistic than that of its rivals. Exxon has become an “outsider” among oil companies, many of which have announced large investments in renewable energy projects this year. An attitude that has cost the former US oil giant credibility in the market.