By Peter De Coensel,


Over 2022, the global oil market rebalanced to demand-supply levels witnessed in pre-COVID 2019 days, with a fragile equilibrium of around 100 million barrels a day. The 30-year average Brent price sits around $75, but over 2022, the average Brent price stood about 30% higher at $98. Geopolitical posturing tries to destabilise oil markets, reflected by an aggressive 1.2mbd OPEC+ production cut announced last week of which Russia represents 500k mbd.

Even so, observers notice higher interconnectedness and substitution flows across friendly nations (on both sides of the divide) to secure energy provisioning and prevent another round of accelerating energy inflation. Yet, short-term actions often fail to integrate the concept of sustainability, the third pillar of the energy trilemma.

Any way you look at the past couple of years, market conditions have resulted in above-average profit windfalls for oil & gas majors. The ground zero sector, when it comes down to solving global, complex decarbonization equations, has seen hesitation in the resolve to combat climate change. Coal production and pricing have witnessed a lift under the premise of energy security at the right price. Some figures are in place.

Integrated sector investments, with companies operating upstream, mid-, and downstream, remain below pre-COVID levels amid record earnings. Combined EBITDA for BP, Chevron, ExxonMobil, Shell, and TotalEnergies has risen from $178bn in 2017 to $332bn in 2022 for a CAGR of about 11%. This in stark contrast to the combined CAPEX that has flatlined around $95bn. The decoupling between operating cashflow and CAPEX is stellar. Indeed, CAPEX as a % of operating cashflow has dropped significantly. Over 2012-2016, cash flows generated by operations dedicated to investments stood at 80% to 100% whereas over 2022, this key metric dropped below 40%.

Over 2018 till 2022, the six European majors (Shell, TotalEnergies, BP, Eni, Repsol, and Equinor) returned about $240bn cash to shareholders in the form of dividends & buybacks ($87bn). Their combined overall CAPEX in absolute terms dropped by nearly 50% from levels in 2012-2013. CAPEX into low-carbon solutions, from bioenergy-biofuels, EV charging, renewables, hydrogen, or carbon capture & storage, has fluctuated between 7.5% and 25% of CAPEX. Target CAPEX into low-carbon alternatives should grow towards a 25% – 45% share over the next 3 to 5 years. Yet, such ambitions still reveal that oil production growth CAPEX is maintained between 30% to 50% of total CAPEX.

The energy trilemma – balancing energy reliability, affordability, and sustainability – is currently not properly reflected in the business strategies of oil & gas majors. Only the former two, energy security & provisioning at the right price, are actively used (pushed) as a blockbuster argument for oil & gas majors to continue to exploit existing reserves and look to add reserves. Effectively, at current production rates, current oil reserves run for about ten years. The latter reality, in combination with the slow ramp-up on investments in low-carbon future businesses (overlooking the third pillar of the energy trilemma), translates into a condition that warrants exploration for new reserves the moment consumers remain hooked on fossil fuels. It is fair to state that in the transition and transformation of the oil & gas sector, consumer behaviour and responsibility are part of the solution. Their willingness to vote in favour of energy sobriety next to substituting towards non-fossil fuel sources of energy is a catalyst for change on the supply side.

But truly solving the energy trilemma, beyond the current two-pronged short-term approach, is also required to safeguard investments beyond the energy supply and demand side. The existing dual, short-term approach ultimately results in higher medium and longer-term (still unpriced) financial risks due to physical climate impact. Climate change impacts across all sectors and society at large. These risks will be much more impactful and difficult to assess and mitigate. Hence, integrating the third pillar, sustainability, allows for a more credible, integrated approach with positive long-term effects.

That brings us to the utility sector. The contrast with the O&G sector is remarkable. CAPEX growth in the utility sector is almost in sync with its EBITDA growth. Most importantly, almost all cash flow generation goes into CAPEX towards renewables and networks. Utilities play at the forefront of the energy transition. The sector has ceased to invest in coal power plants and minimises gas-fired power plant constructions. Effectively, the utility sector has reached high alignment levels with EU taxonomy.

This bypass to the utility sector sends an important message towards the O&G sector. Transition is a strategy. Shareholder activism is a necessary ingredient as the science is clear and unambiguous. GHG emissions, still on a growth path, must reverse short-term. Credible decarbonization strategies, by lifting low-carbon power generation hence a reduction in the use of fossil fuels next to an acceleration in electrification across sectors, has to become dominant. The oil majors’ operations account for about 9% to 10% of all human-made GHG emissions. However, it produces the fuels to create about a third of global emissions (ex-O&G). To be clear, scope 1 accounts for 8%, scope 2 for a mere 1% and scope 3, yes, the 33% mentioned above. Scope 3 is highly material.

That means shareholders should push for meaningful climate policies and emission reduction plans across all oil majors. A level playing field for all can generate impact. Including scope 3 is essential to support the best medium and long-term interests of all our investments. Depending on the source, the current remaining global GHG budget that aligns with global warming of 1.5°C is about 400 to 500 gigatons (GtCO2e). If we emit at about a yearly rate between 40 to 50 gigatons, our budget runs out in 2033. The O&G sector scope 1 & 2 accounts for about 4 gigatons and should reduce emissions by about 90% over a sensible transition timeline, i.e., the next 20 years. From upstream over midstream to downstream, the O&G industry can reduce emissions by reaching for higher efficiency in drilling (electrification), fewer leakages or flaring (less methane), increased carbon capture, use & storage (CCUS), or promoting green hydrogen. The options for the industry are plentiful.

Yet again, demand for fossil fuels needs to curb aggressively. Renewables have seen production costs getting decimated over the past decade and will continue to do so. By 2030, solar energy is bound to become the cheapest source of energy. Building efficient networks and storage capacity are required to respond to a doubling of electricity demand by 2050. The economics of renewables, linked to an evolving policy landscape (e.g., US Inflation Reduction Act or EU Green Deal), shift the return on equity of renewables versus the cost of capital for fossil fuels in favour of the former. This requires companies to revise their traditional strategies.

Through this brief summary, we all sense that the choices we need to make are obvious yet difficult. Lots of conflicting interests are at a crossroads. The asset management industry is a facilitator to guide capital towards its best use. Scientific evidence on human-caused climate change is recognised, and risks are identified and acknowledged by the O&G industry. Then again, short-termism is stubborn. Co-filing and supporting resolutions (next to aligning general voting behaviour with climate ambitions) to push oil & gas majors to fundamentally change their dividend strategies & overall strategic ambitions are in order. Applying genuine climate mitigation enabling strategies has become paramount.

Is the oil & gas industry lost in transition? We believe not. Science has been the main driver of its success. Let science become the engine that, once again, leads to transformation of the O&G sector and innovative portfolio success beyond 2050.


Degroof Petercam Asset Management SA/NV l rue Guimard 18, 1040 Brussels, Belgium l RPM/RPR Brussels l TVA BE 0886 223 276 l

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