Is the Oil & Gas industry transitioning toward a clean world?

The Oil & Gas industry is facing heightened scrutiny amidst the global energy transition and the imperative to address climate change. Companies, rebounding from COVID-induced revenue declines, find themselves at a pivotal juncture, weighing the decision to prioritize investments in core operations or embark on substantial energy transition initiatives.

Sia Partners delves into the investment strategies of eight prominent players across the global Oil & Gas value chain (BP, Chevron, Equinor, Exxon Mobil, Saudi Aramco, Shell, Suncor and Total Energies) spanning from 2018 to 2022. The aim is to evaluate whether these companies adhere to conventional approaches or transition towards sustainable models, consequently influencing the industry's trajectory to achieve zero emissions.

Following a revenue decline during the COVID-19 years, leading Oil & Gas companies have recovered remarkably, with record profits and positioning themselves for reinvestment. The cumulative investments of these eight companies are on the rise in 2022 and are anticipated to further increase through 2025. But where exactly are these investments being directed?

Our analysis reveals 2 key elements:

With investments on the rise, Oil & Gas companies are strategically directing their focus towards core business operations. In 2022, a substantial $124 billion was allocated to these activities, marking a notable 23% increase from the previous year and constituting a significant 87% of capital expenditures. Concurrently, although currently representing a smaller portion, investments in energy transition activities are experiencing rapid growth. In 2022, they accounted for 13% of total investments, showcasing a robust 42% increase from 2021 figures.

Looking ahead, projections indicate a further 17% uptick in core investments between 2022 and 2025, solidifying their position as a dominant allocation of capital expenditures at 78%.

Meanwhile, energy transition activities are poised for substantial expansion in the upcoming years. Projections suggest they will surge to encompass 26% of total investments by 2025, representing an impressive +108% increase in invested funds compared to 2022. 

Within companies, 2 distinct groups seem to stand out in terms of their strategies:

• One group, particularly European companies, plan to allocate nearly half of its investments in 2025 towards energy transition initiatives: BP, Equinor, Shell and Total Energies.
• The other group plans to heavily invest in the core business, with 90% of their investments targeted towards it by 2025. This group includes Chevron, ExxonMobil, Saudi Aramco, and Suncor.

Following a thorough analysis of global investments in both energy transition and core business, we will explore how companies distribute their investments among various identified subcategories.

Transitioning from our comprehensive examination of global investments in energy transition and core business, the subsequent section illuminates specific focus points. These segments dissect the strategies and investment endeavours pursued by key players in the Oil & Gas sector across several identified subcategories.

Core business activities

Oil & Gas

• Current positioning: key players in the Oil & Gas industry have maintained a relatively stable production capacity between 2018 and 2022. 2023 witnessed significant acquisitions, including ExxonMobil's $59.5 billion purchase of Pioneer Natural Resources and Chevron's $53 billion acquisition of Hess, both companies holding substantial oil and gas assets.
• Future strategy: the primary challenge for these industry leaders in the coming years is to balance increased productivity with a reduction in their carbon footprint. To achieve their objectives, they are aligning around common actions focused on three areas: reducing operating costs, lowering emissions from operations, and enhancing employee safety, mainly through digitalization. The players emphasize the necessity to boost hydrocarbon production to meet global demand while committing to participating in the energy transition. This involves, according to them, investing in decarbonization strategies alongside continued investment in fossil fuels.

Energy transition activities

Renewable energy - Wind & Solar

• Current positioning: a notable shift is observed as 5 out of 8 Oil and Gas companies have strategically ventured into renewable energy, particularly solar and wind, amassing a combined capacity of 26.7 GW in 2022. For comparison, the world's renewable electricity capacity (wind, solar, hydropower) stood at almost 3 372 GW in 2022 (IRENA).
• Future strategy: the transition to renewables is motivated by two objectives: satisfying the growing demand for clean energy and responding to the need for storage solutions due to the intermittent nature of renewables. Companies are not only extending their production capacity but also investing in technologies that enable the efficient management of renewable energy, such as the development of storage solutions and hydroelectricity.

Biofuels

• Current positioning: near to their primary operations, biofuels are also pivotal in the activities of Oil & Gas companies. Although the current capacity remains relatively low, ranging from 5 to163 kb/d for the players analyzed, representing less than 1% of their combined 2022 liquid production capacity.
• Future strategy: companies intend to significantly ramp up production by 2030, viewing this as a major market opportunity, particularly with the development of sustainable aviation fuels (SAF) on a European scale.

Hydrogen

• Current positioning: in 2022, 7 out of 8 players have operational hydrogen projects, with some, like Total Energies, entering the hydrogen market early (since 2018), while others, such as ExxonMobil, are still exploring opportunities.
• Future strategy: companies have outlined ambitious targets for hydrogen production by 2030, with a focus on strategic means like partnerships, acquisitions, or joint ventures. For example, BP aims to be a global leader in the hydrogen market with a 10% share in core markets by 2030.

Carbon capture utilization and storage (CCUS)

• Current positioning: traditionally entrenched in Enhanced Oil Recovery (EOR) and internal operations, CCUS is experiencing a surge in interest due to its decarbonization potential. In 2022, while only a limited number of projects are currently operational, noteworthy players, including Equinor, Chevron, and ExxonMobil, have established themselves as pioneers in the sector, having initiated their first operational projects before the 2000s.
• Future strategy: Oil & Gas companies view CCUS as a pathway to diversification, offering new services to customers. The focus is primarily on transport and storage (CCS), leveraging existing business experience, and expanding into capture through research and development or acquisition of specialized firms. Some companies are also prioritizing carbon utilization (CCU), particularly for e-fuel production, while still emphasizing storage. This holistic approach positions CCUS as a key component of its decarbonization strategy.

Considering the information provided, it's evident that investments in CCUS and H2 enjoy broad consensus among Oil & Gas companies. This stands in contrast to other renewable energy sources like wind and solar, which, while increasingly adopted, face challenges in widespread adaptation. This alignment underscores the industry's commitment to exploring diverse pathways toward sustainable energy solutions.

The detailed analysis of the activities carried out by market players confirms the presence of two groups within the industry: those embracing the energy transition scenario and those focused on decarbonizing traditional activities.

Oil & Gas companies have embraced two main strategies: one group persists with business as usual while intensifying efforts to mitigate emissions, while another is gradually shifting towards more sustainable practices. The distinction is evident in the resources allocated to transition activities and the advancement of these initiatives.

As the 2024 annual reports are unveiled, we anticipate discerning whether these trends endure or if companies are poised to enact significant shifts in their approaches.