Energy Review: Part 1 - Oil and Gas

The energy industry is finding itself in a muddle.

For years, the world has slowly but steadily been undergoing the energy transition, swapping out fossil fuels for innovations in renewable energy. 

However, since the beginning of the Trump presidency, many industry titans appear to have undergone a change of heart, abandoning a slew of climate objectives.

So what’s actually going on? This three-article series on the energy industry will shed light on some of the notable recent developments and how this could shape the transition going forward.

Energy Review: Part 1 - Oil and Gas

One energy goliath finds itself at the centre of these pivots: BP.

Over the past few years, BP attempted to reinvent itself as a renewables company, ditching its roots in oil and gas to join the world in the energy transition. 

However, there has been mounting pressure for them to once again change tac to reallocate operational dominance to fossil fuels. 

This pressure comes following successive periods of falling net income, amongst lower oil and gas prices and difficulties in refining margins. 

It appears to have reached a crescendo with the involvement of activist investor Elliott Management. The New York-based hedge fund has over time acquired a 5% stake in the company. 

Hedge funds such as Elliott Management, activist investors, acquire significant stakes in companies to influence their operations. Unlike passive investors who simply hold the shares, activist investors use the influence of their stake to incite change they believe will increase the company’s value.

In this case, Elliott Management, with their 5% stake have been pushing for Oil and Gas. 

Only weeks after the hedge fund announced its intentions, BP caved and announced a pivot back to oil and gas. The chief executive, Murray Auchincloss, announced “Our optimism for a fast transition was misplaced, and we went too far, too fast,” adding that “Oil and gas will be needed for decades to come.”

This was given substance by a report on Wednesday outlining BP’s plan to increase oil and gas spending by 20% whilst cutting renewables expenditure by 70%.

Although BP’s switch-up is mainly attributed to its recent financial failures and investor pressure, its proximity to Trump’s election is impossible to ignore. 

Trump has put substantial effort into creating a favourable political climate for energy companies to turn their backs on renewables. Notable, he assumed the phrase ‘drill, baby, drill’ throughout his campaign, referring to his plans to increase the issuing of oil drilling licences in the US.

This is evident as the trend seizes the broader oil and gas industry with other giants such as Shell and Equinor also scaling back green investments. 

For example, Shell recently became known for their reliance on the carbon credit market, as they continue to keep oil and gas at the centre of their operations.

Companies can buy carbon credits to offset emissions allowing them to stay within government-imposed emission caps without actually changing their operations. 

This is particularly beneficial to companies where emissions are inherent to operations, such as the steel industry. However, for companies in industries where renewable alternatives are possible, these credits are expected to encourage R&D in those renewable sectors. 

Yet oil and gas companies such as Shell, continue relying on the credits to justify pursuing oil and gas operations while valid renewable alternatives exist. 

Shell alone has used the credits to ‘offset’ nearly 15 million metric tons of CO2.

Other signals of oil and gas revival have emerged from Trump’s recent surprise Russian alignment. 

Following the fallout between Zelenskyy and Trump in the Oval Office, talks have begun over the restart of Russia’s Nord Stream 2 gas pipeline to Europe. 

A close friend of Vladamir Putin has found the backing of US investors in the idea, potentially allowing US involvement in the flow of Russian gas to Europe. Although hurdles such as German approval and European sanctions remain.

Even though it is unlikely that gas will be flowing anytime soon, the fact that the once unthinkable idea is even being floated reflects the US’ stark change in its approach to Russia.

For now, it appears that the taps are turning back on in the oil and gas industry as renewables struggle to find their footing during the second Trump term. 

Although, it might not be completely over for renewables in the US. Find out how nuclear energy continues to prosper in the next article.