Shareholder transition: the path to decarbonising oil and gas

https://www.accelaresearch.com...We usually have our evening chats from opposite sides of the world, but today, amidst the bustle of morning workers in London, we were able to meet in person and reflect on the progress on oil and gas decarbonisation without screens. Kevin's opening line was, “People are talking a lot about barriers to transition for the oil and gas sector, but one barrier we are not talking about are the owners.”

In 2020, when oil prices plummeted by over 80% amid collapsing demand, oil and gas companies responded by searching frantically for value for their shareholders, and low-carbon options became à la mode. By 2021, as the world grappled with the COVID-19 pandemic, companies like BP and Shell pledged net-zero targets by mid-century, raising hopes of a shift from fossil fuels.

Fast-forward to 2024, and the cautious optimism over the oil and gas sectors' shift to cleaner energy has faded despite the worsening climate impacts. The war in Ukraine drove oil prices to $130 per barrel in 2022, and with profits once again strong, the urgency for change diminished. There have been pockets of hope in this turmoil. Today, annual clean energy investments have climbed to $2bn, surpassing fossil fuel investments of $1.1bn, and in 2023 the EU’s gas demand has dropped 20% since 2021, much of it offset by renewables. Yet European oil majors' emission intensity has barely budged, down just 2%, while they would need a [three-fold] increase in low-carbon investments and major reductions in oil and gas output to achieve their targets.

With decarbonisation strategies stalled, we’re left wondering: Can oil and gas companies truly make the transition, and if they can, will they?

Barriers to transition

Achieving the Paris goals hinges on whether clean energy projects can be profitable and whether oil and gas companies are willing and able to seize these opportunities. We need to work on the right problem. If it's the attractiveness of clean energy returns, then we need R&D and governments to step up, but if returns are available and companies have the capabilities to execute projects, but projects are not getting capital, something else closer to companies might be the problem.

Distributions over investment

European oil majors have ramped up shareholder payouts ($73bn for European majors in the last four quarters), reaching record highs to entice investors despite underperforming US peers. Amid declining oil prices, the question remains: are these cash distributions a sustainable strategy, or will they come at the cost of future investments and growth?

Low-carbon profitability

The past three years have seen numerous write-downs on low-carbon projects, with some companies citing poor returns as a reason to pull back. Yet these losses reflect early-stage growing pains rather than a verdict on profitability. Our research at Accela suggests that targeted low-carbon investments can be profitable, particularly with policy support and cost reductions. If there are viable projects, what’s holding companies back from pursuing them?

Management myopia

A major obstacle in the energy transition lies at the top. CEOs, often lacking mandates to prioritise low-carbon investments, find themselves incentivised to stick with traditional operations. Investments in low-carbon are, in part, being deprived of oxygen by management myopia and the competing interests of investors. The result? Low-carbon projects can languish in organisations that aren’t fully committed to maximising their potential. A shift in the shareholder base could be the catalyst needed to align executive focus with long-term, sustainable growth.

A solution: shareholder transition

The broad church of asset holders creates tension when companies try to plan for decarbonisation, particularly in the oil and gas sphere. The disconnect can be corrosive. Some investors urge CEOs to push forward with aggressive climate initiatives, while others favour short-term gains and may even advocate for scaling back environmental targets. This isn’t about heroes or villains but rooted in ironclad strategic planning.

Some companies, like Eni, have begun addressing this tension by separating low-carbon divisions and seeking external capital. Activist shareholders have pushed for similar actions at Shell. These cases raise a key question: Can splitting operations unlock capital and create alignment for transition? The challenge with low-carbon investments isn’t just achieving returns but adjusting to a new kind of return—one centred on long-term growth and innovation.

Realignment of the shareholder base

The energy transition requires a rethinking of the shareholder structure. Renewables and low-carbon fuels represent a fundamentally different proposition from fossil fuels, emphasising long-term growth over immediate dividends. Executives must communicate their long-term vision, allowing investors to align with sustainable growth or traditional returns. Transparent “corporate manuals” like those touted by Jeff Bezos (1997) and Warren Buffet (1999) could help investors navigate decision-making and determine if they have the patience for longer payback periods or should seek rewards elsewhere.

What’s next

Balancing ambitious climate targets with profit goals was always going to be a tough sell in boardrooms. Some organisations may lack the expertise to shift away from fossil fuels, while others might be hesitant to become green energy providers. Adaptation policies are increasingly nominal, with some companies focused on appearances rather than meaningful action. The energy transition is inevitable, and executive teams must prepare, or they risk falling behind as the future becomes the present.

The corporate union of the oil and gas industry and investors must be recalibrated. A revolution in thinking is necessary to align shareholders and companies toward sustainable growth. With clear executive incentives and a realigned shareholder base, companies can create lasting value while avoiding the environmental and financial risks of clinging to outdated models. The net-zero honeymoon of 2021 may be over, but the need for reform must be rekindled. We’re all depending on it.

More details on Acela's research can be found here.

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