Energy Security, Transition Risks and No Regrets: The Long-Term Strategies of the Oil Majors

Energy Security

By Mathieu Blondeel and Mike Bradshaw

Despite the current high price of oil and gas and concerns about energy security, the long-term future of the oil majors looks uncertain, due to global energy system transformation and the need for increasingly bold action on climate change. So, what strategies are the oil majors undertaking to address these challenges and what is next for them as the world confronts the impending challenges of energy security and climate change?

The End of the Oil Age?

Not too long ago, it seemed as if the “end of the oil age” was near.1 The pandemic and associated economic downturn triggered an unprecedented collapse in global oil demand of around 9 million barrels of oil per day (mb/d), or 9.2 per cent of total daily demand.2 The CEO of Shell, one of the largest oil and gas conglomerates in the world, declared that oil demand might never recover from the pandemic. Fast forward two years later and it is clear the oil industry’s obituary was written too soon. Since Russian President Vladimir Putin ordered a “special military operation” in Ukraine in February 2022, supply interruptions have added to a price rally that was already underpinned by a post-pandemic recovery in demand that outpaced production by 2.1 mb/d.3 Consequently, the oil industry is one of the few (big) winners in this new global energy crisis that we find ourselves in. The so-called “oil majors”, the group of the largest publicly traded oil and gas companies (Shell, BP, TotalEnergies, Chevron, and ExxonMobil) reported combined earnings of some US$48 billion in the first quarter of 2022 alone.4 Yet, although these companies are benefiting from short-term market turmoil, storm clouds continue to gather over the industry. In recent months, they have had to deal with shareholder revolts, boardroom shake-ups, climate lawsuits, windfall taxes, and contradictory pressures from policymakers. On the one hand, they are now being asked to invest in new fossil fuel supplies and infrastructures to address energy security concerns, while, on the other hand, they are being told to increase their commitment to a net-zero future.

Capital investment in oil and gas reserves, pipelines, refineries, etc. could end up failing to be recovered over the operating lifetime of the asset because of reduced demand and reduced prices.

All of this is happening in a context of global energy system transformation and, as recent extreme weather events across the globe from heatwaves to floods have shown, the increasingly urgent need to act on climate change. This will profoundly reshape the nature of the industry. If we are to achieve the Paris Agreement’s target to limit global temperature increase to 1.5°C, oil consumption must drop 34 per cent this decade. This means leaving 58 per cent of proven oil reserves in the ground. In other words, amid the current turmoil, the oil industry is still facing existential threats.

Climate Change and Transition Risks

One way of understanding these threats is by looking at climate action and energy system transformation through the lens of transition risks, which refers to the financial and business risks associated with the shift toward a low-carbon, climate-friendly economy. This will mean that some sectors of the economy, at some point (and the pace of change is uncertain), will face big changes in asset values or higher costs of doing business as energy transformation progresses. Already, in many parts of the world, renewable generation is the cheapest way to produce electricity. This entails risks not only for the oil industry, but also for a wide range of other stakeholders, including the financial sector.

Like it or not, oil companies – majors, state-owned companies, and independents alike – still have a big role to play in a decarbonising economy.

Capital investment in oil and gas reserves, pipelines, refineries, etc. could end up failing to be recovered over the operating lifetime of the asset because of reduced demand and reduced prices. Some have suggested that the world’s financial markets are therefore carrying a “carbon bubble” similar to the housing bubble that sparked the Great Financial Crisis in 2008. The current calls to invest in new fossil fuel supply may exacerbate this risk if parallel actions accelerate the movement away from fossil fuels in the medium term.

According to a financial think tank, Carbon Tracker, up to US$1 trillion in upstream oil (and gas) assets are now at risk of becoming “stranded”.5 Consequently, activists are urging shareholders to divest their investments in fossil fuel companies. In a bid to avoid such stranded assets, in 2021, the total value of oil (and gas) assets up for sale across the industry stood at more than US$140 billion; and that was before Russia’s invasion of Ukraine and the decision of multiple Western companies to abandon their Russian operations.6

But not all oil companies are the same. Oil giants such as BP, Shell, and ExxonMobil, that are privately owned and publicly traded, are far more vulnerable to these transition risks than their state-owned rivals, such as Saudi Arabia’s Saudi Aramco or Russia’s Rosneft. Why? Because these sit on the largest reserves, have kept the “easy-to-access” and “clean” oil to themselves, and are far less susceptible to public scrutiny, given the enormous rents they generate for their governments and citizens.
The majors are factoring in these threats. Already, back in 2018, Shell warned its shareholders that continued pressure from divestment activists “could have a material adverse effect on the price of [our] securities and ability to access equity capital markets”. Similarly, ExxonMobil noted recently that it has started to “[evaluate] climate change risk in the context of overall enterprise risk, including other operational, strategic, and financial risks”.

How the Oil Majors Strategise for Change

The oil industry deals in capital-intensive projects that pay back over decades. Thus, the oil majors have started to treat climate change and energy system transformation as the existential threats that they are, and they now provide critical impetus to their strategic decision-making. Yet many differences remain among these companies, and it appears that they are not preparing for the same future.

We have developed a useful way of determining similarities and differences in oil major strategy: the “transition strategy continuum”.7 It is a framework that helps categorise oil companies’ strategic behaviour in the face of energy system transformation. We identify three such overarching strategies.

First a conservative “core business” strategy that entails a company continuing to focus on oil and gas production as its main activities. We should, however, not conflate this with a “business as usual” approach, as companies pursuing this strategy aim to limit fugitive emissions, and invest in offsetting or carbon capture and storage technology. ExxonMobil and Chevron, the American majors, best exemplify this strategy. ExxonMobil, for example, has shown very little interest in investing in renewable energy. Instead, it has a more persistent focus on emission-reduction technologies, most notably carbon capture and storage and hydrogen.

During the pandemic, ExxonMobil pledged to cut scope one and two emissions – emissions from its operations and the energy it uses to extract oil – by 2025 and to start publishing annual data on its scope three pollution. In 2021, in a surprising turn of events during the annual shareholder meeting, an activist shareholder group succeeded in getting three people elected onto the company’s board. But change remains slow. The company is now expanding investments in fossil fuel production, and recently, CEO Darren Woods declared that soaring global oil prices can be attributed to pressures to accelerate energy system transformation.

The second strategy, that of becoming an “integrated energy company”, has a foot in the camps of both fossil fuels and renewables. Expanding into other domains – electricity, renewables, or low-carbon-technologies – does not come, initially at least, at the expense of the core oil and gas activities of the prospective integrated energy companies. In the long run, it should lead a company to become “net-zero”. This is a strategy that is most clearly followed by the European majors, such as Shell, BP, and TotalEnergies.

Take BP, for example. It first announced its strategy in August 2020. At the time, it aimed to reduce its oil and gas production by 40 per cent compared to 2019 levels. It also aimed to stop exploration in new countries and increase its annual low carbon investment tenfold to around US$5 billion a year by 2030. In its February 2022 strategy update, BP also expects to increase the proportion of its capital expenditure in transition growth businesses to more than 40 per cent by 2025 and is aiming for around 50 per cent by 2030 – quite different from the approach of ExxonMobil.

Third, and finally, there is a strategy of “radical transformation” that entails a complete transition from an oil-centred business into renewables. This, perhaps, is the only strategy that is compatible with the Paris Agreement’s climate objectives. But, so far at least, the only company that has followed this strategy is Ørsted, the Danish majority-state-owned energy company, formerly known as Dong Energy. In just over a decade, it has transformed from a conventional fossil energy company to the world’s largest producer of offshore wind energy, selling off its last oil and gas upstream assets in 2017. But Ørsted was backed by a government and was relatively small compared to the majors.

Oil Majors

What’s Next for Oil Majors?

Today, the oil industry has reaped financial benefit as worries over energy security and fuel prices have come to overshadow environmental concerns. But the threats facing the industry are far from neutralised. If anything, in the longer term, they are more than likely to come back with a vengeance if the industry does not adequately prepare for them. Analysis of the different strategies oil majors have adopted shows that some are clearly more prepared than others.

For now, the pressing question is, what should they do with the impressive cash surpluses they are generating? Should they direct that cash to new upstream investments (oil exploration and production), reward shareholders by increasing share buy-backs and dividend pay-outs, or up their capital expenditure in their emerging renewables and low-carbon business? Now, they could afford to do all three at once but, the moment oil prices start to come down, difficult decisions will need to be made. A no-regrets policy likely means staying the course, seeing the current windfalls as a one-off opportunity, possibly the last if the current crisis accelerates the low carbon transition. It is also the case that governments and public are more likely to accept the oil majors’ profits if they use them to promote and prepare for a low-carbon future.

Like it or not, oil companies – majors, state-owned companies, and independents alike – still have a big role to play in a decarbonising economy. The ongoing global energy crisis shows that a decline in supply without a managed reduction of demand runs contrary to the idea of a “just transition”. The poorest, most vulnerable consumers must bear the highest cost, as this leads to short-term fuel price hikes. If left unmanaged, this also risks provoking populist movements, such as the Gilets Jaunes in France, that actively seek to block green policies. The irony is that those green policies look even more affordable in the face of record high oil and gas prices. Finally, the fact that oil and gas revenues, one way or another, are supporting Russia’s war in Ukraine is adding impetus to the need to reduce our reliance on fossil fuels.

At present, the tension is clear to see between the urgency of the climate crisis and the role of oil as “lifeblood” to the global economy. So, the stakes are high. A crisis is never a good time to make long-term decisions, and the question for the oil majors remains whether they can (or care to) reinvent their business models within planetary boundaries or whether they want to go down a path that may, in the short term, increase earnings but would inevitably contribute to catastrophic climate change.

About the Authors

Mathieu BlondeelMathieu Blondeel is a Research Fellow in the Strategy & International Business Group of the Warwick Business School (UK), where he primarily conducts research on the geopolitics of global energy system transformation.

Michael BradshawMichael Bradshaw is Professor of Global Energy at the Warwick Business School (UK). He currently serves as Co-Director of the UK Energy Research Centre.


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  7. Blondeel, M. & Bradshaw, M. (2022) Managing transition risk: Toward an interdisciplinary understanding of strategies in the oil industry. Energy Research & Social Science, 91, September 2022.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.