Why Oil Companies Support Renewable Energy

In recent years there has been a divergence in the trajectories of the world’s major oil companies. The shift has been most noticeable in the case of the European oil majors, including companies such as BP and Shell, which during the past decade began to emphasize the importance of renewable energy to their futures, and subsequently built major wind and solar power businesses. American oil majors have, by contrast, generally taken a more defensive approach to the energy transition. In public statements, companies such as ExxonMobil and Chevron have emphasized that their competitive advantage lies solidly in oil and gas production.

What comes into focus when considering the directions of these and other oil companies is that their core approach to the energy transition may be influenced by political dynamics in the regions they call home and, ultimately, in their estimates of the staying power of fossil fuels.

Arthur van Benthem, an associate professor at the Wharton School of Business, discusses the relationship between regional energy policy and the clean energy strategies of major independent and state-owned oil companies. His recent research explores the pressure that oil companies face from policymakers and financial markets to reduce their climate impacts.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. In recent years, there has been a divergence in the trajectories of the world’s major oil companies. The shift has been most noticeable in the case of the European oil majors, companies like BP and Shell, which during the past decade began to emphasize the importance of renewable energy to their futures. They subsequently built major wind and solar power businesses.

American oil majors have, by contrast, generally taken a more defensive approach to the energy transition. In public statements, companies like ExxonMobil and Chevron have emphasized that their competitive advantage lies solidly in oil and gas production. Broadly, their efforts have focused on extending the relevance of their fossil fuel businesses, with less emphasis on the expiration of alternatives to them. What comes into focus when considering the directions of these and other oil companies is that their core approach to the energy transition is often influenced by political dynamics in the regions they call home and ultimately in their estimates of the staying power of fossil fuels.

On today’s podcast, we’re going to explore the intersection of oil company clean energy strategies and energy policy with Arthur van Benthem. Arthur is an Associate Professor of Business Economics and Public Policy at the Wharton School of Business. His recent research has explored the pressure that oil companies face from policy-makers and financial markets to reduce their climate impacts. Arthur, welcome back to the podcast.

Arthur van Benthem: Thank you, Andy.

Stone: Over the past few years, we’ve seen a shift in the oil industry, in which some parts of the industry or some companies have diversified into renewable energy and become players in the electricity sector, while others have very pointedly not. When did this diversification begin in earnest, and what pushed some in the industry to shift?

van Benthem: This difference has existed for quite a while, in fact. Already in the early 2000s, BP and Shell, for example, had renewable energy businesses, solar and wind — whereas Chevron and Exxon did not. But it’s fair to say that over the last couple of years that trend has diverged. So we see Shell, for example, investing in electric vehicle companies, whereas the same cannot be said of Exxon. What’s caused this shift is increasing pressure on IOCs from a wide variety of stakeholders. So it’s governments. It is shareholders. But also the company’s own employees matter. They have been requesting the company to prepare for a different type of future energy system. So all those pressures taken together, and the fact that these are typically stronger for Shell and BP than for companies like Chevron and Exxon explains why there has been a divergence in recent years.

Stone: In a recent article, you point to two high-level factors that can influence how a fossil fuel company, an oil and gas company, approaches the energy transition. And one is, I guess, what we call “political geography,” where a company is located — and possibly more important, where it’s headquartered. And the second factor here is the company’s ownership structure. Is it independent, or is it state owned? To what extent do geography and ownership structure influence energy companies’ clean energy strategies or lack thereof?

van Benthem: It does seem that it plays a major factor. If you think about European independent oil companies or IOCs, I think Shell or BP or Total.  They tend to see themselves as potential green super giants in the future, several decades from now. They argue they have the size, the financial strength. They have the experience with very large infrastructure projects, with many contractors, many stakeholders, so they think they can be successful in the long-run, throughout the energy transition. They also emphasize they have a very highly skilled workforce with skills that could be applicable and useful, even in a world where energy would no longer be predominantly coming from fossil fuels.

So in a nutshell, these European IOCs think they can be successful in a totally new energy ecosystem. To prepare for that, you do see that Shell, for example, invested about $3.5 billion in renewables in 2022. That’s about 15% of their total capital expenditures, but they also invested in carbon capture and sequestration, hydrogen and other low-carbon solutions.

Now if you look at American IOCs like Chevron or ExxonMobil, they are quite different in their approach. As you said, they see themselves mostly as experts in the production and distribution of oil and natural gas products. They don’t think they have a clear competitive advantage in the electricity sector, so even though they would agree, I think, that they would be well positioned for things like biofuels and carbon capture and maybe hydrogen, those are pretty small and uncertain markets at this stage.

And then I think another almost philosophical difference is that they argue that if investors want to hold greener portfolios, they can just buy shares in specialized green energy companies. Why is there a need for Exxon to do that? And the home markets of these companies do play a role there. The European space — more regulation from their national governments in the European Union. There has been an increasing risk of litigation in the courts, more pressure from investors, from employees. So one example is that a Dutch court held Shell partially responsible for climate change and actually ordered them to reduce their carbon emissions. That’s the kind of pressure that American IOCs don’t necessarily face.

Stone: What we’re getting at here is that it sounds like there’s sort of a continuum of sorts when it comes to how the oil and gas companies have addressed the energy transition to date. Some, as you’ve just started to talk about, have embraced the transition. Some have been defensive, kind of doubling down on their oil and gas businesses. Could you talk a little bit more about this continuum? What are the companies at either end of it, and what are the companies along that continuum?

van Benthem: Yes, that’s a really good observation. It’s absolutely a big range. I would say that at the very extremes, you might see a company like Orsted, which is now the biggest offshore wind developer, that used to be Danish Oil and Natural Gas. So there you see that that was actually a government-owned company, but the government and the company’s management at the time decided that it was time to embrace that lower carbon world, with more climate risk. Shell and BP might be somewhere more in the middle. And then a company like Exxon will pretty much stick with its view that it’s not right now the right time to embrace that transition.

So ownership structure also matters, right? We see that the state-owned companies can be on either extreme, actually. A lot of state-owned companies are not doing very much in terms of investing in clean tech because their governments don’t see that as a huge priority. But in countries like Norway and Sweden, it’s actually the biggest shareholder to government that pushes these companies to change their strategies.

Stone: It’s interesting because as you just said, you’ve got Orsted at one end of the spectrum. It’s a company that used to be an oil and gas company which is now largely pretty much completely a renewable energy business. And then you have, at the other end of the spectrum, other state-owned companies such as Saudi Aramco, right? And they have very divergent strategies to the energy transition. One’s all in on clean energy. One is all in on oil and gas, with some development of solar, for example. But it sounds like the companies themselves are not making the decisions, but they are actually aligned very much with what the national energy strategy is.

van Benthem: Yes, so if it’s a state-owned company, then of course the national energy strategy, the government is the big shareholder, so that matters. But I would say in general what really matters is who are your shareholders, right? And that is different for different companies based on their ownership structure. It’s also different based on the location of the company’s headquarters.

Stone: So it’s interesting, as well, the European independent oil companies, again the Shells and the BPs, have really focused on reducing what’s called their Scope 1, 2, and 3 carbon emissions. And that aligns with the fact that we’ve got nascent carbon markets in Europe. In the United States, we don’t. So when we hear about the US oil companies working on reducing their emissions, they’re really focusing on Scope 1, which is their own direct emission and some Scope 2 upstream emissions. Is that accurate?

van Benthem: That’s mostly accurate. Some shareholders have also pushed US companies to adopt targets to reduce Scope 3 emissions, so that’s for an oil company by far the biggest source of emissions, right? That’s basically once they sell the gasoline to you and me, and we burn it as we drive, those are Scope 3 emissions for an oil company. So when you hear about most targets from American IOCs, it’s mostly about the energy that’s used when the oil is actually produced. But the targets for Scope 3 — so what the consumers do in the end are typically much more aspirational, but typically not binding. And certainly also, they change all the time.

Stone: I want to know here, as well, there has been some recent backtracking by the European independent oil companies. Shell and BP and Total have recommitted themselves to fossil fuels and to the investment in new production. It’s interesting that that recommitment comes despite the fact that the International Energy Agency within the last year or so basically said that new oil and gas exploration and production really needs to stop if we’re going to meet some of the decarbonization goals set out in the Paris Climate Agreement.

What has driven this recommitment to oil and gas by some of the European majors?

van Benthem: That’s a great question, right? I think maybe about a year or two years ago, some people starting wondering: Could Shell and BP be on a path towards becoming the next Orsted? And then even bigger and become a true green super giant, after they had announced some fairly ambitious carbon reduction targets? But right now, as you say, recent developments suggest that the answer is at least “not quite yet.” The reason, I think, is pretty obvious. The oil majors announced record profits earlier this year. BP, Shell, Exxon — they all reported profits in the tens of billions of dollars, and that sparked this response also by shareholders that may not be as sensitive to climate risks to say, “Well, that’s really where the money is.”

BP responded immediately that, “We need to help provide the world the energy it needs.” They dialed back their targets to reduce internal emissions. There used to be a 35% reduction target by 2030. Now it’s more like 20 to 30. And especially Shell made a big turnaround. Wael Sawan, the CEO, said that Shell is actually abandoning its plans now to cut oil production. He also said that Shell had, in fact, already reached its reduction targets eight years early, so there was no need to further decrease it.

One interesting observation here is that American shareholders are making up a larger and larger fraction of shareholders, as European shareholders tend to maybe diversify or become more sensitive to climate risks. It looks like the statements that Shell makes are really there to please the shareholders that are in there to benefit from the current bonanza in fossil fuel. So Wael even said, “Reducing our oil consumption is dangerous and irresponsible, as the world desperately needs oil and gas.”

What I think is so interesting here is that this really makes clear that investor pressure can go in different directions. Academics are finding mounting evidence that climate risks are in fact priced into financial markets and investment decisions. We do see insurance companies leave markets where climate risks are high. But then again, if the core business is still very lucrative, there is also a lot of shareholder pressure from other kinds of shareholders to just stick with the status quo and maximize value in the very short-run. And I think that’s something that some people tend to overlook.

Stone: That’s interesting because we started this conversation talking about how governments, and where these companies are located and headquartered, can influence their stance on the energy transition. But what you’re saying here is that investors are not equally aligned necessarily — I guess if that’s the correct way to say it — with the energy transition, based upon where they’re from, as well.

So you’re talking about a case here, in the case of Shell, more North American investors are investing in Shell now than proportionally in the past. And that’s giving Shell a little bit more free rein to invest in fossil fuels. Is that reading that right?

van Benthem: Yes, Shell needs to ultimately respond to its shareholders, and its shareholders will need to make their own assessment about what the climate risks are that the company faces. People have diverging views on that. If you believe that it’s very likely that, for example, carbon pricing will expand and get tighter all across the world, it might not be a very good idea to stick with your core business. But if your expectation is that governments will only slowly expand these policies, then perhaps you think it’s the best decision to keep doing what you’re doing for a little bit.

Ultimately, the pressure that investors put on firms is passing on expectations about things like how stringent will future climate policies are? I think ultimately that is still the biggest force of change. How aggressively will governments step in the end?

Stone: There’s an interesting question here. If you’ve got government policy on one side, and you’ve got investor preference on the other, these can be complementary or competing forces, I would imagine, in terms of the impact on the oil companies and how they’re pressured towards the energy transition or not.

I’m curious. If they are antagonistic to each other, which holds more sway?

van Benthem: I don’t think they’re necessarily antagonistic. The question is what does shareholder pressure really mean? While there could be some shareholders that have true green preferences or altruistic motives, I think a lot of literature suggests that shareholders are just optimizing the tradeoff between risk and return when they invest in stocks. And the risk of investing in a fossil fuel company are things like if government sets very strict emissions reduction targets, that’s going to make investing in new fossil fuel projects less profitable. It makes investing in low-carbon more profitable. So in that sense, the pressure from investors is not a personal preference. It’s simply passing on what they expect to happen in a market and what they expect governments to do. Apparently the massive investments in oil and gas today suggest that many investors still don’t think that governments are going to really tighten regulations enough to offset those big profits in the short-run.

Stone: I want to jump back for just a moment here, talking about the backtracking of the European independent oil companies recently, reinvesting in the oil and gas development. You had mentioned several factors that are going into this: High profits, profits driven by energy scarcity, driven by the war in Ukraine. Also the general rebound of global economies from COVID and the increase in energy demand that resulted from that.

But in any event, this shift towards higher profitability could very well be temporary, yet the companies are really changing their direction. What’s your view on that? How temporary is this? Are we going to see the oil and gas companies flip again in two years, when oil profits come down and more emphasis goes maybe to renewables? What do you think about that?

van Benthem: Yes, that’s a great question. I can speculate a bit. It’s notoriously hard to predict oil prices. That said, if you look at the most reputable energy analysis institutions like the International Energy Agency, a lot of their predictions are, in fact, that fossil fuels are going to peak, especially in the US and Europe. Refining capacity may go down. There is absolutely reason to believe, based on historical experiences, that these times of record profits are not going to last.

And then I think the second ingredient is simply how much do you expect governments to do? Will they really step up and meet their announced net-zero targets?

Stone: These are targets under the Paris Agreement?

van Benthem: These are targets under the Paris Agreement and subsequent climate negotiations. The EU has recently increased its ambitions and has set stricter and stricter targets for itself. I think what we’re seeing is that slowly but steadily, even here in the United States, new states are experimenting with carbon trading. Prices in carbon markets have reached record highs, as well. China has started its national emissions trading scheme.

So in the longer-run, in the medium-run perhaps, I also see a lot of action from governments, and my personal expectation is that is only going to ramp up. If I were an investor in these companies, I would definitely pay a lot of attention to potential upcoming regulatory changes that make investments in fossil fuels potentially quite risky 10 to 20 years from now.

Stone: So Arthur, I mentioned at the beginning of this conversation, in my introduction, that the European oil companies have made significant investments in renewable energy. The US oil companies, by contrast, have spent more effort it seems extending the relevance of their existing fossil fuel businesses, while putting less emphasis into exploring alternatives to those businesses. I wonder if you could dive in for just a moment on that fundamental difference?

van Benthem: Yes, I wouldn’t say that US IOCs haven’t explored alternatives. I think the types of alternatives that they have been more interested in are investments that stay closer, so to speak, to their current infrastructure and expertise. So they’re good at dealing with gases. They’re good at dealing with liquid fuels. And that’s why, for example, hydrogen or biofuels or carbon capture and sequestration, which would allow the companies to keep producing fossil fuels but reducing the impact on emissions, sound much more appealing to some of the IOCs, and typically the American ones.

The European IOCs are also interested in those solutions, but they have been a little bit more willing to also experiment with a whole new, different type of energy, basically the electron. So they are willing to invest in electricity in the forms of solar and wind.

Stone: There’s also the issue of perceived strategic advantage. And you mentioned this a few minutes ago, when you mentioned, I believe, BP. BP’s CEO Bernard Looney earlier this year stated that independent oil companies such as his own have the scale, the expertise — and, as you also mentioned — the political influence that are critical to the energy transition. And by participating in the energy transition, making investments in clean energy, et cetera, they can help move the transition along. Exxon and Chevron, though, the American companies, seem to deny the same, and they seem to be saying that their strategic advantage again is very much in their legacy oil and gas businesses. What in your view is the right interpretation?

van Benthem: I think it’s fair to say that it is not a hundred percent clear that an independent oil company would necessarily be the green super giant of the future. I think it’s certainly the case that any IOC has certain capabilities that would also come in handy if they were to become a green superpower. They have skilled employees. They are used to dealing with governments in difficult areas, sometimes where the government cannot be fully relied upon for multiple decades. They are big project management companies almost that are used to dealing with many different contractors and developing these mega-projects. Those are skills that are probably very useful also in a low-carbon energy world.

Then again you might say power companies or renewable energy developers are also players that you might expect to keep growing over time and fill that role. So I think whether Shell or Exxon would be the green company in the energy space in the future might depend on a couple of things. It may depend on how large of a role there will be for energy carriers like green hydrogen and biofuels or carbon capture and sequestration. Those are all technologies that could reduce carbon emissions, depending on how they are implemented. They are very close to the current IOCs’ areas of practical expertise.

So in that situation, I could imagine that these IOCs might remain market leaders. My best guess is that the outcome could actually be somewhere in-between. Some of the expertise, some of the people, some of the divisions of today’s IOCs will certainly remain. The company could still be called Shell, or it could become a merger of some parts of Shell with a big electricity company. So how exactly that takes shape, I don’t know. But I would certainly imagine that parts of the current IOC infrastructure would be relevant and transferred to a greener energy world.

Stone: You have another paper that you co-authored recently, as well. In that paper, you examine the tools that are available to investors to influence companies across ESG lines. And one of those tools or those strategies is very well known on college campuses, and that’s divestment, divestment from fossil fuel companies. There are a couple of other strategies, as well. I wonder if you could walk us through these strategies for investors again to influence the direction of fossil fuel companies — and clean energy companies, as well.

van Benthem: Broadly speaking, investors do three kinds of things, and they’re typically called engagement, divestment or alignment. So engagement could happen through proxy voting, or very directly when investors talk to an energy company’s management team about shifting to a lower-carbon strategy. Or they can request that the company disclose their climate risks better. We’ve seen some of that in the news because in extreme cases, things can happen like board members being voted out, which is what happened at ExxonMobil in May, 2021, when a majority of shareholders elected three new board members that were proposed by an activist hedge fund called Engine No. 1. So that’s engagement. Then divestment, as you said, that’s a common theme on college campuses. That basically means that you’re selling or you deliberately decide that you’re not going to own certain types of stocks. So there could be no coal companies, or even no IOCs.

I will say there’s quite a bit of academic papers and of finance literature trying to look at how that affects companies. And so far I think it’s fair to say there’s very limited evidence that this truly affects share prices. So it’s kind of more a signal perhaps than a huge financial consequence for those firms.

And then finally there’s a large discussion about alignment. The question is, if you have green preferences as an investor, should you own stocks in renewable energy companies that are effectively close to zero carbon already? Or would you like your money to flow to a company that’s currently high in its carbon emissions but has a credible commitment and a plan to reduce their emissions? That’s actually where you can make the change, instead of just sitting on a bunch of wind energy stocks. So that means you kind of align with the carbon strategy of a current high-carbon company.

So those are the three channels that investors can use, among others, to try to influence a company’s climate strategy.

Stone: On that alignment strategy you talked about, if investors put their money into companies that specifically appeared to be making an earnest effort in the transition, that would presumably lower their cost of capital, facilitate that transition for them?

van Benthem: Yes. The idea from finance theory at least is that the more you reduce your emissions, the less exposed you’re going to be to things like stricter climate regulations. Or in the extreme case, you might actually start seeing your profits increase as you develop technology that’s green and you can sell to other firms. So alignment would help high-carbon companies that are currently highly exposed to regulatory climate risks, and turn them into companies that are actually facing less of that risk, and a financial market should therefore request a lower rate of return.

Stone: So from a policy angle, how might actions such as the SEC’s, the Securities and Exchange Commission’s proposed ESG disclosure rules — how might that influence investor perspective?

van Benthem: Yes, that of course remains to be seen to some extent, but it is responding to a big concern, which is that there is a real lack of data, and there’s certainly also a lack of, let’s say, like a unified ESG reporting framework, especially when companies are asked to disclose or scope three emissions — so down a value chain that they don’t directly control. And that right now gives firms a lot of leeway to engage in selective reporting. It’s hard to see for investors what the true climate risk exposure is of these firms, and therefore it’s hard to assess a firm’s climate risk.

So even though there are many metrics and scorecards and dashboards, and you name it, and companies that offer all kinds of ESG reporting surfaces, these proposed SEC rules and the similar set of rules in Europe will help standardize some of those ESG reporting metrics. The hope is that standardized reporting is going to make it easier for investors to compare firms and to truly assess how risky that firm is from a climate perspective.

Stone: Also we’ve recently had the Inflation Reduction Act here. The United States passed it last year. How might the passage of the IRA and the billions of dollars that it provides for clean energy in forms of incentives — how might it influence energy company perceptions of fossil fuel and clean energy risks and rewards?

van Benthem: I wish I could tell you at this moment. I think, in all fairness, it’s a bit too early to tell. There are very generous tax credits for clean energy in manufacturing, and several companies have expressed a lot of enthusiasm about these tax credits. They’ve announced that they are going to make use of them to invest in low-carbon investments. But as of now, the full effect of the IRA on emissions is simply not known yet.

What we have seen is that firms in the European Union have become quite upset because they see this as a massive source of support for their American competitors, which to some extent is suggesting that these subsidies are large enough to make a real difference. Otherwise, you wouldn’t expect too much of those sorts of complaints. I’d personally see the IRA as fitting the general observation that governments are ramping up both the carrots, the subsidies, and also the sticks, the regulations on the carbon pricing which over time is going to make investing in high-carbon industries relatively riskier, and it’s going to make investing in low-carbon industries relatively safer. And that will lead to a reallocation of capital between brown versus green in the next couple of years. That’s my expectation.

Stone: Let me ask you, Arthur, a final question here. Getting back to our initial discussion, do you see the divide in oil company strategies to the energy transition, and in terms of their investments in renewable energies and related new technologies? Do you see that divide continuing for the foreseeable future, or do you see some convergence? Do you see fossil fuel companies at some point all being forced to make clean energy investments or not?

van Benthem: I personally don’t see any indications that that difference in stance is going to change very soon. I think Exxon has been remarkably consistent in its messaging that it’s excellent at producing fossil fuels and distributing them, that there is no need for Exxon to diversify. If the world changes, it’s not the end of the world if the company will sort of slowly return the money to the shareholders and let other green energy companies take over. I haven’t seen a real change in that view, so I expect that difference to continue for the years to come.

Stone: Arthur, thank you very much for talking.

van Benthem: Sure, my pleasure.

Stone: Today’s guest has been Arthur van Benthem, an Associate Professor of Business Economics and Public Policy at the Wharton School.