European O&G Groups: actively trending towards electric utilities’ business models?

In the field of climate action, the past few months have been marked by major statements by Europe’s largest integrated Oil & Gas groups (BP, Eni, Repsol, Shell and Total). From Repsol last December to Total last month, European majors have unveiled a series of additional actions to substantially reduce their carbon footprint, in particular through accelerated development of renewable energy and other low-carbon assets. What’s more, with the exception of Eni, all these players have announced their ambition to reach a certain form of carbon neutrality by 2050, this with a view to aligning their business with the 2015 Paris agreement on climate change.

Such announcements being made before and after the sanitary crisis broke out is worth highlighting, given the deep impacts the pandemic has had thus far on the oil industry, not only through a slump in Brent prices, but also through an unprecedented lockdown-induced oil demand destruction phenomenon. Such developments had almost immediate impacts on the industry as evidenced by European majors nearly all reporting double-digit contractions on their operating result generation in Q1-20 relative to Q4-19. Against such backdrop, the assets cushioning the unprecedented deterioration of sector fundamentals were those contiguous with Utilities’ traditional or new activities, namely renewable energy production, LNG (liquified natural gas) supply, gas and power sales in the retail market.

As all sectoral players, European majors swiftly responded to the new price and volume environment, with a set of measures mimicking those implemented in 2014-15 during the previous oil price downturn (Opex and Capex cuts, revised shareholders’ remuneration schemes). Interestingly, while slashing overall 2020 capex budgets by ‑25%/-30%, European majors maintained the bulk of their investment effort in the renewable sector, which is consistent with the increased sustainability targets announced before or after the Covid-19 broke out.

European majors preserving their spend in the renewable sector came out alongside European utilities maintaining their capex effort to increase the share of green assets in their generation fleets. Such steady focus amid exceptionally depressed macroeconomic conditions has to be put in the context of electric utilities accelerating their transformation to align their asset base with the demands of the 2015 Paris agreement (general trend of “electrify everything” through expansion of renewable capacities).

European majors lifting their sustainability ambitions comes at a time these players have to cope with an overall environment characterized by mounting political/societal pressure on climate change action but also by mounting uncertainty on the extent of oil demand recovery after the end of the sanitary crisis. We therefore expect their shift towards electric utilities’ business models to continue and even to intensify in the coming months/years. Its magnitude remains nonetheless contingent on a series of mostly exogeneous factors and it is still unclear at this stage whether European majors will undertake such asset base reshuffling organically or through large-scale M&A transactions potentially involving European utilities (Iberdrola? EDP? Orsted?) or independent renewable development specialists (Neon? Voltalia?). 

This article is a summary of the recently published research document on the Oil & Gas sector – find out more by clicking below.


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