European Oil Majors Maintain Lead in Energy Transition Plans

European oil and gas companies are maintaining their lead in the planned emission reduction targets, but US and other peers are catching up, Fitch Ratings says.

Royal Dutch Shell plc, Eni SpA, TotalEnergies SE and Repsol, S.A. are among those that have pledged to reach net-zero emissions on a Scope 3 basis by 2050. Targets announced by other European and US majors vary, but all European companies plan at least a large reduction in emissions, while US peers focus on reducing emissions from upstream operations.

The main pillars of energy transition remain intact for most European companies compared to targets announced in 2020, when the main shift in long-term strategic approach to energy transition took place, but some companies are continually refining their goals. Repsol recently increased investment plans for 2021-2025, allocating an additional EUR1 billion to low-carbon projects and increasing its goal for renewable electricity generation by 60% to reach installed capacity of 20GW by 2030 and 6GW by 2025.

Shell has introduced a target for absolute emissions reductions of 50% by 2030, on a Scope 1 and 2 basis compared to 2016 levels (around 49% compared with 2019 levels). The addition of this target is a positive step, adding to existing net zero targets. We do not expect it to materially affect the company’s capital allocation framework as capex guidance remains unchanged.

We expect that full or partial divestitures of significant assets by the major companies with more ambitious emissions targets may gradually ramp up beyond historical levels as part of their ESG strategies if prices remain supportive, although the use of proceeds is likely to be different company by company. This year Shell has sold upstream shale assets for USD9.5 billion, of which USD7 billion will be paid out in a one-off buyback and the rest will be used to strengthen the balance sheet. Eni is IPO-ing its renewables and retail business, and is conducting a strategic review of its holdings in Var Energi, which may also yield an IPO at some point. Repsol may also decide to reduce ownership in its renewables business.

Roadmaps to achieve carbon neutrality differ. TotalEnergies, Eni, BP and Repsol expect renewable energy generation to be an important part of their energy mix. Shell is moving towards marketing, natural gas and chemicals, with less ambitious growth targets for renewable energy generation. All European companies plan to expand natural gas and LNG production as a “bridge” energy source, transform existing refineries into biofuel sites and boost green hydrogen production.

Outside the European majors, other major companies are mainly focusing on Scope 1 and Scope 2 targets with limited Scope 3 emission targets announced as of yet. This includes the US majors, and other notable entities such as Saudi Aramco, which recently adopted a target to become net zero on a Scope 1 and 2 basis by 2050. We view the increased focus on emissions and other green targets as a positive development supporting long-term sustainability of the companies’ business profiles, although details around these strategies are still in flux and are likely to evolve as the industry progresses through the transition.

We expect changes in most business profiles to be gradual given timing uncertainties for decarbonisation and our expectations that traditional hydrocarbon businesses will still account for most cash flow generation until 2025 at least.
Source: Fitch Ratings