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Oil and gas yield more than “green” ones. But there is pressure for transition

Oil and gas companies are not investing as much in the energy transition as is needed to curb global warming.
The returns from low-emission projects are not yet the most attractive.
The oil and gas industry accounts for just 1% of global clean energy investment. "A broader coalition [in the industry], with much more ambitious targets, is needed,” says the International Energy Agency (IEA). However, the financial returns from fossil fuel projects are still higher than those from low-carbon projects.
"At the moment, traditional oil and gas projects have higher returns than low-carbon investments. However, businesses are keen to diversify to include an increasing proportion of low-carbon projects, as the energy transition is expected to result in increasing regulatory and market pressures on hydrocarbons,” writes Gabor Petroczi, director of natural resources and raw materials at Fitch Ratings. The pressure is also being exerted by the carbon neutrality targets set by governments and other entities.
A report by the International Energy Agency, from November 2023, indicates that oil and gas projects generate "slightly higher” returns on investment than those associated with renewables, although the latter are "less stable”. Between 2010 and 2022, the return on this polluting industry fluctuated, on average, between 6 and 9%, while clean energy projects delivered average returns of 6%, according to the report "The Transition to Carbon Neutrality in the Oil and Gas Industry”. Oil companies such as Shell and BP point to future returns on their investments in renewables of between 6 and 8%. TotalEnergies estimates that it will reach 12% in 2028, according to data from Bloomberg NEF.
Not only should oil companies "do more for the energy transition”, but they "can do so more quickly and effectively, given their financial, technological and operational strength”, considers the Bank Carregosa. However, the bank's chief economist, Paulo Rosa, concedes that oil companies "may be faced with higher costs and lower profit margins".
The context is indeed one of transition. "The momentum in clean energy remains strong enough to lead to a peak in demand for each fossil fuel by 2030," the IEA predicts in an October report, the "World Energy Outlook 2024". At the same time, demand for oil is expected to slow in 2024 and 2025, compared to the post-pandemic years (2022 and 2023), mainly due to the decline seen in China, which is turning to electrification.
Investment still lacking
Although, according to the IEA, investment in the oil and gas sector is still justified, the US$800 billion currently invested each year is double what is required to meet demand in 2030, respecting the Paris Agreement goal of not exceeding 1.5 degrees Celsius compared to the pre-industrial period. Emissions related to oil and gas must be reduced by more than 60% by 2030 in order to keep this objective alive.
In Fitch Ratings' view, Shell, Eni, TotalEnergies and BP have the "most comprehensive" strategies to address the challenges of the energy transition. This is because they have "clearly outlined" short-term goals, accompanied by long-term strategies, in addition to "reasonable" details of how they intend to achieve these objectives. TotalEnergies also stands out, from Bloomberg NEF's point of view, taking into account its plans to expand its renewable portfolio. It aims to achieve carbon neutrality by 2050, with 75% of its energy m/x based on low-carbon energy, combined with carbon capture and emissions offsetting technologies. However, it has already defined objectives for 2025, such as reducing scope 1 and 2 emissions (related to the company's operations and consumption) by 15% compared to 2015, a drop that should be 40% by 2030.
From carbon capture to renewable fuels, the new bets
"It makes sense to invest in a combination of renewable and complementary technologies that align with its existing technical capabilities and infrastructure", considers Paulo Rosa, so the best options depend on each company's business. However, Carregosa’s chief economist points to several possibilities: green hydrogen, solar energy, sustainable aviation fuels (SAF) and wind energy are "opportunities”, while carbon capture "is a strategic investment that can help mitigate the environmental impact of its operations during the energy transition”.
Bloomberg NEF identifies carbon capture, renewable fuels and advanced materials as the "industry darlings” — with properties that give them superior performance compared to conventional materials, since hydrocarbons are also used in the manufacture of plastics. The same source estimates that 53% of low-carbon investment made in 2023 will be in the "clean molecules” segment.
ANA BATALHA OLIVEIRA