High oil and gas prices, record-breaking earnings in traditional upstream businesses, and lower returns in many low-carbon businesses may test European oil majors’ commitments to the energy transition, Fitch Ratings says in a new report.

These high hydrocarbon prices may slow European oil majors’ refocusing towards low-carbon business. Even though BP continues to execute regular deals to expand in the energy transition business, the company has recently toned down its decarbonisation pledges, announcing that it will now aim to decrease oil production by 25% by 2030, compared to the 40% target previously. Shell may also revise its target for a gradual hydrocarbon production decline as its CEO has recently identified the longevity of its upstream portfolio as a focus.

We expect investments in low-carbon energy as a percentage of European oil majors’ total capex to continue to increase in the long term, further spurred by climate-neutral targets in the EU and other jurisdictions. In addition, industry cost deflation and improved efficiencies have led to a decrease in upstream investment needs.

Low leverage increases the oil majors’ flexibility to adapt their course while they are re-focusing their business if the transition is not fast enough or is excessively tilted towards green energy, for example through acquisitions.

We believe the oil majors have sufficient flexibility to adapt their business models to evolving low-carbon requirements.
Source: Fitch Ratings