Will Oil Company Profits Boost Green Investments?

Governments around the world--including the U.S.--are considering excise taxes for what they consider excessive oil company profits, in light of extremely high commodity prices. A new report by?Deloitte?(London, England), examines ways oil companies could instead invest in green technology--and how they already are moving in a low-carbon direction.

The "Striking the Balance" report states that select oil and gas companies already have reduced Scope 1 direct carbon emissions by 50% over the last three years. Scope 1 emissions are direct emissions from company-owned and controlled resources. In 2021, 75% of worldwide carbon capture, utilization and storage (CCUS) investments came from the oil and gas sector.

Perhaps most telling is that the sector was responsible for adding 105 gigawatts of operating renewable generation capacity in 2021, with a 100% growth rate over the last three years, said John England, sector leader for Deloitte's Global OG&C Practice, in a webinar discussing the report.

From those well-documented profits, Deloitte expects free cash flows to total $3.6 trillion by 2030, with a large part of that (70%) coming by 2024.

Of course, a certain percentage of those dollars will be reinvested in exploration and development of new oil and gas resources, and some will go to stock buybacks and other investor returns. But England said he believes that there still should be a significant amount of money available for companies to expand their green portfolios.

The growth trend began in 2015, when low-carbon investments as a percentage of total investments hovered near 1-2%, growing slowly through 2021, when it neared 3%. This year, Deloitte expects the number to reach 5%. The report quotes figures from the U.S. Energy Information Administration (EIA), which estimates the percentage could reach 15 by 2030.

Oil and gas companies face a trilemma of forces that must be balanced, England explained in the video: assurances of affordability of energy, a secure supply, and movement toward a lower carbon footprint. Companies will have to spend some of that free cash on exploration to ensure a continuous energy supply, he said, until it's certain that renewables can shoulder the load.

Some companies are more focused on carbon neutrality than others. Many of the more serious ones are taking a radical step in that direction, England observed. "We're seeing some companies actually divest their hydrocarbon businesses to put that money into low-carbon businesses. We're even seeing a lot more (movement) by midstream companies in terms of developing infrastructure that perhaps today is used for hydrocarbons, but tomorrow could be used as (CO2) pipelines, as carbon-storage areas, or even for hydrogen."

One question for observers is whether oil companies will be willing to dedicate funds to low-carbon businesses, when those endeavors may offer a lower internal rate of return (IRR) than their hugely profitable petroleum production.

Why, one might ask, would an oil company lose that kind of money on a green investment? England suggests two reasons. "There is a sense that those profits might be more sustainable in the future, depending on what you believe about energy demand, and hydrocarbon demand in particular." In other words, if oil demand is squeezed by increasing green energy capacity, the green investments maintain their value.

The second reason for green spending involves wooing ESG investors. "I think carbon intensity is going to continue to be a more important topic going forward," said England, including the amount of carbon expended in the production of oil and gas.

If the switch to green energy is indeed coming, the decision of how to invest becomes clearer.

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