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Renewables: Big Oil is missing the opportunity high profits create

High oil and gas prices mean big producers gush with cash. But companies are not investing much of it back into their business, traditional or renewable. That speaks to the tight spot they find themselves in — and does not bode well for the energy transition.

The story is the same across the board. Shell’s third-quarter adjusted net income was $9.4bn. That’s off the boil compared with the second quarter, when oil prices averaged $114 per barrel but still more than twice as high as last year. Adjusted net income at TotalEnergies was just shy of $10bn — up from less than $5bn the previous year.

This year’s profits translate into bumper cash flows — which so far mostly reduce debt or go back to shareholders. Nine month capital spending at Shell was some 35 per cent of cash flow. At Total it made up about a quarter.

Making hay while the sun shines is normal in cyclical industries. But this much hay suggests producers are in a strategic bind. On the fossil fuel side, that is to be expected. With the International Energy Agency warning on peaking or plateauing oil and gas demand, why would oil and gas companies invest in anything except for high-return, quick payback stuff?

But businesses are also underspending on renewables, which the IEA reckons need to receive double their current annual investment by 2030. At Shell, investments in wind and solar will come in at $4bn this year — a sixth of its capex programme and 5.5 per cent of operating cash flow, which Goldman Sachs estimates at $71bn this year.

The whole of the “growth” portfolio will account for about a third of capital and operating expenditures. This includes other low-carbon businesses such as biofuels, carbon capture and electric vehicles. In pure renewables investment, we are still talking small beer.

Building scale in new energies takes time — or requires a penchant for mergers and acquisitions. Given the financial firepower available to them, expect oil majors to hoover up much bigger green energy companies instead.

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