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* Bank sees 4% growth in oil demand by 2040
* Forecasts sharp rise in sector returns
By Ron Bousso
LONDON, Sept 17 (Reuters) - JPMorgan has upgraded itsoutlook for Europe's top oil and gas companies, forecastingsharp growth in shareholder returns while striking a downbeatnote on the pace of a transition to low-carbon energy.
The note, titled "Reality check needed on 'Black Gold'", waspublished on Monday, when crude prices surged nearly 20%following weekend attacks on Saudi Arabian oil facilities.Crude's gains pulled up the share prices of oil firms.
JPMorgan's bullish tone comes amid calls from some investorsand activists for reduced investment in oil and gas companiesdue to a gradual shift towards cleaner, renewable energy.
The brokerage Redburn downgraded the sector earlier thismonth, citing increased risks from a global transition torenewables.
JPMorgan said firms including Royal Dutch Shell, BPand Total had in recent years started adaptingto lower oil demand by cutting costs and reducing greenhouse gasemissions from their operations.
"While some progress is being made on (European majors')carbon intensity ... there is further work to do," ChristyanMalek, JPMorgan's top European oil and gas analyst, said in thenote.
"We believe decarbonizing will be far harder than currentconsensus assumes, especially in the industrial and transportsectors."
The European oil majors have lagged major stock indicesincluding London's FTSE so far this year andunderperformed relative to Brent crude futures.
JP Morgan, in upgrading Europe's top energy companies, citeda stronger oil price outlook, a relatively weak shareperformance and a lower carbon intensity from the firms'operations.
It also pointed to forecasts that shareholder returns wouldrise to 28% of the companies' market capitalisation by 2022.
The top U.S. investment bank forecast oil demand by 2040would grow by 4% from current levels, peaking between 2035 and2040, similar to projections by a number of oil companies.
The projection nevertheless falls short of targets set outin the 2015 U.N.-backed Paris Climate Agreement to lower carbonemissions to "net zero" by the end of the century, a move aimedat limiting global warming to "well below" 2 degrees Celsius.
European oil producers have faced investor pressure inrecent years to hit the Paris goals, setting targets to cutemissions and increasing spending on renewable energy.
The bank maintained its "overweight" recommendation on Shelland BP while upgrading Total from "neutral" to "overweight".
The three firms, it said, were best positioned among theirpeer group to reduce carbon emissions and adapt to the energytransition while offering strong cash returns.
JPMorgan upgraded Norway's Equinor to "neutral"while downgrading Italy's Eni to an "underweight"recommendation and initiating coverage of Austria's OMVwith an "overweight" rating.
The rating changes mean the outlook for the group ofcompanies has shifted to bullish, Malek said.
(Reporting by Ron Bousso; Editing by Dale Hudson)
