For years, the oil and gas industry has boasted about the longevity and durability of oil and gas reserves despite growing signs that peak oil demand is around the corner. Many companies shrugged off the threat. Suddenly, however, there appears to be a scramble underway by energy companies to begin preparing for the peak and to transition to cleaner forms of energy.
The tone at the IHS CERAWeek Conference in Houston was glaringly different than in years past, with one oil executive after another talking up the need to address climate change and prepare for a low-carbon world. To some degree, this is lip service. Very few, if any, companies are making proactive decisions to leave their reserves in the ground and unburned.
But we seem to be in the midst of a major change in the industry, and one that is not just about a shift in rhetoric. Norway’s $1 trillion sovereign wealth fund recently recommended divesting from upstream oil and gas companies, a move that sent shockwaves through the industry.
Other signs of change abound. Many oil companies are suddenly backing methane regulations. Shareholders are pressuring companies to acknowledge their long-term risks to climate change. Royal Dutch Shell is aiming to reduce carbon emissions by 2 to 3 percent between 2016 and 2021, the first specific target laid out by the company. Importantly, executive pay will be linked to those goals.
Occidental Petroleum plans on doubling its Permian production to 600,000 bpd within the next five years. But the company’s chief executive also said that she wants Occidental to become carbon neutral. “We believe if you’re not addressing these [climate] issues today, you’re going to be behind the game,” Vicki Hollub, Occidental’s CEO, told the FT. “We feel like that’s the key to sustainability of our business over time,” she said. “If you don’t have that, you almost don’t need to be in operation.” Occidental wants to capture its CO2 and reinject it underground into reservoirs, which, not coincidentally, could lead to more oil production.
Moreover, even as the oil majors continue to scale up their shale operations, they are increasingly turning to renewable energy to power those same operations. BP is only the latest company to turn to solar because it is the cheapest option. “It’s a no brainer for them to play in solar,” Katherine Ryzhaya, the CEO of Lightsource BP, a solar company partially owned by the oil company, told Bloomberg. “They’re doing it for financial reasons.” Last year, Exxon singed a deal for 500 megawatts of solar and wind to power its Permian operations.
Separately, the world’s largest oil trader, Vitol, said that it expects oil demand to reach a peak within 15 years. That is not at the most aggressive end of the peak demand forecasts, but it is notable because of who is saying it. Vitol’s business is moving oil around – 7.4 million barrels per day in 2018 – so a peak is an existential problem. The FT says that Vitol’s admission about peak demand is the “most detailed yet from a trading company whose views are closely tracked in the industry.”
“We anticipate that oil demand will continue to grow for the next 15 years, even with a marked increase in the sales of electric vehicles,” said Russell Hardy, Vitol’s CEO, according to the FT. “But that demand growth will begin to be impacted thereafter.” Vitol is looking at cleaner fuels, energy storage, and wind power. That’s worth repeating – the world’s largest oil trader is beginning to explore a pivot into clean energy. It’s only marginal, and not consistent with the climate targets set out by the scientific consensus, but it reveals that the oil industry itself is beginning to see the writing on the wall.
Behind much of this shift is the clear recognition that the oil and gas industry has some complicated financials. The oil majors are posting profits, but a lot of their earnings come from petrochemicals, refining, LNG and conventional oil fields. They are going big in U.S. shale, but those operations are by and large not posting positive cash flow yet.
Smaller shale companies are mostly unprofitable and running out of time. They are scaling back drilling as the oil majors push them out of the Permian. A review of 29 publicly-traded oil and gas companies in the U.S. found $6.7 billion in negative free cash flow in 2018, according to the Institute for Energy Economics and Financial Analysis and the Sightline Institute. That came despite the fact that U.S. oil production hit a record high last year. “[T]hese results hid a grim irony: record-setting production didn’t lead to financial success. To the contrary, America’s frackers spilled alarming volumes of red ink in 2018,” the report’s authors wrote.
Shale drillers continue to believe that profits are around the corner as they improve technology and lower costs. Perhaps. But the industry faces a bigger and longer-term problem as peak oil demand looms. Some companies are beginning to prepare for that. Others are not.