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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Is This The Beginning Of The End Of Oil & Gas Exploration?

Booms and bust cycles are very much a part of investing in the fossil fuel sector. In previous energy downturns, prices frequently experienced serious slumps, but oil and gas companies mostly kept faith in their biggest asset: Oil and gas reserves buried deep in the ground. But things are markedly different this time around. 

Faced with pandemic-driven demand destruction and a relentless call for climate-conscious and ethical investing, oil executives are resigning themselves to the uncomfortable fact that a significant amount of their vast oil and gas reserves will end up totally worthless.

So much so, that's it may hardly be worth it to entertain new exploration at this point. And "discovery" news these days doesn't tempt investors like it once did. 

You know things have truly gone to the dogs when the likes of BP Plc.(NYSE:BP)-- a company that doubled down on its aggressive drilling right after the historic 2015 UN Climate Change Agreement--finally gave in saying "..concerns about carbon emissions and climate change mean that it is increasingly unlikely that the world's reserves of oil will ever be exhausted." BP has announced one of the largest asset writedowns of any oil major this year after slashing up to $17.5 billion off the value of its assets and conceded that it "expects the pandemic to hasten the shift away from fossil fuels."

BP owns a series of high-risk prospects including deepwater discoveries off Brazil, Angola and in the Gulf of Mexico. Its Sunrise deposit jointly owned with Canada's Husky Energy Inc., has an abundant supply of bitumen estimated at 3.7 billion barrels but requiring a complicated extraction process. Related: Bank Of America: Brent Will Recover To $60 In H1 2021

On the opposite end of the spectrum, 'arrogant' ExxonMobil (NYSE:XOM) has resisted writing down any shale assets this year, remaining adamant that oil and gas values will eventually  recover.

However, the decision of whether or not to declare their prized gems worthless might soon be taken out of Big Oil's hands.

2025: D-Day for Stranded Assets

The Paris Climate Agreement set to limit global warming to no more than below 2 degrees by the turn of the century if our planet is to avoid catastrophic and irreversible climate change. But here's the alarming news: Our current trajectory shows that we are heading for a 3.2 degrees temperature rise by 2100, which gives us a tiny 10-year window to severely curtail our greenhouse gas emissions or forever face the consequences of our folly.

Unfortunately, precious little has been achieved since the ratification of the Paris Agreement in 2016. Last year's UN climate summit (COP25) in Madrid was a dismal failure with no new goals set despite hosting delegates from nearly 200 countries.

However, companies like Exxon that continue to value their oil and gas assets based on 'business as usual' government policies could be whistling past the graveyard. This is the case because these companies are working on the assumption that governments will not take any "forceful action" in a bid to combat climate change.  Related: Shale Executives Make Millions As Their Company Goes Bankrupt

Yet, this view might be wishful thinking. Back in January, Andrew Grant, senior analyst at Carbon Tracker, had warned that  new regulations regarding climate change are likely to be "forceful, abrupt, and disorderly" with decisive policy response likely to be seen from 2025 that will "seriously hit the fossil-fuel industry."  

Companies at the biggest risk

Grant's warning appears to have aged well, with the global oil and gas sector expected to write off a staggering $300 billion in stranded assets in the current year alone, and nearly a trillion over the next few years if governments begin to get aggressive with global climate goals.

All eyes will be on the next UN Climate summit (COP26) set to be held in Glasgow, which will hopefully achieve much more than its predecessor.

Bearing this in mind, companies that have aggressively written off their stranded assets such as BP, Royal Dutch Shell (NYSE:RDS.A), Hess Corp.(NYSE:HES), and Occidental Petroleum (NYSE:OXY) could be safer long-term picks than others like Exxon that are still stubbornly clinging to their potentially worthless assets. Indeed, even long-suffering OXY is finally beginning to get some Wall Street love with JPMorgan recently upgrading the stock "given the magnitude of underperformance, the de-risking of the maturity wall and the recent stability in the oil price."

Thankfully, even Exxon might slowly be coming to its senses after its recent decision to devalue its massive Kearl Lake mine north of Fort McMurray and ditch its debt-fueled US$30 billion-a-year plan to rebuild its aging worldwide portfolio.

America's Big Oil is likely to be safe in the medium-term if Trump is re-elected, but could be in for interesting times if his chief Democrat adversary with his $5 trillion climate plan trounces him in the November elections. Trump has continued to roll back Obama-era climate regulations, with the EPA recently waiving federal requirements for oil and gas companies to monitor and repair methane leaks. Meanwhile, the Trump administration has approved a sweeping plan to sell drilling rights in Alaska's 19M-acre Arctic National Wildlife Refuge for the first time ever.

By Alex Kimani for Oilprice.com

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  • Mamdouh Salameh on August 18 2020 said:
    No it isn’t. Anybody who thinks otherwise is deluding himself. The global economy and civilization as we know and enjoy don’t exist without oil and natural gas and vice versa. The global economy will continue to run on oil and gas well into the future.

    It follows that there will neither be a post-oil era nor a peak oil demand throughout the 21st century and probably far beyond. Moreover, the notions of an imminent global energy transition from oil and gas to renewables and zero emissions by 2050 are no more than illusions. Oil and gas will continue to be the fulcrum of the global economy and the core business of the global oil industry well into the future.

    When a prominent climate activist like Michael Shellenberger, who was nicknamed by Time magazine as ‘Hero of the Environment’, apologizes on behalf of the environmentalists for the climate alarmism they had propagated over the past three decades and also for misleading the public about the imminent existential threat of climate change, it speaks volumes about how environmental activists and the oil and gas asset divestment campaigners have been resorting to militancy and dogmatism to pressure the global oil industry to divest of its oil and gas assets irrespective of the huge damage it inflicts on the global economy.

    Take for instance the case of London Heathrow airport. This international airport directly employs 75,000 people and supports another 230,000 jobs and also contributes 10% to the United Kingdom’s GDP. It is one of the most important contributors to the British economy. It badly needs a third runway so as to expand its aviation activities which promise to enhance its contribution to the British economy. And yet, excessive and militant pressure from environmental activists have so far thwarted every attempt by the government to add a third runway. This is a case when militancy and dogmatism prevail.

    The reason supermajors like Shell, BP and Equinor are announcing asset writedowns worth billions of dollars has virtually nothing to do with the environment and everything to do with eliminating unprofitable assets and reducing their outstanding debts to justify drastically cutting their dividends and making thousands of employees redundant.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • OneComment StopPosting on August 18 2020 said:
    I agree with the above Professor. The clickbait title, grammatical, and spelling errors aside.
    The original post author seemingly doesn't understand that even with EV's on the rise and a temporarily tightened demand. Many countries still haven't developed economies capable of supporting not only charging networks, but the relatively expensive EV option cars to begin with. Unless the few truly cheap (on a global scale) EVs gain traction, the world is left with cars that START at 30k USD. Something that is simply not an option for much of the world.
    This is all to say nothing of: heavy industrial use, farm equipment, cargo and freight trains, aeronautical shipping etc.

    Even as just a gross oversimplification of the market shown in the above paragraph. We are a LONG way of saying goodbye to o/g, and even exploration.
  • V Fatalis on August 18 2020 said:
    Dear Dr Mamdouh G Salameh,

    You're absolutely right, our civilization doesn't exist without oil.

    However, you're certainly aware that we have been exploiting oil for some time now, and as a result most (if not all) of the big oil fields have their peak production past.

    Peak oil for conventional oil was past in 2006, and peak for all combined was attained in november 2018.

    With the pandemic, the price of oil dropped to a level that is not satisfying for oil producers. Only the cheapest oil is being extracted currently, and the oil companies are not in a hurry for new projects.

    It is totally possible to see a rise in price, but it will only happen when supplies will be on the short side, and only for a brief moment, because a lot of people have lost their jobs and economies of all countries in the world are in terrible shape. The economy is too depressed to withstand a high oil price.

    EROI of oil is declining, and so is the production of a majority of oil fields... What does this means ? It means we are contemplating the end of our modern civilization. Not only it is unavoidable, but it's coming VERY fast - only a few months or years from now.

    The delusion is on you, I'm afraid. You'll see it for yourself soon enough.

    Dr Fatalis
  • Horry Knowbean on August 18 2020 said:
    I think you fail to see the nature of change in the economy. In 1900 the world was horse driven but by 1910 the wealthy in the world had changed to the ICE. All within a decade. Another decade and vehicles were available to all but the poorest in the developed countries.
    The world is just waiting on developments in batteries and wind and solar (also hydrogen from these sources). Once that happens it just wont be viable to get the oil and gas out of the ground.
    It's all about the money. Republican/Democrat regimes cannot force this change, maybe grease the rails a little but when the breakthroughs come then the consumer decides.
    In 2030 the world will look different and hopefully better.
  • Jeff Green on August 18 2020 said:
    Its amusing to see the comment listed before mine. Clear scientific consensus on climate change and what we will see happen to our climate if we continue on. Energy storage of different kinds are coming down the pipe with lithium ion batteries in the main lead now. I look forward to no pollution from dirty fossil fuels
  • Eric Gagen on August 19 2020 said:
    I generally agree with this article. The end of the use of oil and gas is a long way out, but the end of traditional exploration is within easy reach and sight. There is such a large volume of already discovered recoverable oil and gas that it's not reasonable to expect that continued exploration will be required to meet world demand, even if that demand rises. When was the last time that there was a major exploration component to the coal industry? It's been a very long time. Oil and Gas is approaching that point in it's maturity as an industry now. Just as was once the case with coal, there are now numerous practical alternatives to oil and gas, and which ones get used in which situation boils down to the value they produce, not necessity.

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