The year 2020 was a watershed moment for the fossil fuel sector. Faced with a global pandemic, severe demand shocks and a shift towards renewable energy, experts warned that nearly $900 billion worth of reserves--or about one-third of the value of big oil and gas companies--were at risk of becoming worthless.
Even Big Oil mostly appeared resigned to its fate, with Royal Dutch Shell (NYSE:RDS.A) CEO Ben van Beurden declaring that we had already hit peak oil demand while 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 went on to announce one of the largest asset writedowns of any oil major 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."
Yet, an ironic twist of fate might mean that rather than huge oil and gas reserves remaining buried deep in the ground, the world could very well run out those commodities in our lifetimes.
Norway-based energy consultancy Rystad Energy has warned that Big Oil could see its proven reserves run out in less than 15 years, thanks to produced volumes not being fully replaced with new discoveries.
According to Rystad, proven oil and gas reserves by the so-called Big Oil companies, namely ExxonMobil (NYSE:XOM), BP Plc., Shell, Chevron (NYSE:CVX), Total ( NYSE:TOT), and Eni S.p.A are falling, as produced volumes are not being fully replaced with new discoveries.
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Source: Oil and Gas Journal
Massive impairment charges saw Big Oil's proven reserves drop by 13 billion boe, good for ~15% of its stock levels in the ground, last year. Rystad now says that the remaining reserves are set to run out in less than 15 years, unless Big Oil makes more commercial discoveries quickly.
The main culprit: Rapidly shrinking exploration investments.
Global oil and gas companies cut their capex by a staggering 34% in 2020 in response to shrinking demand and investors growing wary of persistently poor returns by the sector.
The trend shows no signs of moderating: First quarter discoveries totaled 1.2 billion boe, the lowest in 7 years with successful wildcats only yielding modest-sized finds as per Rystad.
ExxonMobil, whose proven reserves shrank by 7 billion boe in 2020, or 30%, from 2019 levels, was worst hit after major reductions in Canadian oil sands and US shale gas properties.
Shell, meanwhile, saw its proven reserves fall by 20% to 9 billion boe last year; Chevron lost 2 billion boe of proven reserves due to impairment charges while BP lost 1 boe. Only Total and Eni have avoided reductions in proven reserves over the past decade.
Yet, policy changes by Biden's administration, as well as fever-pitch climate activism, are likely to make it really hard for Big Oil to go back to its trigger-happy drilling days.
In his first three months in office, Joe Biden has rejoined the Paris climate agreement, scuppered a controversial oil pipeline, suspended fossil fuel leases on public land, proposed unprecedented investment in clean energy, and started to reverse many of his predecessor's regulatory rollbacks.
In a virtual climate summit with 41 world leaders last month, President Joe Biden unveiled an ambitious 10-year Climate Plan that has proposed cutting U.S. greenhouse gas emissions by 50-52% by 2030. That represents a near-doubling of the U.S. commitment of a 26-28% cut under the Obama administration following the Paris Agreement of 2015. Related: The Future Of U.S. LNG: Only The Biggest Will Survive
Biden had even proposed a carbon tax, though it was conspicuously absent in his latest climate policy.
Meanwhile, the world's biggest asset manager BlackRock, has been doubling down on oil and gas divestitures.
Back in 2019, BlackRock declared its intention to increase its ESG (Environmental, Social and Governance) investments more than tenfold from $90 billion to a trillion dollars in the space of a decade.
But now the firm is pushing out the goalposts on climate action and wants companies that he invests in to disclose how they plan to achieve a net-zero economy, which he has defined as eliminating net greenhouse gas emissions by 2050. BlackRock plans to put oil and gas companies under the clamps by creating a "temperature alignment metric" for both its public equity and bond funds with explicit temperature alignment goals, including products aligned to a net-zero pathway.
Climate activists, including the Sierra Club, have been bombarding BlackRock and Vanguard with calls and emails urging them to vote against Exxon Mobil's CEO Darren Woods, saying Exxon's board "needs an overhaul" to better manage climate risks and guide the company to a low carbon future.
During last month's CERAWeek by IHS Markit energy conference, it became abundantly clear that Big Oil wants to focus not so much on curtailing oil and gas production but rather on mitigating the impact of its carbon and greenhouse gas emissions.
According to Exxon Mobil CEO Darren Woods and Occidental Petroleum's (NYSE:OXY) Vicky Hollub, reducing carbon emissions from fossil fuels and not the actual use of fossil fuels, offers the best way to combat climate change.
Interestingly, both CEOs have stressed that the world still needs oil and gas, and governments need to focus on mitigating global warming using technologies such as carbon capture and storage (CCS) instead of attacking fossil fuels.
Nevertheless, even the biggest hardliner of them all, Exxon Mobil, has markedly changed its tune from just a few years back.
During the company's 2021 Investor Day, CEO Darren Woods outlined the company's energy transition strategy, including plans to trim production growth and boost cash flows in a bid to support a growing dividend. Exxon revealed that it plans to hold production flat from 2020 levels through 2025 at 3.7M boe/day, good for a 26% cut from the 5M boe/day estimate for 2025 it released just a year ago.
In other words, it's going to be really hard for Big Oil to continue with business as usual despite an oil price recovery.
By Alex Kimani for Oilprice.com
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Whilst remaining reserves of top IOCs such as Total, BP, Shell, Chevron, ENI and ExxonMobil are expected to last 8.0-10.5 years, the NOCs of countries like Saudi Arabia, Iraq, UAE, Venezuela and Kuwait to name but a few have access to proven reserves that could last from 66-91 years at the 2019 production levels.
Between 1998 and 2002, top IOCs replaced 99.7% of oil produced. This declined to 51.7% between 2003 and 2007. These have fallen further by 25% since 2015 with less than 10 years of total annual production available. For instance, oil supermajor Shell expects to have produced 75% of its current proven oil and gas reserves by 2030, and only around 3% after 2040.
The real culprit is rising resource nationalism. Resource nationalism has been on the rise around the world underpinned by governments wanting to fully control whatever hydrocarbons and mineral resources they have in order to maximize their revenues, growing global demand for these resources and also growing influence of the NOCs. That is why resource nationalism has become a major threat for the IOCs.
When oil prices were low as in the late 1980s and much of the 1990s, IOCs were courted by oil-rich countries to develop their national resources. However, when prices started to rise, as they did in the early years of the 21st century, host governments started to rethink their contracts and seek higher taxes and royalties. Thus, it is natural that during a period of high prices the phenomenon of resource nationalism returns.
As a result of resource nationalism, IOCs are virtually not welcome in the major oil-producing regions of the world. The bulk of their production comes nowadays from Alaska, the Gulf of Mexico and the North Sea, areas which are witnessing rapid decline and where production is becoming increasingly more expensive and profit margins per barrel far lower than their counterparts in the Middle East and Russia.
In order to remain viable, major IOCs need to increase their reserve base and oil production in order to generate profits. However, the rise of NOCs and resource nationalism will ensure that major IOCs will not be able to secure new reserves and favourable deals in future. As a result, the next fall in oil prices could lead to mega-mergers among the IOCs if not the demise of some.
One way to salvage the IOCs in the long-term would be for their home governments to assume partial control, thus creating NOC-IOC hybrids, which may be more resilient in dealing with the challenges ahead.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London