Over the long run, the oil business is under threat.
There are various arguments about why that might happen. Peak supply people argue we are running out of oil. Peak demanders say that market saturation, efficiency, and new technologies will cause oil demand to peak and decline. Similarly, clean energy proponents argue oil will be undercut by electric vehicles. Another variation of this argument can be found in the “stranded assets” theory, which posits that low oil prices, cheaper alternatives or strict climate regulation – or some combination of the three – will keep vast volumes of unprofitable oil in the ground.
A shrinking number of people see oil dominating the energy landscape decades from now. Or, even though it will likely still be a major source of fuel in, say, 2040, its growth is capped. Reasonable people can argue about how much oil will be consumed at what date far out in the future, but the bottom line is that there is broad consensus that oil’s days are numbered.
Even the largest oil companies in the world recognize this looming threat, and are starting to diversify their assets to hedge against a non-oil future. The investments and the commitment to diversification vary by company, but the oil majors are starting to make moves that will, over time, see them become less oily.
For example, Royal Dutch Shell has bet its future on natural gas, or more specifically, LNG. The $50 billion purchase of BG Group turned Shell into the largest LNG exporter in the world, with enormous export capacity in Australia in particular. Shell’s bet seems to be that as the world cracks down on coal in order to cut carbon pollution, it will benefit from higher gas sales. Natural gas has about half of the carbon emissions impact compared to coal. And if carbon pricing makes oil less competitive, it will be less impacted because natural gas will gain market share. Company executives have said that they see global oil demand hitting a peak by 2030.
ExxonMobil is the largest natural gas producer in the U.S., and holds the largest gas reserves in the country as well. However, that bet on gas – a $31 billion purchase of shale gas producer XTO Energy in 2009 – was not made with an eye on future carbon restrictions, but because the company had struggled to make new large oil discoveries. Exxon has had a complicated relationship with climate change, having been accused of covering up climate science and funded climate denying organizations. Officially, it supports a carbon tax, but it is still betting the future on oil and gas. The difference now, however, is that Exxon is dialing back its spending on megaprojects and is focusing on shale drilling, which cuts down on its long-term risk since shale projects can be quickly completed. Related: Are U.S.-Saudi Relations Turning Sour?
Chevron and ConocoPhillips are pursuing similar strategies, stepping up their spending on the Permian and declining to pursue major long-term projects like they did in the past. Conoco has even said that it would abandon new offshore exploration, focusing instead on comparatively lower-risk shale.
BP is going in the opposite direction, increasing spending on large-scale projects such as the Gulf of Mexico and West Africa.
So how will these companies fare 10 to 20 years from now? It’s a fool’s errand to predict what oil prices might do, but it would be a reasonably safe bet to assume that carbon restrictions tighten. The companies that drill in shale today can easily pivot at some point when that becomes less attractive – shale does not tie up cash for years and years like an offshore well or oil sands. ExxonMobil and ConocoPhillips recently took oil sands reserves off of their books and Shell said that it would sell off its oil sands assets. Instead they are focusing on short-cycle and cheaper projects.
But, the bulk of the oil majors’ production will still be oil, even if gas is a growing part of their portfolios. Their risk to low oil prices, peak demand, carbon pricing, or outright restrictions on production remain extremely high. How they deal with this is still very much uncertain. Groups like the Carbon Tracker Initiative argue that shareholders are exposed to imprudent oil investments, investments that might ultimately fail if oil is locked away in the ground.
Statoil, however, is arguably going the furthest to future-proof itself. The Norwegian state-owned oil company, which is credited with helping Norway build up an $880 billion sovereign wealth fund, just announced the results of a “stress test,” evaluating the company’s exposure to a future in which the energy industry is subjected to ever-tightening climate policy.
Statoil assessed a future scenario laid out by the IEA on its portfolio, which assumes the removal of global fossil fuel subsidies combined with a $100 per ton carbon price by 2030. Such a scenario would have reduced Statoil’s net present value by 5 percent in 2016 if it occurred. However, Statoil is planning to evolve, making large investments in renewable energy while also reducing its own carbon emissions. As a result, its net present value could rise by 6 percent by 2030, even with the carbon price. Related: The Single Biggest Threat To An OPEC Deal Extension
Statoil withdrew from Canada’s oil sands in 2016, one of the dirtier forms of oil production. Statoil plans on ramping up spending on renewable energy, so that by 2030 clean energy accounts for 10 to 15 percent of its capex. Statoil already has a handful of offshore windfarms in Europe, and it recently won a lease to develop an offshore wind project off the coast of Long Island, NY.
French oil company Total is probably the other biggest renewable developer among the oil majors. Total purchased solar developer SunPower years ago, and last year the company purchased a French battery maker Saft Groupe SA. For now, Total will spend $500 million per year on renewables.
Statoil and Total might be the farthest along, but the other oil majors will likely move into the renewables space more and more. Royal Dutch Shell is starting to dip its toes into the offshore wind market, leveraging its offshore experience in the North Sea for wind power. Italian oil giant Eni says it has a series of renewable projects in Italy, Egypt and Pakistan.
Decisions made today will have an enormous impact on the financials years from now.
“We believe that we’re in a period of energy transformation over the next decade,” said Bjørn Otto Sverdrup, Statoil’s head of sustainability, according to the Wall Street Journal. “The winners in the industry will be the ones that are able to provide energy with the lowest cost and carbon footprint possible.”
By Nick Cunningham of Oilprice.com
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