This year has brought the uncertain future of the energy industry to a head. The novel coronavirus has catalyzed and brought to the surface discussions that have been percolating for years about the global clean energy transition and the end of an era for oil. And the discussion is not just philosophical--it’s fiscal. As Oilprice reported last week, “Big Oil’s Most Profitable Business Is No Longer Oil.” Supermajor oil companies, especially in Europe, are moving away from oil extraction toward more lucrative pursuits like energy trading and renewable energy production. “Companies like Shell aren’t going to stop producing oil, but it will become less important as the world increasingly embraces less carbon-intensive forms of energy,” oil strategist Julian Lee recently wrote in a column for Bloomberg Opinion earlier this month. “As they become more focused on natural gas, electricity, and, very likely, hydrogen, their ability to offset any weaknesses in their core activities through trading profits are likely to be severely curtailed.”
Just this week, Bloomberg continued this line of reporting, writing that oil companies are now wondering if looking for oil is even worth it. At this point, any new acquisitions could easily end up being more of a liability than an asset. In fact, there is already a growing list of what are known in the biz as “stranded assets,” which are already purchased, yet-untapped oil reserves that no longer make sense to exploit.
One soon-to-be example of this is the Falkland Islands, which were “once at the forefront of a new era for the oil industry as companies scoured the planet for resources.” Bloomberg reports that the estimated 1.7 billion barrels of crude in the waters surrounding the islands in the Southern Atlantic will likely remain right where it is, as the cost-benefit analyses favor letting the purchases remain an untapped sunk cost. Unfortunately, these stranded assets could also cost the oil companies that own them “huge sums to mothball.”
“As the coronavirus ravages economies and cripples demand, European oil majors have made some uncomfortable admissions in recent months: oil and gas worth billions of dollars might never be pumped out of the ground,” says the report. There are a number of reasons for this, not the least of which is the economic impact of the COVID-19 pandemic. Low oil demand and a catalyzed clean energy transition will more than likely leave fossil fuel prices too low to incentivize production at the same time that levies on carbon emissions are set to increase. “These two simple assumptions mean that tapping some fields no longer makes economic sense.”
Supermajors are already changing their strategy. Business does not favor nostalgia, and the savvier Big Oil companies are moving headlong into the energy transition and leaving oil behind without a second look. Just this month BP publicly announced that it will no longer do any oil exploration in new countries. Evidently, the era of Big Oil manifest destiny is drawing to a close.
Under the looming shadow of peak oil demand, exploration is fast becoming old-fashioned. A Rystad Energy AS consultant, as paraphrased by Bloomberg, “expects about 10% of the world’s recoverable oil resources—some 125 billion barrels—to become obsolete.”
The list of projects most at risk of becoming stranded assets “includes deepwater discoveries off Brazil, Angola, and in the Gulf of Mexico,” according to Rystad research VP Parul Chopra. “Canadian oil-sands projects such as the expansion of the Sunrise development in Alberta are also in doubt.”
Some supermajors have been slower than others to accept peak oil as an inevitability in the near future. European companies are already pivoting toward green energy and trading as the core of their business model, transitioning from Big Oil to Big Energy. In the U.S. it’s a different story, where the current administration has not followed the global trend of building a green post-corona stimulus package. But even on this side of the Atlantic, the tide is beginning to turn in the private sector, where the data clearly shows that green energy holds great promise for lowering the staggering unemployment rate and even McDonald’s is begging Congress for clean energy.
By Haley Zaremba for Oilprice.com
More Top Reads From Oilprice.com:
- Bezos And Blackrock Are Pouring Billions Into This $30.7 Trillion Trend
- Is This The Beginning Of The End Of Oil & Gas Exploration?
- Uncertainty Upends Mergers & Acquisition In Oil And Gas