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.”
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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
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(Falklands) and one company that tacitly denounces their business model (BP). First, the Falklands has legal issues that prevent insurance and bonding, and the fact that the local government is pretty hostile. As to BP or "Beyond Petroleum" ever since John Brown ruined the company (replacing engineers with accountants) it has never been considered a real oil company in the U.S. The incidents that led up to the Macondo spill were attributed and similar to the absolute negligence (Texas City Refinery fire) of BP. Now that Hillcorp has bought BPs assets in Alaska, I say good riddance and their voluntary removal from upstream is just less competition for the rest of us. Oil companies get reputations in the industry such as when Gulf Oil was no longer (one of the finest exploration companies ever) or when Texaco was subsumed (Nobody cared as Texaco spent half its time screwing shareholders and the other half screwing Independents). This post is quite myopic when ne considers that global demand was right at 100 MMbbls/d and is about 10% off now. The author ignores the other 6,000 products from oil and gas than just fuel for electricity. I leave with this thought - there is new research into using stranded oil reserves for manufacturing carbon fibers - the material of the future.
As long as the global economy continues to run on oil, exploring for oil will not only be profitable but also very essential. Anybody who thinks otherwise could be listening to false claims and deliberate disinformation from environmental activists and oil and gas asset divestment campaigners and thus deluding himself or herself.
Oil exploration is determined by the prevailing oil prices, cost of production, profitability, demand and size of the reserves. Oil companies always start with cheap oil leaving uneconomic oil underground until oil prices rise high enough to make it profitable. A case in point is North Sea oil. Therefore, what can today be called stranded oil or gas assets will become very desirable once oil prices rise high enough to provide reasonable profits for the oil companies.
The global energy scene will be governed by the following realities well into the future. The first reality is that there will neither be a post-oil era nor a peak oil demand throughout the 21st century and probably far beyond. The second reality is that notions of an imminent global energy transition from oil and gas to renewables and also zero emissions by 2050 are illusions. The third reality is that oil and gas will continue to be the core and most profitable business for 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 other 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.
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