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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian has extended experience working in the energy sector. His involvement with the fossil fuel industry as well as renewables makes him an allrounder…

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The World’s Largest Oil Companies Are At A Crossroads

The global oil and gas market was once dominated by a select group of Western energy companies called “The Seven Sisters”. The unparalleled influence of these International Oil Companies (IOC) was broken in a wave of nationalism in the Middle East and South America. The birth of the National Oil Companies (NOC) was a significant gamechanger that has had a lasting impact on the global oil and gas market. The energy transition, however, does not have the same priority for these companies due to their inherent differences.

Recently, it was made public that several Dutch conglomerates, including Shell, provided funding to a climate change denier in the nineties to organize a global network. The current political environment in Western societies would, most likely, exclude a similar chain of events. Activist shareholders have become a force to reckon with. For three consecutive years, an activist investor group filed resolutions pressing Shell to increase its renewables portfolio. The success of this group led to the (temporary) withdrawal of a similar resolution in 2019.

Another important reason why the energy transition is on the minds of IOCs is the potential reputational damage. Especially in Europe continuation of ‘business as usual’ is not an option anymore. European IOCs are gradually shifting towards a business model where income from renewables eventually should overtake fossil fuels. Western IOCs, however, are not unified in their approach towards the energy transition due to another factor.

The size of proven oil and gas reserves can also influence the necessity to diversify and invest in renewables. For IOCs with large relative reserves, such as Exxon and Chevron, an alternative business model is not a pressing issue. The reserves of most NOCs, however, dwarf those of the largest IOCs. IOCs, therefore, have to choose between spending precious resources on renewables or exploration and production activities for which profitability is under growing strain from regulations and new technologies such as EVs. Related: UAE’s Latest Natural Gas Discovery Is A Gamechanger

Thirdly national interests strongly drive the respective strategies of NOCs. Countries with large proven oil and gas reserves have an interest to maximize income from sales for the benefit of their society and the state’s coffers. Energy wealth is a major asset and advantage. Therefore, the strategies of these countries are focused on maximizing the income from oil and gas sales. The only exception being Equinor, which is largely owned by the Norwegian state.

The alternative is diversification which means competing with more experienced IOCs. Some energy-rich countries, especially in the Gulf region are investing in renewables, but not under the umbrella of their NOC which is left to focus on oil and gas. Saudi Arabia and the UAE have set ambitious goals to increase the share of solar power in the energy mix. However, these 'green goals' are not a change of strategy but are to be attributed to the drop in costs of solar PVs.

The partial IPO of energy behemoth Saudi Aramco is another sign of the oil-rich country’s strategy. Riyadh’s goal is to maximize the revenue from its massive domestic oil fields before it’s too late. The energy transition and rising sales of EVs are a threat to fossil fuel based business models. According to some analysts, the IPO is already too late because the oil business is in retreat.

Another country that is highly dependent on the export of fossil fuels is Russia. Moscow relies heavily on its oil and gas sector for the necessary funds to fuel the economy. Therefore, national champions such as Gazprom and Rosneft are doubling down to maximize the value of their oil and gas fields. Instead of an energy transition strategy, Moscow intends to develop its Arctic region where significant undeveloped resources are located.

The energy transition will continue regardless of the fossil fuel based strategy of NOCs. However, the speed of the transition is not determined by the willingness and investments of IOCs but largely by external factors such as regulations and the price of fossil fuels. The EU’s increasing pressure on car manufacturers to reduce CO2 emissions and existing carbon schemes such as ETS have a bigger impact. Furthermore, sustained low prices for oil, natural gas, and coal could lengthen the use of fossil fuels due to the financial advantage for consumers.

By Vanand Meliksetian for Oilprice.com

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  • Mamdouh Salameh on February 26 2020 said:
    The fact that the global oil and gas industry managed to raise $617.4 bn in capital in 2019 speaks volumes about the indispensability and profitability of this industry. After all the oil and gas business is the world’s biggest and most profitable business. Oil and gas will continue to be the fulcrum of the global economy well into the future.

    Therefore, those writing about the global energy transition should always remember the following mantras. There will neither be a post-oil era nor a peak oil demand throughout the 21st century and probably far beyond. An imminent global energy transition is an illusion and oil and gas will continue to be the core business of the global oil industry as long as there is demand for both oil and gas.

    Yet, Big Business is investing heavily in energy transition because of genuine interest in being part of the clean energy solutions.

    International oil companies (IOCs) with declining proven reserves of crude oil have no alternative in the long term but to adopt a business model whereby income from renewables would eventually overtake fossil fuels. This, however, is not the case with national oil companies (NOCs) with huge reserves. For NOCs, their future strategies are to continue to maximize revenues from their plentiful oil and gas wealth.

    Still, oil-rich countries like in the Arab Gulf are accelerating the diversification of their economies so as to reduce the adverse impact of low oil prices on their economies, to replace oil and gas with solar power in electricity generation and water desalination plants and to create the world’s largest petrochemical industries as is the case with Saudi Arabia. Part of their diversification is to invest a share of their oil revenues in food production probably in Sudan.

    Yet, even with diversification, oil will continue to be the driving force of their economies well into the future.

    For now, we’re in an era of energy diversification where alternative sources to fossil fuels, notably renewables, are growing alongside—not at the expense of—the incumbents.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Lee James on March 03 2020 said:
    Where to begin with understanding the growth (or "blip") of alternatives we can take to burning oil?

    A lot depends on how you ask what is taking place. Are you looking at total world energy production and demand? Or do you look for per capita use? How dis-aggregated is your data. Is nuclear, or hydropower, mixed in with other sources of clean energy?

    It's kind of complicated . . . to the point that you can believe just about anything that you want to believe, and select data to make your case.

    So, in answer to whether Big Oil has anything to worry about from alternatives to burning fossil fuel, you have to really look closely and then use your best judgement about what's coming.

    In a nutshell, in looking at world-wide burning of fossil fuel, it's not particularly slowing down. However, if you look at some of the advanced economies, and especially Nordic ones, you'll see not only increased use of clean energy, but also a plateauing or decrease in per capita burning of oil. This pattern is in sharp contrast to the rapid per capita increase in oil consumption of earlier decades.

    We find there is some change in energy production and consumption, but it's only a recent trend and it's only in certain areas of the world.

    But who knows? Reaction to our oil virus may be only in its infancy. Concern and action may accelerate. The home-offices of many of the Big Oil companies are smack-dab in areas of heightened concern. These companies are taking note. Concern and local action could grow.

    For a nifty look at what has occurred up to 2015, I just now played around with interactive tables and charts from worldbank.org. They show total and per capita use per country, region and the world. Maybe take a look!

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