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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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U.S. And Europe Divided On The Future Of Oil

Several energy revolutions have, over the centuries, changed the world: first, man learned to transform fire into kinetic energy during the Industrial Revolution with the invention of the steam engine. Second, the development of the internal combustion engine and the widespread use of refined oil after the First World War caused major societal changes. Finally, electrification has begun transforming the way we live, albeit at a slower pace than the previous two revolutions.

Recently, however, this change has been accelerated due to lower production costs for wind and solar energy and a growing urgency in the fight against climate change. Several major energy companies with roots in fossil fuels have made inroads in the utility sector in order to take advantage of new developments. Europeans are taking more radical steps in adjusting to the new situation while Americans still see oil as being the dominant energy source for a longer period of time.

Europe’s drive towards change

Several acquisitions and announcements have stirred the energy sector and heralded the beginning of a new era for some companies. Total’s CEO, Patrick Pouyanné, revealed that his organization is pivoting towards lower carbon energy sources by increasing its stake in natural gas and electricity. His statement during the CERAWeek in Houston hinted at a transformation of the French company: “instead of being an oil-and-gas company, maybe we will become a gas-and-oil company”.

Total has made important decisions regarding its activities on the utility market by the acquisition of a majority stake in Direct Energíe in April 2018, a utility company of 2,6 million customers in Belgium and France. Royal Dutch Shell, on the other hand, has bought utility firm First Energy in the UK, EV charger producer New Motion, and according to rumors Eneco, a Dutch gas and power provider, is on the company’s target list.

Furthermore, other European super-majors are also taking steps towards a future where natural gas and electricity will be more important than oil. BP’s acquisition of Chargemaster and its $200 million bet on solar producer Lightsource are also signs of movement. Electrification is a European wide development with companies making strategic choices across the entire value chain (see figure below).

First come, first serve

The stakes are high as those who recognize a potential change quickly, could take the lead in the future due to first-mover’s advantage. Shell’s $70 billion acquisition of British Gas was seen as a major risk in 2015 due to the volatility of the LNG market. However, the second biggest oil-and-gas deal ever has been successful as prices are relatively high and impressive growth of demand has improved the outlook for LNG.

It is no coincidence though that European companies are moving quicker and more aggressive than their American peers. Although predictions on market developments have large variations, Europeans tend to believe that oil used for transportation will be displaced faster by alternative sources such as electricity and hydrogen than Americans do. According to some reports it could amount to more than 8 million barrels per day in 2040 or 25% of OPEC’s production. European super-majors are investing heavily in alternative energy sources in order to take advantage of the displacement.

(Click to enlarge)

Furthermore, European countries are stringent on reducing CO2 emissions in order to mitigate global warming. The U.S. under President Trump, on the contrary, has decided to follow a different path by withdrawing from the Paris Climate Agreement and supporting coal. EU ministers, however, recently agreed on cutting CO2 emissions by 35% for new cars by 2030. Last December Paris, Madrid, and Athens announced they would remove diesel cars and vans by 2025. Norway will phase out the sale of all fossil fuel-based cars by 2025, followed by France and the United Kingdom in 2040 and 2050, respectively.

Big oil's rescue

The American auto industry, on the other hand, is less constrained. Therefore, oil companies have less incentive to acquire a foothold in alternative sources of energy. American super-majors such as Exxon and Chevron were late to the game, but they have invested heavily in the gushing oilfields of West Texas. Shale is in the spotlight now, while alternative energy sources are put on hold.

Whatever path energy companies choose, external factors are decisive concerning the level of change. No doubt oil’s position as the world’s most important source of energy will come to an end. The speed of transition, however, will be strongly influenced by political developments and innovations such as improved battery technology.

By Vanand Meliksetian for Oilprice.com

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