WILL OIL BOOM LAST?
With only a small fraction of global energy needs met by renewables like wind and solar, oil and gas seem likely to remain important fuels for decades, writes
THE good times are back. Or are they? The money is rolling in once again for the international oil giants after a grim period of budget cuts and job reductions following the plunge in oil prices in 2014. The profitability of major oil companies now approaches or, by some measures, exceeds the levels before the crash.
For eight of the world’s largest oil companies including, ExxonMobil, Chevron, BP and Royal Dutch Shell, combined free cash flow, a measure that tracks the money going in and out of company coffers, was US$30.9 billion (RM128.42 billion) in 2017 — far higher than the US$3.8 billion recorded in 2014, when oil prices were far higher, according to Bernstein Research. That was after paying a rich US$46 billion in dividends to shareholders.
The reasons for the fatter numbers: A combination of higher prices for the benchmark Brent crude and a continuing squeeze on spending. There has also been a changing of the guard with executives like Michael Wirth of Chevron; Patrick Pouyanné of the French company Total, and Ben van Beurden at Royal Dutch Shell, who worked in the less glamorous and more cost-conscious refining and petrochemicals units of companies, taking the reins and bringing a more tightfisted mentality to finding and developing new oil fields. In the US$100-abarrel era, in contrast, a “whatever it takes” approach prevailed.
“You definitely have a different culture permeating through these organisations,” said Oswald Clint, an analyst at Bernstein in London. The current group of chief executives is more “focused on cost-cutting and not just building fancy toys,” he said.
Along with the bitter experience of low prices, concern about the role of fossil fuels in climate change is also influencing industry behaviour.
While demand for oil has been growing strongly in recent years, the question is whether it will continue to grow as governments and societies demand a shift to a low-carbon economy that may only be achievable by reducing use of emissions-spewing fossil fuels. While the Trump administration may be trying to roll back regulation of energy producers, oil executives fear that future administrations may reapply the rules even more aggressively.
Pondering uncertainties like these, company boards are wary of approving the long-term, multibillion dollar projects that used to be oil industry staples. In this environment of uncertainty, investors also want quick payoffs in terms of higher and higher dividends and share buybacks.
The contretemps creates an existential problem for the oil industry and for society as well.
With only a small fraction of global energy needs met by renewables like wind and solar, oil and gas seem likely to remain important fuels for decades.
“I don’t think oil will be under pressure for the next 30 to 40 years,” Claudio Descalzi, chief executive of the Italian company Eni, said, while acknowledging that the industry must eventually slash emissions.
Yet, government and societal pressures on the oil business seem likely to increase, potentially discouraging investment in new finds that may be needed to satisfy demand. Julie Wilson, an analyst at Wood Mackenzie, an energy consulting firm, said exploration spending plummeted to US$35 billion last year, from US$94 billion in 2014.
Wilson said chief executives now were focusing more on finding oil near existing installations, which could quickly be developed, as well as other activities like squeezing more oil out of existing fields — all of which produce relatively quick paybacks without making giant discoveries.
Cost pressures appear to be behind recent decisions at Chevron, which earlier in this century developed one of the largest projects, Gorgon, a US$54 billion liquefied natural gas giant in Australia that far outran its original cost estimates. The new chief executive, Wirth, has put the company’s ageing fields in the British North Sea up for sale. On Oct 1, Chevron said that it was selling the company’s future in the region: a promising but costly frontier field called Rosebank off Scotland to Norway’s Equinor.
The message seems to be that it is better to take cash now and turn the management attention and long-term risk for the coming decades over to someone else. “Chevron regularly reviews its global portfolio to ensure assets continue to meet our criteria for investment,” the company said in a statement.
Many see van Beurden of Shell as a chief executive who embodies the attributes needed in the industry. Van Beurden, who became chief executive in 2014, knows that the oil and gas business remains vital to a company like Shell. He improved middling financial performance by buying a British energy company called BG for US$54 billion in 2016 when oil prices were low, bringing in a rich portfolio of liquefied natural gas, a fast-growing fuel that has a lower carbon footprint than oil. BG brought oil, too, mostly in Brazil.
Van Beurden also recognises that his company will be in trouble unless it convinces society and governments that it wants to be part of the solution to climate change, not the problem. He has gradually been placing bets on businesses — a solar company in California, a utility in Britain, an electric car-charging outfit in the Netherlands — intended to reduce the overall carbon content of the energy Shell sells.
The key, he said, in an earlier interview, was ensuring that the company remained relevant in the future.
“Understanding how this energy transition is going to play out,” van Beurden said, “and how we are going to respond is actually the main strategic question”.
The reasons for the fatter numbers: a combination of higher prices for the benchmark Brent crude and a continuing squeeze on spending.