End of fossil fuel’s dominance in sight
Energy giants facing uncertain future
Oil companies have crisscrossed the world for more than a century, drilling on nearly every continent and in ever deeper oceans to prospect for fossil fuels that power the global economy.
While they did, the biggest six or seven companies collectively known as Big Oil reshaped international politics and economies, bending them to their will. Oil executives became statesmen in their own right, negotiating deals with foreign leaders to extract oil from the tar sands of Canada, the deserts of the Middle East, off the coasts of South America and Africa and in the shale formations of the U.S.
But after suffering their worst financial losses in decades, the world’s largest oil companies are emerging diminished and
humbled by the pandemic-fueled oil bust. They face an uncertain future, under pressure from governments looking to curb greenhouse gases, investors seeking better returns and others simultaneously wanting both.
Exxon Mobil, BP and Shell last week reported losses for the year of $22.4 billion, $20.3 billion and $21.7 billion respectively as they grappled with a historic oil crash wrought by the global pandemic while also reckoning with a societal shift from fossil fuels amid growing concerns about climate change. After slashing spending, losing billions of dollars on the value of their oil assets and laying off tens of thousands of workers in 2020, analysts say Big Oil may never again dominate the global economy as they did just a decade ago.
“(Last) week’s huge losses by Shell, BP and Exxon reflect the challenges oil and gas companies face,” said David Elmes, head of the global energy research network at the Warwick Business School in the U.K. “They are skating on ever-thinning ice as the effects of climate change combine with other events like the COVID-19 pandemic.”
If the global influence of the oil giants is waning, it would have profound implications for Houston, the “energy capital of the world,” and for Texas, the top oilproducing state of the world’s top oil producing country. The state is home to many of the world’s largest oil companies, which still employ almost 150,000 workers despite layoffs that claimed about 60,000 jobs in 2020.
Illustrating the industry’s challenges, General Motors — the largest U.S. automaker — said it would phase out gasoline-powered cars by 2035, the same year California’s ban on sales of new gasolinepowered vehicles takes full effect. The rise of electric vehicles could reduce oil consumption by as much as 2.5 million barrels per day by the end of this decade, the
International Energy Agency says.
Adding to the pressure on oil majors, President Joe Biden used an executive order last month to rejoin the Paris climate accord that dictates tougher emissions targets for the U.S. Biden also issued a one-year moratorium on new oil and gas leases on federal land and water. While the majority of U.S. crude production takes place on private land, U.S. production from the Gulf of Mexico could decline by as much as 200,000 barrels per day by 2030 if the moratorium is extended for four years or longer, Norwegian energy research firm Rystad said.
The world will continue to need oil for some fuels and petrochemical products derived from crude, Elmes said.
“But that can’t sustain the industry we’ve seen in the past as we look to address climate change,” he said. “Some companies will need to change to survive.”
Some oil giants have begun preparing for a lower-carbon future. European majors such as BP, Shell and Total have moved aggressively over the past year to expand into wind and solar power to meet net-zero carbon emissions targets in the coming decades.
“The energy transition is a matter of when, not if, and we’re at a point in history when things are changing very quickly,” said Andrew Grant, head of climate, energy and industry research with Carbon Tracker, a financial think tank that studies climate change risk on companies. “It’s going to happen sooner or later, so oil and gas companies might as well be thinking about it. The direction of travel is very, very clear.”
In the U.S., oil majors like Exxon and Chevron have been slower to acknowledge the energy transition, betting that the world’s growing population will
continue to need fossil fuels. Yet they too face mounting pressure from investors to change course. Facing a proxy battle with San Francisco-based activist investor Engine No. 1, Exxon last week said it will invest $3 billion over the next five years in a new Low Carbon Solutions business to develop technologies that can capture and store carbon emissions from its oil and gas operations.
“2020 was definitely an inflection point in terms of this massive bifurcation of strategy between the U.S. and European supermajors,” said Dane Gregoris, director of energy investment research with Enverus. “The market is still uncertain about what strategy to pick. ”
Even as crude prices have rallied with the rollout of coronavirus vaccines, analysts say the recovery remains tenuous as COVID-19 cases continue to climb globally. Oil markets also were buoyed by OPEC’s commitment to production cuts agreed to in January. But that deal is widely expected to be short-lived as oil prices soar. Crude prices Friday were within striking distance of $60 a barrel, a price at which many U.S. oil drillers can turn a profit.
“We have not tried to build plans based on speculating where prices will go,” Exxon CEO Darren Woods told analysts on Tuesday. “Instead, what we’ve tried to do is build plans based on what a reasonable assumption is.”
Oil majors are assuming that demand for crude and petroleum products will remain depressed until at least 2023, after which predictions for long-term demand for oil vary widely. Bank of America analysts say it could peak this decade while others see it continuing to rise as developing nations consume more crude.
Amid the uncertain future, oil majors are holding the line on spending and targeting low-cost, high-margin drilling projects to deliver returns for investors, many of whom soured on the industry after years of poor performance.
“It makes no sense to grow into this market environment,” ConocoPhillips CEO Ryan Lance told analysts last week after reporting a 2020 loss of $2.7 billion. “So we're choosing to stay at a sustaining level for the year.”
“I don’t think we’re going to see a big resurgence to 800-900 rigs that we saw in 2019,” Gregoris said. “You’re going to see less investment because the outlook is for muted growth in the next decade.”
Despite the caution the oil majors are showing now, some analysts believe they may return to their swashbuckling ways if crude prices continue to soar. While 2020 was a reminder of how volatile the oil industry is, history shows that most oil companies “go mad” when the going gets back to good, Grant said.
“It’s difficult to see how this industry is going to change their behavior,” he said.