Will Q1 financials change international oil firms’ energy transition?
US and European international oil companies (IOCs) have registered positive financial income in the first quarter of 2021 following huge losses registered throughout most of 2020. The revenues came as a result of higher oil prices, improving refining margins and higher demand prospects.
The pandemic drove IOCs to heavy and unprecedented losses last year, a result of the largest oil demand shock in history.
One of the adverse effects of this was a significant decline in upstream investments, which will result in a negative reflection on the market value of these companies and, in the long term, cause a catastrophic shortage in oil supplies.
IOCs have seen their market values sink in recent months, battered by concerns over oil demand due to the pandemic as well as investors’ doubts over their ability to successfully carry out an ambitious plan to pivot away from fossil fuels to renewable energy.
Some IOCs mistakenly believed that oil demand may have already peaked in 2019, and intend to reduce oil and gas production by 40 percent by 2030. Others began charting a new path at the beginning of this year, with pledges to reduce emissions from their operations to net zero by 2050. The goals behind this sudden shift to what they claim is more sustainable and environmentally friendly energy means they have set themselves a new set of financing challenges as they seek to transition their investments into renewable energy.
While the IOCs have started talking suddenly and boldly about their plans to switch to renewable energy, they lack tangible projects on the ground, and the huge investments are not yet a reality, meaning they are still vulnerable to the pandemic oil demand shock and the huge losses as a result.
As the world moves to become greener and embrace more eco-friendly energy sources in the long term, it is scaling down oil investments and ramping up funding for renewables. So, the question remains: What will be the repercussions on oil?
Several IOC refineries have announced plans to convert some production operations to renewable fuels. However, how can IOCs deal with the financial challenges posed by this energy transition? It is not clear, and it will be extremely challenging, for refineries to invest and earn returns that are above their weighted average cost of capital and shift toward a cleaner, more sustainable and eco-friendly form of energy.
With the returns seen from oil revenues, the rebound in oil demand and global inventories returning to their five-year average, will IOCs still abandon oil investments?