How Oil and Gas Giants Are 'Buying Options' for an Uncertain Future
The
attack on two Saudi oil facilities this weekend injected a new element into
discussions on the future of energy.
Those
watching the rise of renewable power and electric vehicles often point to cost
reductions from mass-manufacturing and a growing will to act on climate change
as key drivers of the shift to lower-carbon energy. The physical vulnerability
of global oil supply lines has gotten less airplay in recent years.
“That’s
been absolutely put back on the agenda,” said Ed Crooks, longtime energy editor
at the Financial Times and now Wood Mackenzie's vice-chairman of energy in the
Americas, speaking at the Energy Disruptors Unite conference in Calgary
Tuesday.
The
attack in Saudi Arabia took 5 percent of the world's crude oil production out
of commission, and precipitated the biggest jump in oil prices since Saddam
Hussein invaded Kuwait in 1990.
By
Tuesday evening, the price of Brent crude had dropped to a few dollars higher
than it was prior to the attack, as Saudi Arabia and the U.S. signaled they
would not go to war in retaliation. But the attack proved that surprise
disruptions can happen, leaving open the possibility it could happen again.
That’s
just one of several stresses facing the biggest oil and gas companies, said
Crooks. Shareholder and market pressures are pushing some companies to
diversify from fossil fuels, in order to stay dominant in a changing energy
landscape.
Shareholder
pressure building
Those
oil majors that are not state-owned enterprises must contend with shareholder
sentiment, and shareholder action related to climate change has increased in
recent years.
In
2011, 2012 and 2013, climate-related shareholder proposals to U.S. companies
numbered in the 30s, Crooks said. That figure rose through the decade,
culminating in 90 proposals in 2018; 2019 saw 55 through July.
Not
all of these pass, but many have succeeded, prompting companies including BP,
Equinor and Shell to disclose climate risks facing their portfolios and report
on how their investments track with the Paris climate accord goals.
“There’s
been a big difference in the way the companies think about climate change and
the way they talk about it, and that’s really been in response to the
shareholder pressure,” Crooks said.
Oil
and gas companies have further reason for concern about shareholder sentiment:
Their stocks are not doing well.
Setting
the start of 2014 as a baseline, Crooks noted, the S&P 500 index has gained
81 percent. In that same interval, the S&P 500 energy stocks have lost 22
percent.
“The
oil and gas sector has been a really terrible investment,” Crooks said.
Electric
power offers growth opportunity
Oil
and gas companies concerned about those stresses could do worse than moving
into the electric power sector.
For
one thing, global demand for electricity will grow about 50 percent through
2040, according to WoodMac’s forecast, and that outpaces all fossil fuel
growth. Coal consumption will stay flat, oil consumption will rise roughly 12
percent relative to 2018, and gas will grow 35 percent.
“If
you want to be where the growth is...electricity is really where you want to
be,” Crooks said.
At
the same time, even market leaders in the power sector look miniscule compared
to the leading oil and gas players.
NextEra
Energy, the largest U.S. power company by market capitalization, is half the
size of Shell or Chevron, and little more than a third the size of ExxonMobil.
One renewables company explicitly targeted growth on the order of an oil and
gas giant — but that was SunEdison, and it collapsed after sinking money into a
string of acquisitions. The global electricity supermajor remains elusive.
Some
energy incumbents have taken initial steps in that direction. Shell acquired
its way into a retail electricity business, electric vehicle charging and
energy storage. BP made a major investment in Lightsource, the biggest solar
developer in Europe. Total bought battery manufacturer Saft and a majority
stake in solar manufacturer SunPower.
For
most of these companies, clean energy investment amounts to low-single-digit
percentage points of its investment in new oil and gas resources over the last
three years, according to WoodMac analysis.
“A
majority of their spending over that period is going to oil and gas,” Crooks
said. “Oil and gas is still where the profit is made. And oil and gas is
undoubtedly going to have a future for decades to come.”
The
oil and gas companies, some of which attended the Energy Disruptors event in
the heart of Canada’s fossil fuel industry, could keep doing what they’re
doing, and could stay profitable for some time yet.
But
in a world where a critical mass of governments has committed to putting
pressure on carbon emissions, sticking with the old business model could lead
these companies down a path they can’t escape.
“You
have to be ready for a potential range of outcomes,” Crooks said. “What
companies are doing with these investments in renewables is buying themselves
options where they could be in a world of much greater renewable energy, much
tougher controls on emissions, and they could remain successful.”
Today’s
supermajors could become energy dinosaurs — dominating the landscape only to
fade with surprising speed. But, Crooks pointed out, the extinction event that
wiped out the dinosaurs did not eliminate all of them. Their descendants
survived and evolved into the birds we know today.
“It’s certainly possible that the energy dinosaurs could survive in a new world, but they may just need to grow feathers and learn how to fly,” he said.