Energy transition: Questions rise over oil and gas company strategy

• DOI: http://doi.org/10.1111/oet.12679
• Date: 01 April 2019
• Published date: 01 April 2019

EDITORIAL

Energy transition: Questions rise over oil and gas company

strategy

Most of the oil industry continues to forecast strong oil

demand for the foreseeable future and is investing on that

basis. However, doubts are growing, and many shareholders

are now expressing concern about the risks of market con-

traction, stranded assets, and future emissions. Other indus-

tries, notably the car sector, are preparing for a much more

rapid transition, and with warnings from the UN growing,

along with consumer pressure and public image issues, some

within big oil think it may be time for a change in approach.

Others remain resistant due to a perceived lack of lucrative

opportunities in low carbon energy.

The equity market performance of oil and gas companies

as a whole has been below the general market since before

2014, and the situation has been getting steadily worse as

concern among investors grows over falling renewables

costs, growing regulation and the medium-to-long-term

demand for oil and gas—despite recent healthy profits and

dividends. In March, Norway’s sovereign wealth fund

announced it would no longer invest in oil and gas compa-

nies, apart from the integrated majors (although this was

partly to spread risk given Norway’s heavy reliance on oil

and gas income from state Equinor).

The poor performance comes despite a successful focus

on costs among all majors, aimed at combating lower renew-

ables costs. Capex this year is around two-thirds of 2014

levels (despite last year’s price recovery), but is expected to

produce the same results in output terms—indicating a dra-

matic improvement in productivity. Cost cutting measures

include longer field life/enhanced output designs and

reduced service company costs, as well as modular construc-

tion, digitization and other technical advances, not least in

shale drilling.

As part of the cost drive, some companies are dropping

or selling off lower margin or higher CO

2

(tar sands, etc)

prospects, which helps keep upstream costs in check, but

also effectively consigns some reserves to remain in the gro-

und. This raises questions over the traditional metrics used

to value oil and gas companies—in particular, a company’s

production-to-reserve ratio, or reserves life. This measure

used to equate to value in the ground, required to sustain

output, but is now seen by many as exposure to potentially

stranded assets that are either too expensive or polluting to

develop.

Shell, which has perhaps faced the greatest shareholder

pressure over the issue, has only replaced its annual produc-

tion with new reserves twice since 2011. And in February, it

reported a slump to just 8.4 years production from current

reserves, following divestments (this is the lowest among

energy majors—Exxon’s have been rising sharply the last

year or 2 as Liza reserves, offshore Guyana, are booked; BP

and Eni are also up.)

1|CONTRASTING APPROACHES

Most of those in the industry point to widespread forecasts

of continued growth in demand for oil and gas for reassur-

ance. BP’s chief economist Spencer Dale, for example,

recently said that even under a “Rapid Transition

1

”scenario

of radical switching to cleaner fuels compatible with meeting

the Paris climate goals, oil demand would still only be

reduced by around 28 mn bd in 2040 to 80 mn bd (in its ref-

erence case, BP expects oil demand to peak by 2035 before

holding at around 108 mn bd to 2040, when oil’s share of

the global energy mix will slip to around 27% from 34%

currently.)

“If we can produce amongst the cheapest oil of the

80 mn bd demand in 2040, then we can carry on producing

that oil,”he said in January, when presenting BP’s latest

long-term energy outlook. Nevertheless, competing in such

a shrinking market with other majors and the low-cost pro-

ducers in OPEC and elsewhere, could prove to be tough.

His boss, BP’s CEO, Bob Dudley, reflected in February

that his first duty was to maintain returns to shareholders

rather than preparing for the energy transition, and a lack of

lucrative low-carbon opportunities meant keeping invest-

ment there to a minimum “both shorter-term and long term.”

He said BP’s main ambition was to keep downward pressure

on oil and gas production costs in order to stay competitive

with alternative energies.

On the other hand, Shell’s director of integrated gas and

new energy, Maarten Wetselaar, recently said avoidance of

12 EDITORIAL