By Julian Lee | Bloomberg: August 30, 2020 at 7:36 a.m. GMT+1
From Monday there will be just one oil company in the Dow Jones Industrial Average — Chevron Corp. The removal of Exxon Mobil Corp. from the index after an uninterrupted presence since 1928 shouldn’t come as a surprise. It’s not the end of Big Oil, but it may signal the start of the beginning of the end.
It may seem odd to remove one of only two oil companies in the index at a time when the shale boom has transformed America’s role in the global market. After all, the U.S. now produces more oil and more natural gas than any other country. Last year’s domestic oil production was up by 125% from levels in 2010, while gas output has increased by 60%.
But those figures only tell part of the story, and not the most important part.
It’s not the first time that there’s only been one oil and gas company in the Dow. The last time was between 2000 and 2008, when Exxon was the sole industry representative. Before that you have to go back to the 1920s. For a brief period of two weeks in 1924, there were none at all.
Why remove Exxon rather than Chevron? That’s easy. The Dow is calculated using share prices, not market capitalization, so Chevron’s higher share price (it’s more than twice that of Exxon’s) gives it greater weight in the index. At the close of business on August 27, Chevron accounted for 2.04% of the Dow; Exxon just 0.96%.
Removing Chevron would have reduced the weight of oil to an unreasonably low level. Its stock has also outperformed that of its larger rival over almost any recent period you care to choose.
The replacement of Exxon with Salesforce.com, a cloud-software bellwether, reflects the evolution of the U.S. economy even as the current president champions the fossil fuel industries.
The first shale boom, which saw natural gas output start to rise from 2005 and oil follow it five years later, helped spur a massive surge in jobs in the sector. The number of people employed in oil and gas extraction rose from about 125,000 in the first half of 2005 to a peak of more than 200,000 at the end of 2014, according to the Bureau of Labor Statistics. The second shale boom only created a quarter of the jobs that had been shed in the sector between 2015 and 2017 before it ran out of steam at the end of last year — and then the Covid-19 pandemic struck.
Despite record production levels, oil and gas extraction contributed a mere 1% of U.S. GDP last year, according to the Bureau of Economic Analysis.
Oil just isn’t what it was to the U.S. economy and, with much of the shale boom driven by small independent oil and gas companies, Big Oil is even less important.
It is not just in the U.S. that Big Oil faces headwinds. Its opportunities and reputation are in decline worldwide.
The oil majors, including Royal Dutch Shell Plc, BP Plc and Total SE, operate in a world where they are often denied access to prime prospects. They’re kept from investing in key areas of low-cost production, such as Saudi Arabia, Iran, Venezuela and Russia, by local laws or the risk of sanctions. In other areas, they face contract terms that make investment unattractive.
It’s not just the lack of opportunities to discover and develop big, new oil fields. The companies are facing the need to reinvent themselves in a world where their core product is coming under increasing pressure from consumers for its impact on climate change and local pollution. And the long, hard slog of trying to turn themselves into producers of sustainable energy has only just begun.
Exxon’s removal from the Dow may not signal the end of Big Oil, or even that its end is near, but it is reflective of the industry’s failure so far to adapt.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.
An update on climate change litigation – no signs of cooling
Katharina Theil considers progress on legal moves around the world to bring companies to account for their contribution to climate change.
The COVID-19 pandemic has profoundly changed many aspects of our daily lives. However, one issue that remains firmly on the agenda is the urgent need for action to mitigate the worst consequences of climate change.
As the UK emerges from lockdown, the UK Committee on Climate Change has urged the Government to tackle the climate emergency in its attempt to revive the economy and has called for ‘a green, resilient COVID-19 recovery’.
Due to many governments’ failures to take adequate action, individuals and communities have turned to the courts as one means of achieving change (‘climate litigation’).
In October 2017, my colleague Jonny Buckley examined a number of US climate change lawsuits against major fossil fuel producers (‘carbon majors’), and considered whether these could pave the way for litigation against corporates in the UK. He concluded that although theoretically possible, the likelihood of similar claims being brought in the UK remained remote. This was primarily due to the difficulty in attributing specific damage to the carbon emissions of a particular company.
Update: Climate change lawsuits two years on
More than two years later, there has been much development in the global field of climate litigation.
Recent cases that have attracted particular attention include claims against states, such as Urgenda Foundation v the Netherlands (‘Urgenda’), and Juliana v US.
In Urgenda, the Supreme Court of the Netherlands confirmed an earlier decision holding that the state had a duty to protect its citizens from ‘dangerous climate change’ in accordance with its obligations under the European Convention on Human Rights (‘ECHR’).
Even more recently, on 31 July 2020, in a case known as Climate Case Ireland, the Irish Supreme Court held that the Irish Government’s National Mitigation Plan was defective and ordered the Government to produce a more ambitious strategy.
Juliana v US, a constitutional climate lawsuit brought on behalf of 21 young people in the US, however, was dismissed in January 2020. The court held ‘reluctantly’ that the relief sought (an order requiring the US government to devise and implement a remedial plan) was beyond the court’s constitutional power, as this would involve complex policy decisions. Nevertheless, the claimants have noted that the judges were divided over the decision and requested a rehearing by a new panel of judges.
In the Californian cases filed by San Francisco and Oakland in September 2017, in state courts against five carbon majors, legal arguments have largely focused on whether the claims should be allowed to proceed in state or federal courts. The cases, brought in public nuisance, allege that carbon majors are the ‘proximate cause’ of climate change and seek to reimburse taxpayers for associated adaptation costs such as sea walls to protect from rising sea levels. Similar cases are also ongoing. In May 2020, the US Court of Appeals confirmed that San Francisco’s and Oakland’s claims could proceed in state courts. The carbon majors’ request for a rehearing was denied. Consequently, following an earlier dismissal, this most recent ruling appears to pave the way for the substance of the claims to be heard.
Climate attribution science has continued to expose the relationship between anthropogenic emissions and climate change.
An update to a study first published in 2014 suggests that the 20 largest oil, natural gas and coal companies are responsible for 35 per cent of the global fossil fuel and cement emissions between 1965 and 2017. The causal link between a specific company’s carbon emissions and particular harm, however, is still one of the key issues for claimants to grapple with.
Despite these difficulties, some recent cases indicate that courts around the globe are gradually becoming more receptive to engaging with corporates’ responsibility for their contribution to climate change.
In Smith v Fonterra Co-Operative Group Limited [2020], for example, a court in New Zealand rejected Smith’s arguments that the defendant companies had been negligent in emitting greenhouse gases or that their emissions constituted a public nuisance. Nevertheless, the court held that the claim for a novel tortious duty to cease contributing to climate change should proceed to trial. The court commented that “it may be that a novel claim such as that filed by Mr Smith could result in the further evolution of the law of tort. (…) I am not prepared to strike out the third cause of action and foreclose on the possibility of the law of tort recognising a new duty which might assist Mr Smith.”
A Peruvian farmer’s claim against RWE, a German energy company, was allowed to proceed in the German courts on appeal in November 2017.
The farmer alleges that global warming has caused glacial retreat in the area near his village Huaraz, causing acute threat of flooding of his property.
The claimant is seeking payment of 0.47 per cent of the estimated cost of measures to protect the property from damage in case of flooding.
The amount claimed is proportionate to RWE’s contribution to global greenhouse gas emissions between 1965 and 2010 (see Particulars, §9).
Considering RWE’s submissions against the appeal, the court held that “[i]n this context, the alleged threat to the plaintiff’s property is attributable to the defendant’s actions, i.e., to the active operation of power plants by the subsidiaries controlled by the defendant.”
RWE denies liability, arguing that a single company cannot be held responsible for the consequences of climate change. The court and parties are currently awaiting permission from the Peruvian authorities for a site inspection in Huaraz.
The case of Milieudefensie et al. v. Royal Dutch Shell plc. filed in the Netherlands in 2019, which builds on the arguments advanced against the government in Urgenda as regards a duty of care to take positive action, is likely to give further insight into a court’s willingness to extend duties recognised for the state towards corporate actors in the area of climate change.
In addition to tort claims by affected individuals and communities or NGOs who represent them, shareholders have become more vocal in advancing climate-related causes, including in courts and non-judicial forums.
Climate litigation continues to be pursued actively in many countries and new and old avenues are being explored and developed.
Recent successes have been achieved primarily in cases brought against governments, and significant barriers to litigating climate change against corporate actors in the UK remain.
US courts hearing the lawsuits against the carbon majors are yet to grapple with the issue of causation and attribution of liability.
Some pending cases from around the globe suggest that courts may become more receptive to holding corporates to account for their contribution to climate change.
In addition, it appears that other avenues, such as shareholder actions, have a significant role to play.
It is hoped that both judicial and non-judicial routes being developed around the world will be useful in holding corporates to account for the actions they take and that recent climate litigation successes against governments are indicative of what the future may bring.
Big Oil’s patchy deals record casts shadow over green makeover
When Shell bought BG Group for $54 billion in 2016 in the midst of the price crash, Chief Executive Ben van Beurden made a compelling case to investors…: Speaking in July, Shell’s CEO stood by the deal. “The company did get stronger, but indeed the company was not able to withstand the onslaught of COVID if we wanted to adopt a prudent stance … I remain convinced it was the right move,” van Beurden told reporters.
by Thomson Reuters
By Ron Bousso
LONDON (Reuters) – As major oil companies prepare to spend billions on renewable energy assets to stay relevant in a low-carbon future, the industry’s patchy track record on takeovers is a red flag for some investors.
Ten years ago, the world’s top energy companies were spending billions of dollars on major oil and gas assets and costly drilling programmes in remote parts of the world in a relentless drive to produce more.
Fast forward through an oil price crash in 2014 followed by the fallout from the coronavirus pandemic this year and some big oil companies are counting the cost of the spending spree – as are their shareholders.
When Shell bought BG Group for $54 billion in 2016 in the midst of the price crash, Chief Executive Ben van Beurden made a compelling case to investors: The deal would support Shell’s dividend under almost any imaginable oil price scenario.
Four years later, with the world gripped by an unexpected global pandemic, the Anglo-Dutch company has slashed its dividend for the first time since the Second World War and suspended what was the world’s biggest share buyback programme.
For investors, the deal crowned a decade of disappointing takeovers, from Exxon Mobil’s $30 billion acquisition of North American natural gas producer XTO in 2009 to Repsol’s $8.3 billion takeover of Canada’s Talisman Energy just months before the 2014 crash to Occidental Petroleum’s ill-timed $38 billion bet on shale producer Anadarko last year.
Now, with European policymakers cracking down on greenhouse gas emissions, the region’s major oil companies have promised to reinvent themselves as low-carbon power suppliers that would thrive in a world of clean energy.
To hit their goals in time, though, they will almost inevitably have to chase a relatively small pool of renewable energy assets in competition with big utility companies at a time valuations are going through the roof.
And some investors worry that history will repeat itself.
“The majors have been poor capital allocators for the better part of the past 20 years,” said Chris Duncan, an analyst at Brandes Investment Partners which has shares in several European oil firms. “I’m nervous … usually when companies transition to a different market the transition is not a profitable process.”
BP and Total will present details about their new strategies to investors this month. Repsol will hold its strategy day in November and Shell’s will be in February.
The collapse in oil prices since COVID-19 struck has also forced the big companies to wipe billions of dollars off the value of their assets and it has also hit revenue to the point they’ve taken on more debt to keep up payments to shareholders.
Shell, for example, cut $16.8 billion off the value of its assets, which included a big chunk of the flagship QCLNG liquefied natural gas (LNG) plant in Australia it acquired through the BG deal.
All told, the world’s top energy companies have booked asset writedowns totalling $60 billion this year following the slide in oil prices and demand during the coronavirus pandemic.
And since 2005, the combined debt of the top five global oil majors, which include Shell, BP and Total, has risen five fold to $370 billion. That means much of the cash they will generate in the coming years will probably go towards cutting debt.
So oil companies chase renewable assets such as wind, solar and hydro, which generally have lower returns than oil and gas – or invest in green projects from scratch – they’ll be starting from an already highly leveraged position.
Some analysts said that with record debts, an uncertain outlook for oil prices and a weak deal-making record, the big oil companies face a tough task getting investors on board.
“The European majors in particular will have to earn the right to invest more in renewables, and convince investors they will not make the same mistakes again, and again,” said RBC Capital Markets analyst Biraj Borkhataria.
“When Shell acquired BG Group, a key quote from Shell’s CEO stuck with us: ‘Bold, strategic moves shape our industry’. Unfortunately, many of the ‘bold’ moves from management teams in recent years have proven to destroy value over the long term for shareholders,” he said.
Speaking in July, Shell’s CEO stood by the deal.
“The company did get stronger, but indeed the company was not able to withstand the onslaught of COVID if we wanted to adopt a prudent stance … I remain convinced it was the right move,” van Beurden told reporters.
Three current and former BG and Shell executives interviewed by Reuters, however, believe the deal was overvalued even at the time due to bullish oil and gas price forecasts.
LOWER RETURNS
Big oil companies have historically attracted investors with a promise of large and steady dividends. But the sector has had a poor track record from shareholders’ perspective of late.
Over the past five years, Shell’s total shareholder returns stood at minus 2.9%, according to Refinitiv data.
The picture is similar for others including BP, Exxon Mobil and Total. In addition to Shell, BP and Norway’s Equinor , have also cut dividends and suspended share buybacks.
BP’s total shareholder return, which assumes dividends are reinvested in its shares, is just 1.4% since 2015, while for Exxon it was minus 7.3%, the weakest in the sector, according to Refinitiv data.
Chevron had the strongest total returns at 5.9%.
By comparison, returns from Apple shares over the past five years are above 40% while Google’s Alphabet shares have returned more than 15%.
The steady drop in the value of oil companies – BP’s market capitalisation has halved over the past two years to about $75 billion, for example – might also make it harder for them to land large acquisitions of renewable assets or power companies which have seen they shares surge in recent years.
Shares in Danish renewables power firm Orsted , for example, have more than doubled over the past two years, giving it a market capitalisation of about $45 billion.
Shares in Spanish utility Iberdrola , one of the world’s biggest renewable power companies have jumped 180% in two years to give it a market value above $80 billion.
Valuations of companies such as Orsted could also rise further as many of Europe’s top oil and gas companies compete amongst themselves to expand their low-carbon businesses fast.
Still, some investors said that as the European oil companies evolve into becoming low-carbon businesses, they might attract a different kind of investor more interested in long-term stability than bumper shareholder payouts year after year.
“Traditional oil and gas investors are fond of the high returns and, until recently, the outsized dividends associated with the sector.” said Alasdair McKinnon, portfolio manager at The Scottish Investment Trust.
“However, this shift may attract a different set of investors who look at the prospectively lower returns on offer from renewables with a less jaundiced eye.”
(This story has been refiled to add ‘a’ in paragraph 1)
(Reporting by Ron Bousso; editing by David Clarke)
ExxonMobil Australia announced Wednesday that it has commenced a voluntary redundancy program.
The program follows an extensive review of the company’s current and future project work, according to ExxonMobil Australia, which highlighted that staff who take part in the program will be asked to offer expressions of interest through this month.
The program is being offered to all employees in Melbourne, Gippsland, Sydney, Adelaide and Perth, according to the company. Workers who participate in the program will be provided with company support, including outplacement services, ExxonMobil Australia revealed.
“This program will ensure the company manages through these unprecedented market conditions,” ExxonMobil Australia said in a company statement posted on its website on Wednesday.
The ExxonMobil Australia group has been operating in Australia since 1895. It conducts several upstream operations, including the Gorgon development, which is described as the largest single resource project in Australia, as well as several downstream projects, such as the Altona refinery, which has been fueling Victoria since 1949.
ExxonMobil Corporation describes itself as one of the world’s largest publicly traded energy providers and chemical manufacturers. The company, which traces its roots back to 1859, had 74,900 regular employees at year-end 2019. This figure stood at 71,000 in 2018, 69,600 in 2017, 71,100 in 2016 and 73,500 in 2015, ExxonMobil’s latest Form-10K reveals.
Oil prices plummeted earlier this year amid the pandemic and a disagreement among OPEC+ members. They have since started recovering but are still down on price levels seen last year.
ExxonMobil’s expulsion from the Dow Jones industrial average is just the latest sign that major oil companies aren’t as important to the economy as they used to be
A dozen years ago, ExxonMobil was the bluest of blue-chip companies. Raking in record-breaking profit, it spent every quarter of 2008 as the world’s most valuable publicly traded company.
Not anymore. The oil giant’s market value today is a third of what it was in 2008, when it was worth over $500 billion. That slide culminated last month with Exxon ending its 92-year run on the Dow Jones industrial average.
The removal of the longest-serving component of the U.S. stock indicator — Exxon joined in 1928, when it was known as Standard Oil of New Jersey — is just the latest sign of the decline of oil as major driver of the U.S. and global economies.
Pummeled by the coronavirus pandemic, which has stopped travel in its tracks and sent oil prices to historic lows, the energy sector became the smallest component of the S&P 500-stock index this summer after dipping below utilities, real estate and materials.
The departure from the Dow, while symbolic, is emblematic of the economic shift toward the tech sector and away from energy that has accelerated during the pandemic.
Today, oil and gas companies constitute just 2.3 percent of the S&P 500, down from more than 15 percent in 2008. Similarly, oil and gas made up about only 4.2 percent of the European stock market at the end of July.
The slide has been so steep that today five technology firms — Alphabet, Amazon, Apple, Facebook and Microsoft — are each worth more than the top 76 energy companies combined. (Amazon chief executive Jeff Bezos owns The Washington Post.) The Dow dropped Exxon for yet another tech darling, the cloud computing company Salesforce.
Exxon and a half dozen or so of the world’s largest oil companies — so-called Big Oil, though that’s an increasingly outdated term — just aren’t that big anymore.
“Oil has shrunk as part of every economy, not only the U.S.,” said Pavel Molchanov, an oil analyst at Raymond James. “This is a global trend.”
Even as some stay-at-home orders are lifted, apprehension about traveling during the pandemic may continue to weigh on demand for oil until a safe and effective vaccine is readily available.
During what are normally busy driving months of April, May and June, BP lost $16.8 billion, Exxon netted $1.1 billion in losses and Chevron — the Dow’s last remaining oil firm — shed $8.3 billion.
“I don’t think we know how this is going to play out. I certainly don’t know,” BP CEO Bernard Looney told the Financial Times in May. “Could it be peak oil? Possibly. Possibly. I would not write that off.”
The supermajors that were able to turn a profit were still off the mark from the previous year. Total and Royal Dutch Shell saw a second-quarter profit of $126 million and $638 million, respectively — a more than 80 percent decline from 2019 for each.
Big oil companies are borrowing money and selling assets to maintain dividends prized by investors, though those payouts create an unsustainable cash flow. According to the Institute for Energy Economics and Financial Analysis, those five oil majors spent $16.9 billion more on dividends and stock buybacks than they generated.
Next year likely won’t be much better for oil demand than this one. The International Energy Agency cut its most recent estimate for global oil demand in 2021 by 240,000 barrels a day, to 97.1 million barrels a day, with an expected stagnation of air travel being “the major source of weakness.”
In the power sector, natural gas now accounts for more than a third of U.S. generation after years of eating into coal’s share of the electricity market. But the fuel is too cheap and abundant due to the boom in fracking to turn a big profit.
“For those companies that are selling both oil and gas, oil has often been the more profitable product,” said Ethan Zindler, an analyst at Bloomberg NEF.
It was only a few years ago when new techniques for coaxing oil and gas out of the ground transformed the United States into an oil-producing juggernaut. Driven by domestic petroleum prices above $100 a barrel, the fracking revolution spurred a surge in extraction jobs in Texas, North Dakota and Pennsylvania, peaking at a total of more than 200,000 industry positions nationwide at the end of 2014.
But as prices dropped and companies automated jobs, sector employment declined to 158,000 last December, according to the Bureau of Labor Statistics. The pandemic, which briefly pushed the price of West Texas Intermediate crude into negative territory for the first time ever, has only led to more layoffs.
Even after the viral outbreak passes, oil companies will still be under intense pressure to curtail emissions from their core products as investors, consumers and politicians grow increasingly concerned about catastrophic climate change.
Although electric vehicles represent just a faction of auto sales, investors are pouring money into Tesla — while General Motors, Ford and other traditional automakers prepare their own electric fleets — in the expectation that buyers and regulators are ready to make the internal-combustion engine a thing of the past.
“Stocks reflect expectations for the future,” Molchanov said.
The European Union is aiming to cut its climate-warming emissions to net-zero by 2050. On this side of the Atlantic, Democratic presidential nominee Joe Biden wants to renew incentives for the purchase of electric cars and eliminate carbon pollution from the electric sector by 2035.
President Trump likes to boast that, under his watch, the United States has become the world’s No. 1 oil and gas producer.
But even if he wins reelection in November, the future of making money off oil looks bleak if prices hover around $40 a barrel. Such low prices limit exploration in the Gulf of Mexico and the Alaskan Arctic, where petroleum is plentiful but drilling costs are high.
Amid all the strife, some supermajors could come out of the recession with more assets than ever. In the oil business, contraction is often followed by consolidation. The market tumult has made smaller firms vulnerable to being scooped up by bigger players. Chevron has already acquired Houston-based Noble Energy in a $13 billion deal in July.
Big oil companies, Zindler said, are still a “very meaningful and important part of the economy, regardless of where the stock is trading at the moment.”
Oil companies plan to invest $400 billion into new petrochemical plants, betting that demand for plastic will keep growing.
Authors of a new report say the industry and other forecasters fail to consider that large majorities favor legislation to curb plastic use and waste and that governments are acting.
Plastics impose a cost of $1000 per tonne — through CO2 emissions, air pollution, and collection costs. Calls to shift those costs onto producers through taxes are growing.
Outside experts said the long-term outlook for plastics demand remains uncertain and will depend on consumer preferences and government actions.
The COVID-19 pandemic and accelerating green growth around the world have eviscerated many of the oil industry’s dogmas: that renewables would suffer from high costs, that governments would slow-walk environmental commitments, that investors would continue to reward long-term bets on oil with generous market values.
But one nugget of wisdom has survived everything the market has thrown at it, and now oil companies like ExxonMobil and Shell are wagering billions on it: that the world’s demand for plastics is still growing, with no end in sight.
Only around 9% of all the oil pumped from the ground is consumed in petrochemical plants to make plastic, making it a relatively small part of the oil industry’s bottom line. But the consistent and prodigious rate of demand growth for plastics has made it an appealing investment: between 1971 and 2015, plastics production grew more than twice as fast as global gross domestic product (GDP).
That may only be the beginning, if forecasts are to be believed. The Paris-based International Energy Agency (IEA) expects plastic production to reach some 540 million metric tonnes by 2040, an increase of more than a quarter from current levels. That demand increase would account for between 45% of total oil demand growth, the largest single component of oil demand, the IEA believes. (BP reckons it is closer to 95%.). In other words: even as demand for gasoline or jet fuel is seen stagnating or falling, plastics demand will only continue growing, underpinned by growing consumption in populous and fast-growing nations like India and China.
The report argues that a rising tide of tightening government regulations, environmental awareness, and technological innovations to reduce plastic use and boost recycling rates will put an end to plastic’s seemingly interminable growth. Far from the unstoppable 2-4% annual demand growth the industry and the IEA expect, global plastic demand growth could well slow to just 1% per year and peak as soon as 2027, argues Carbon Tracker, which specializes in identifying financial risks related to climate change.
If the think tank is right, the risks for oil companies are grave. Prices for petrochemicals already are lagging, and over-capacity will depress their margins even further. “The petrochemical industry already faces huge overcapacity, but is planning to spend a further $400 billion on…new capacity,” the authors write. “Unless stopped, this will result in continued low prices and stranded assets.”
In line with similar such estimates, the authors calculate that each tonne of plastic produced imposes a cost on society — what economists would call an “externality” — of $1,000. The cost is borne in various ways: air pollution from the production as well as incineration of plastic; the collection and sorting of plastic waste, at a cost of some $327 per tonne; ocean clean-up efforts; and the carbon dioxide emissions themselves, which hasten atmospheric warming. More than 400 million metric tonnes of plastic are produced around the world each year — equal to the weight of around 1,000 Empire State Buildings — bringing the total estimated externality cost to $350 billion annually.
The report calls for transferring these costs onto producers through the imposition of taxes, which would create an incentive to recycle more existing plastic and reduce waste. Currently, 36% of all plastic is used once and thrown away, 40% ends up in the environment, and only 5% of plastic is really recycled, the report says.
Kingsmill Bond of Carbon Tracker, one of the authors, stressed that they are not inherently against plastic. “We didn’t write this report as an attack on the oil industry.”
Still, forecasts by such formidable players as the IEA — a respected provider of energy intelligence — and BP are not to be dismissed lightly. Reached for this story, academics and consultants with expertise in petrochemicals said it would take more than just one report to dislodge the view that “peak plastics” won’t be reached for some time yet.
“I do believe that there is a very real possibility that changes in household behavior and tightening environmental policies around the world will indeed depress the growth in virgin plastic demand,” said Roland Geyer, a professor and widely cited authority on plastics production. (Geyer helped Carbon Tracker pull together some of its data.) But Geyer also cautioned: “I would argue that BP’s and Carbon Tracker’s assessment probably both have elements of wishful thinking.”
Others were more dubious, including Alan Gelder, vice president for refining, chemicals and oil markets at Wood Mackenzie, a consultancy. “The growing use and greater penetration [of petrochemicals] is unlikely to stop, as natural alternatives often have poorer life cycle emissions,” he said.
Poking holes
The Carbon Tracker and SYSTEMIQ analysts do not take a sledgehammer to the industry’s forecasts. Instead, they poke holes.
They note, for example, that the IEA’s central plastics output forecast to 2040 doesn’t include a material increase in the recycling rate or much significant regulatory or technological change — a striking omission, given rising environmental concern. What is more, the IEA observes that the case for robust future plastic demand rests on rising consumption in developing nations, even though there is growing concern about plastics there, too, which has led to anti-plastics legislation. Kenya banned plastic bags in 2017, and late last year India came close to outlawing all single-use plastics, including cups, plates, bags and bottles, by 2022.
“The industry is planning to double capacity in the next 20 years and society wants to cut demand,” said Bond, referring to polls by IPSOS that have shown that 70-80% of people want to take “radical action” on plastic over-production. “Something has to give.”
How could the oil world’s preeminent forecasters have missed these signals? One major oversight, Carbon Tracker says, is that technological solutions to curbing plastic production are now widely available, just waiting to be noticed, and they are finally being deployed at scale. Some are new, but most are old and mundane: replace packaging materials with recyclable substitutes; extend the lifetime of household goods; convert more plastic waste back into raw product; and so forth.
“I cannot, hand on heart, point to one piece of technology and say, ‘That’s the answer,’ which I can do with electric power,” Bond said. And yet, unlike in the past, governments are now implementing these ideas with seriousness, spurred to action by growing concern over the environmental costs of proliferating plastics and associated greenhouse gas emissions.
Europe and China’s governments are taking the most decisive steps. In Europe, a ban on single-use plastics passed by the European Parliament in March 2019 will come into force in 2021, and all plastic packaging must be recyclable after 2030. China in 2018 closed its industry for importing and processing foreign plastic waste, a move that may have overwhelmed recycling capacity in other countries but signified the country’s grand ambitions to reduce waste. Meanwhile, in 2019, nearly every country in the world last year signed on to a United Nations pact that legally binds them to reduce pollution from plastic waste.
For the moment, the COVID-19 pandemic has scrambled everyone’s outlook. Petrochemicals demand is expected to retreat this year, just as it did after the 2008-9 financial crisis, but the longer-term impacts aren’t yet clear. “It’s too early to tell,” said Gelder. “Much depends upon the trajectory of economic recovery.”
Eventually, however, the usual drivers will kick in: consumer preferences and government action. Carbon Tracker reckons that the former is increasingly informing the latter, and that oil companies will be left in the lurch.
Delaware joins list of states and localities suing Big Oil
Defendants in the lawsuit include Exxon Mobil, Chevron, ConocoPhillips, BP, Royal Dutch Shell and the American Petroleum Institute.
By Randall Chase | AP: September 10, 2020
DOVER, Del. — Delaware has joined the list of state and local governments that have sued the petroleum industry in an attempt to hold oil producers accountable for costs related to climate change.
The attorney general’s office joined forces with a California law firm that has sued the industry on behalf of other state and local governments in filing a Superior Court complaint Thursday.
The 222-page complaint alleges that the petroleum industry misled the public for decades about the role its products play in causing climate change. The lawsuit seeks unspecified damages for the costs of responding to sea level rise and other problems in Delaware that have been blamed on global warming.
“Defendants individually and collectively played leadership roles in denialist campaigns to misinform and confuse consumers and the public and obscure the role of defendants’ products in causing global warming and its associated impacts,” the lawsuit alleges. “But for such campaigns, climate crisis impacts in Delaware would have been substantially mitigated or eliminated altogether.”
“But for defendants’ conduct, the state would have suffered no or far less serious injuries and harms than it has endured, and foreseeably will endure, due to the climate crisis and its physical, environmental, social, and economic consequences,” the complaint adds.
Defendants in the lawsuit include Exxon Mobil, Chevron, ConocoPhillips, BP, Royal Dutch Shell and the American Petroleum Institute.
Asked why the state did not include the Delaware City oil refinery as a defendant, Attorney General Kathy Jennings said officials decided to go after “the big dogs” who are substantially responsible for climate change.
Casey Norton, a spokesman for Exxon Mobil, said the claims in the lawsuit are “baseless and without merit.”
“Legal proceedings like this waste millions of dollars of taxpayer money and do nothing to advance meaningful actions” toward reducing risks of climate change, Norton said in an email.
Copyright 2020 The Associated Press. All rights reserved.
Every so often, corporations confront questions of life or death.
IBM did it in the 1990s, when its hulking mainframe computers faced the challenge of next generation PCs. A new chief executive successfully shifted IBM to services and software. Netflix did it — three times. It first played the role of disrupter, offering movie DVDs by mail and then mastering the business of online streaming. Then it changed again, generating its own content.
Now, BP, one of the world’s largest oil and gas companies, is aiming to ride the waves of disruption instead of being crushed under them.
Led by a new chief executive, BP is trying to reinvent itself as an energy company in the age of climate change. The company is shrinking its oil and gas business, revving up offshore wind power and developing solar and battery storage. It is even considering installing electric car charging kiosks at its gas stations, part of a drive to eliminate or offset its carbon emissions to a net zero level by 2050.
There is much at stake because the century-and-a-half-old oil and natural gas business — unlike the business of home entertainment — has the ability to inflict even more lasting damage to the planet’s climate if it fails to act and continues to generate greenhouse gases.
But BP is not just doing this out of altruism; it is making a business wager that low carbon energy will be a huge part of the world’s future.
“The challenge as I see it is that it is almost impossible for incumbent companies to change their business models,” said Bruce Usher, a professor at Columbia University’s business school who uses Netflix as a case study in his classes. Netflix is one of the very few cases of a firm “radically changing its business model and going on to even greater success,” he said.
“I can’t think of a company like that in the energy business,” Usher said.
BP is giving it a try. On Thursday, the London-based oil giant said it would spend $1.1 billion for a half ownership in Equinor’s wind projects off the shores of Massachusetts and New York, with the hope that the partnership will build more offshore wind projects in a global market expected to grow from 30 gigawatts now to more than 200 gigawatts by the end of the decade.
BP is adding this to a portfolio that includes a 50 percent ownership stake in European solar company Lightsource BP, which is developing projects.
It’s just a start. The oil and gas company’s chief executive Bernard Looney, a drilling and production engineer, said on Aug. 4 that it aims to boost spending on low carbon projects from $500 million a year to $5 billion a year by the end of the decade. Even that larger figure, however, would be barely 40 percent of BP’s overall capital spending budget.
The company has also said it would consider installing electric vehicle recharging stations at many of the more than 7,000 retail gasoline stations in the United States. The company has already purchased Britain’s largest electric vehicle charging network and another network in China. And it plans to help cities and utilities buy packages of renewable energy and storage.
The need for a far-reaching corporate makeover as the planet warms is pressing, the company said. “There’s a fundamental belief about our business proposition: that the world actually demands more affordable clean energy,” said Dev Sanyal, chief executive of BP’s alternative energy business and a member of the company’s executive leadership team. “Providing the energy the world needs the way that it wants it — that is a shift in our strategy.”
After years of trying to impress investors by building bigger oil and gas reserves, BP earlier this year said it would stop looking for oil and gas in new areas and would slash oil and gas output by 40 percent. Last quarter it also sharply wrote down the value of its oil and gas reserves.
The new strategy might be good for the world, but tough on the company in the short run.
Sanyal said that BP expects returns on renewable investments in the range of 8 to 10 percent — a solid, stable performance but perhaps falling short of the oil industry’s traditional returns. BP recently cut its dividend and Royal Dutch Shell slashed its dividend for the first time since World War II, a blow for shareholders, especially British pension systems that rely heavily on Big Oil’s checks.
“We’re not promising the world. We’re promising 8 to 10 percent,” Looney said in answering questions from stock analysts on Monday.
“You have to continue to take care of the core business to generate the cash to fund the transition and keep the investors on board as you slowly shift away from higher-margin projects to lower-margin energy projects,” said a mid-level executive who was not authorized to speak for the company. “I don’t envy the job of a CEO of an oil company. It’s a really hard task.”
He said that there wasn’t much choice, though, given shareholder activism and political pressure for fossil fuel companies to abide by guidelines in the Paris climate accord. The alternative was to wait for big financial shareholders to divest or vote you out of business, or for the company to get “regulated out of business” because of climate change, he said.
The other challenge that BP faces as it tries to reinvent itself is competition in areas where other companies have more experience.
One competitor is 8minute Solar Energy, a privately owned firm that is building solar panels expected to generate 18 gigawatts — enough to provide power to 20 million people. (Eight minutes is the time it takes for solar radiation to travel from the sun to Earth.)
The company has more than 50 utility-scale projects under construction, including a $1.3 billion installation for the Los Angeles Department of Water and Power that generates solar energy and then stores it. The projects rely on power purchase agreements, where the developer owns the solar panels and keeps a percentage of the payments for the electricity produced.
BP’s Looney said that the Lightsource solar unit has gone from 1.6 gigawatts under construction to 16 gigawatts in just two years. Looney’s goal is 50 gigawatts.
“As a climate activist I say [BP’s overhaul] sounds great,” said Tom Buttgenbach, chief executive of 8minute Solar. “The problem the oil majors have as businesses is they’re so damn big. To invest a little in renewables isn’t going to help.”
Usher, the Columbia professor, agreed.
“The key challenge for BP and other oil & gas companies isn’t just that these (renewable energy) business areas are less sexy but that they are relatively simple businesses with low barriers to entry and therefore low profitability,” Usher said in an email. Compared to oil and gas drilling, Usher said, “running a solar or wind farm isn’t very complex or difficult.”
As a result, he expects big oil companies to “gravitate towards the more challenging projects,” which include offshore wind where their experience with drilling platforms would help. They could also take on very large projects in challenging countries such as in sub-Saharan Africa, where major oil companies already have experience, he said.
In the end, BP — which has searched for gas and oil reserves in far-flung places such as Iraq, the Caspian Sea, Russia, the Gulf of Mexico and Alaska — could end up looking like an electric utility, albeit one that will be good for the climate.
The reason? Fighting climate will require a massive infusion of capital for a shift toward electrification. The International Energy Agency has calculated that reaching net-zero emissions by 2050 requires taking the equivalent of the largest solar park in the world and building a new one every two days. Or it could mean building the equivalent of the massive Northern Lights carbon capture project every week.
Oil and gas is one of the few industries able to make those massive investments. A Goldman Sachs report says that capital spending on low carbon projects by Europe’s big oil companies — BP, Total, Shell, ENI, Equinor and Repsol — would surpass $170 billion by 2030. While ExxonMobil and Chevron have devoted only modest resources to low carbon projects, other smaller companies have made the switch already. Orsted, once a Danish coal company, has become one of the world’s leading installers of wind turbines.
Companies have done the easy part — changing their names. BP used to be known as British Petroleum. The Norwegian state-owned Equinor was formerly known as Statoil. Orsted was previously Danish Oil and Natural Gas, or DONG.
“If a company is to succeed over time, it must change and adapt at least as fast as its surroundings,” Equinor says on its website. It said the name change meant it was “going from being a pure oil and gas company to become a broad energy major.”
But that might not be enough. Most companies facing disruptive technology go the way of Smith Corona, the once-dominant typewriter maker that couldn’t match the competition from personal computers and filed for bankruptcy in 1995.
BP’s annual outlook paper puts forward three widely divergent scenarios for oil and gas consumption. Looney says in the report that “the world is on an unsustainable path and its carbon budget is running out.”
Getting off that path will be difficult. The report politely adds that “a rapid and sustained fall in carbon emissions is likely to require a series of policy measures, led by a significant increase in carbon prices” — something American lawmakers have been averse to doing. Without tax-driven increases in carbon prices, oil and gas use will continue to rise, the report said. But “delaying these policies … may lead to significant economic costs and disruption,” the company said.
BP isn’t waiting.
“In terms of an oil company saying it will no longer emit carbon dioxide when that’s what fossil fuels are, it’s a radical change for a company BP’s size,” Usher said. “If it is successful in this it will be extraordinarily impactful. But from a business management perspective this is going to be very hard.”
Steven Mufson covers the business of climate change for The Washington Post. Since joining The Post in 1989, he has covered economic policy, China, diplomacy, energy and the White House. Earlier, he worked for The Wall Street Journal. In 2020, he shared the Pulitzer Prize for a climate change series “2C: Beyond the Limit.”
‘Stranded Assets’ Risk Rising With Climate Action and $40 Oil
By Laura Hurst | Bloomberg:
September 18, 2020 at 7:55 a.m. GMT+1
What had seemed like an abstract debate about leaving oil, gas and coal in the ground to fight climate change has suddenly become real. Environmental activists have long fought for lower fossil-fuel production. Now, with the pandemic crippling economies and reducing energy use and prices, drillers and miners are coming to grips with projects that are no longer viable. Some companies are even abandoning investments, leaving deposits worth billions of dollars in the ground to languish as so-called “stranded assets.” While environmentalists applaud, fund managers, banks and regulators worry that project financing could sour and collateral become worthless.
1. Who’s taking action?
The world’s biggest oil companies began to slash the value of reserves and current projects in 2020 as some fields became unprofitable to drill. Total SE wrote down about $7 billion of Canadian oil sands assets in July, while Royal Dutch Shell Plc took a $4.7 billion hit in the second quarter relating to assets in North America, Brazil and Europe and a project in Nigeria. Exxon Mobil Corp. warned in August that low energy prices may wipe as much as one-fifth of its oil and natural gas reserves off the books. Chevron Corp. said it expects to revise its reserves down about 10%, mainly in the Permian Basin straddling Texas and New Mexico, and in Australia.
2. What type of assets are at risk?
Those where production is especially costly or complicated —including deep-water discoveries off Brazil and Angola as well as fields in the Gulf of Mexico and Arctic — or where deposits contribute disproportionately to global warming. In Canada’s tar-like oil sands, extracting and processing generates more than twice the amount of emissions per barrel than for the average North American crude. Oil producers face a double whammy, as fossil fuels may become cheaper, while taxes make releasing carbon more expensive. BP in June cut estimates for oil and gas prices in coming decades by between 20% and 30%, while projecting that the cost of carbon emissions will more than double.
3. How much are we talking about?
There are different ways to look at it and estimates vary. About a third of the fossil-fuel investment planned through 2030 risks failing to deliver adequate returns for developers under policies that would achieve the United Nations’ target of limiting the rise in Earth’s temperature to well below 2C (3.6F) above pre-industrial levels. That’s according to Carbon Tracker Initiative, an environmental group that advises institutional investors and coined the term “stranded assets.” (The think tank has received support from the charitable foundation of Michael Bloomberg, the majority owner of Bloomberg LP, the parent of Bloomberg News.)
4. What are projections showing?
Consultants at Rystad Energy AS estimate that the pandemic could result in about 10% of the world’s recoverable oil resources, or some 125 billion barrels, becoming stranded. A separate Financial Times study in February concluded that if governments attempted to restrict the rise in temperatures to 1.5C for the rest of this century, more than 80% of hydrocarbon assets, including coal, would be worthless. Under this scenario, $900 billion, or one-third of the value of big oil and gas companies, would evaporate.
5. Are prices likely to stay low?
The jury is out on that because of the unpredictability of the pandemic. But meanwhile the writedowns continue. Energy companies were starting to review assets in the face of a decline in oil prices, irrespective of investor pressures and before the full effect of lockdowns was felt. Brent crude tumbled below $20 a barrel in April and was still trading around $40 in September, down from almost $70 in early 2020. The international benchmark has been pulled lower both by the coronavirus-led drop in usage and a price war in March involving Saudi Arabia and Russia.
6. Who’s affected by stranded assets?
Everyone. The debate about stranded assets has been pushed along by investors, stock exchanges, banks and regulators who have grappled with how companies should reflect the hazards of global warming. Investors say fossil-fuel companies need to calculate the financial risks of their climate policies and incorporate those in public strategy documents. Some investment managers are facing pressure to dump fossil-fuel companies altogether. “Every major systemic bank, the world’s largest insurers, its biggest pension funds and top asset managers are calling for the disclosure of climate-related financial risk,” former Bank of England Governor Mark Carney, who is also the United Nations Special Envoy on Climate Action and Finance, said in February.
7. Will more assets get stranded?
Maybe. Climate Action 100+, a group of more than 500 investment firms that together manage over $47 trillion in assets, called in September on some of the world’s biggest polluters to be more aggressive in reducing their greenhouse gas emissions, putting pressure on marginal assets. No new oil-sands projects fit into a world compliant with the Paris Agreement on climate change, reached under United Nations auspices in 2015, according to Carbon Tracker.
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Shell is making deep cuts in its fracking business as it tries to free up cash to cope with the pandemic and invest in renewable energy.
The international oil giant will cut about 40pc of overheads including staff in the US-focused shale oil and gas division by early 2021.
The business includes seven projects in the US, Canada and Argentina, including in the core shale region of the Permian Basin, Texas.
Shell along with other oil majors such as Exxon, Chevron and BP has looked to US shale as a source of growth in recent years, but falling oil and gas prices due to the pandemic have taken the shine off many assets and triggered heavy write-downs.
The FTSE 100 company launched a $9bn (£7bn) cost-saving drive across the entire business in March to help cope with the pandemic. Keeping shale costs low has always been key given the rapid rates of drilling required to maintain output.
Shell is also seeking efficiencies as it tries to adapt to the global push towards lower-carbon sources of energy, freeing up investment for early-stage carbon capture and hydrogen projects.
It announced plans in July to cut its carbon emissions to net zero, going further than many by including emissions generated by customers.
Boss Ben van Beurden has signalled a “complete overhaul”. Wael Sawan, Shell’s director of upstream, told City analysts recently there was less capital available for production, with shale particularly affected, and he expected the approval of projects to slow down.
In July, Shell sold its Appalachia shale assets to the National Fuel and Gas Company for $541m as it focuses on core higher-margin assets.
There has been talk of the demise of oil and gas for decades. But you know that things are getting serious when even the boss of oil giant BP, Bernard Looney, warns that demand for oil may peak in the next few years and then decline.
The so-called energy transition from fossil fuels to renewables is gaining momentum.
And Looney’s comments are among a series of indicators in recent days that suggest it could play out sooner than previously thought.
In Britain, Ministers are considering whether to ban sales of new petrol and diesel cars as early as 2030 – ten years ahead of the current schedule.
Meanwhile, in China President Xi Jinping last week announced the country will aim to hit peak emissions by 2030 before becoming fully carbon neutral by 2060.
All this presents a dilemma for investors. Many of us have large chunks of our portfolios invested in the oil and gas sector – often via income funds, which typically hold shares in BP and Shell.
Historically, these stocks have been a great bet. They tend to be very profitable – just two years ago, oil companies generated more than a fifth of FTSE100 profits.
They have also proved a key source of income for investors, paying out some of their vast profits as dividends.
BP and Shell alone accounted for £1 in every £5 of dividends paid by FTSE100 companies in 2018. Their payouts have sustained pension funds for years.
So should investors keep faith in gas and oil companies as they lay out their plans to transition to green energy? Is BP’s pledge to increase renewable spending tenfold by 2030 – and produce net-zero emissions by 2050 – just hot air or a brilliant new strategy?
Or perhaps it’s time to ditch the giants entirely and seek out new income generators – or switch to companies already making money from green energy.
Investment manager Job Curtis says he’s now hunting for income outside the fossil fuel giants. He manages the City of London Investment Trust, which plans to increase its dividend once again for the 54th consecutive year, and is putting his faith in consumer staples firms such as Unilever and Reckitt Benckiser, which owns Dettol.
‘If your household is anything like mine, there are a lot of Dettol bottles and wipes being used at the moment,’ he says.
Insurers and asset management firms ‘also tend to be pretty good from a dividend point of view,’ he adds. His holdings include Prudential and Phoenix.
Royal Dutch Shell was the trust’s largest investment last year. This year it has fallen to sixth place.
Meanwhile, BP has this year fallen out of its top ten holdings altogether. ‘Both intend to grow in renewables, but it is very difficult to judge how profitable they will be,’ says Curtis.
If renewables are the future, there is an argument for skipping ahead now and investing in the companies that already have that focus.
Chris Salih, investment trust analyst at FundCalibre, says: ‘I believe renewables really are the energy of the future – and the good news is they can generate a nice income for investors.’
He tips Greencoat UK Wind, which provides a 5 per cent yield from wind farms, and Foresight Solar Fund, which yields 6.5 per cent and specialises in solar energy investments. However, Salih cautions that many of these investment trusts trade at a ‘premium’. That means they are more expensive to buy than the value of their underlying holdings.
These premiums do fluctuate – sometimes turning into discounts where you get more underlying value from the fund than you paid for – so it pays to keep an eye on them by visiting the Association of Investment Companies website (theaic.co.uk).
Salih adds that investing in electric vehicles is another way to profit from the energy revolution.
However, the best-known electric car maker Tesla has already seen its share price soar dramatically. You could instead look for other companies in the supply chain – for example, investing in firms that make components for the cars, batteries and battery storage.
Zehrid Osmani, manager of Legg Mason IF Martin Currie European Unconstrained Fund, says: ‘In the gold rush it was the people making the pickaxes and shovels that made the real money.’
His fund invests in companies such as Infineon Technologies, which makes parts for electric vehicles, and ASML, an innovation leader in the computer chip industry. The fund has produced a 30 per cent return over three years.
Teodor Dilov, fund analyst at Interactive Investor, suggests VT Gravis Clean Energy Income, which currently yields around 3.1 per cent – meaning it pays about £3.10 in income for every £100 you invest.
‘It invests in a diversified portfolio of global listed securities of companies involved in the operation, funding, construction, generation and supply of clean energy,’ says Dilov.
He says Unicorn UK Ethical Income is a good option for those ‘who want a nod to sustainability’.
‘The smaller company focus means it should be part of a broader, balanced portfolio,’ he adds.
It currently yields 3.76 per cent.
Not all investors are convinced that gas and oil companies are in terminal decline.
While some investors may believe now is a good time to support cleaner energy, others focused purely on profit may still find opportunities in oil and gas.
The oil price is currently dampened in part by a 10 per cent drop in demand due to the Covid pandemic. However, should restrictions on global travel and industry lift, demand could bounce back.
Russ Mould, AJ Bell investment director, says if you agree with BP’s forecasts that we’re on a road to a zero-carbon world, it may be hard to justify investing in oil companies – at least until they start to make greater profits from activities away from fossil fuels. However, he adds that if change is not as fast as we think – perhaps owing to lack of political or public action – the picture could be very different.
He says: ‘Demand could recover in a post-pandemic world and do so just as oil majors cut investment, US shale output falls and global oil rig activity is down more than 50 per cent year-on-year. That could make for a surprise comeback from an industry that financial markets seem to be writing off – the FTSE All-Share Oil & Gas Producers index rose 50 per cent in 2016, the year after BP and Shell last made a combined loss, just as they are forecast to do in 2020.’
Big Oil’s $110 billion asset sale target could prove big ask
By Ron Bousso: October 1, 2020
LONDON (Reuters) – Leading energy companies are hoping to sell dozens of oil and gas fields and refineries worth more than $110 billion to curb both their ballooning debt and their carbon footprints.
But with the outlook for oil and gas prices uncertain because of the coronavirus pandemic and a shift to cleaner energy, finding buyers and striking deals might prove tricky.
“This is not a very good time to sell assets,” Total CEO Patrick Pouyanne said while presenting the French giant’s strategy to switch to renewables on Wednesday.
Eight of the world’s top oil companies, Exxon Mobil XOM.N, Chevron CVX.N, Royal Dutch ShellRDSa.L, BPBP.L, Total TOTF.PA, Equinor EQNR.OL, Eni ENI.MI and ConocoPhillips COP.N, are expected to sell assets with resources of around 68 billion barrels of oil and natural gas equivalent.
Those assets today carry an estimated value of $111 billion, and are equivalent to around two years of existing global oil demand, Norwegian consultancy Rystad Energy said in a note.
Oil prices hit their lowest since 1999 in April after a collapse in demand caused by coronavirus-related travel restrictions. They have since recovered to around $40 a barrel, but are not expected to rise dramatically in coming years.
This means an opportunity to snap up cheap assets for smaller companies like Serica Energy SQZ.L, Cairn Energy CNE.L and Jadestone Energy M4E.BE, Peel Hunt analysts said.
Yet with a narrowing pool of buyers and a growing reluctance to lend to the oil and gas sector, disposals could be tough.
“Oil and gas asset sales will of course put pressure on market pricing if there are few buyers for these assets,” Garrett Soden, CEO of Canadian-listed Africa Energy AFE.V, which is part of Lundin Group, said.
Reduced investments by the majors could however lead to tighter supply and higher oil prices, which would increase the value of their resources, Soden added.
The majors need to sell assets to boost revenues and reduce debt amassed in the wake of the oil price collapse.
European companies including BP, Shell and Total are also looking to focus their oil and gas operations on the most profitable and least polluting projects after pledging to slash carbon emissions in coming decades.
Exxon and BP each hope to sell $25 billion of assets in the coming years, while Shell aims to dispose of $5 billion a year.
Spiro Youakim, global head of natural resources at investment bank Lazard, told Reuters that oil company boards should consider spinning off unwanted oil and gas production and refining businesses to attract new investors as buyers such as private equity lose appetite.
“The majors’ portfolios are exceedingly large and they include more peripheral assets which could be run more effectively by different types of investors,” Youakim said.
Reporting by Ron Bousso; Editing by Tomasz Janowski and Alexander Smith
Royal Dutch Shell and BP have lost over half of their market value so far this year, with both shares hitting 25-year lows this week…
Big Oil shares capitulate to COVID, lower carbon doubts
By Ron Bousso: OCTOBER 2, 2020
LONDON (Reuters) – Royal Dutch Shell RDSa.L and BP BP.L have lost over half of their market value so far this year, with both shares hitting 25-year lows this week, battered by weak oil prices and investor concerns over their plans to shift to low-carbon energy.
Exxon Mobil, the largest U.S. oil company, which is set to report its third straight quarterly loss at the end of this month, has seen its shares dive 52% since the start of the year.
Oil companies are squeezed by a steep drop in oil prices due to the COVID-19 pandemic combined with growing investor pressure to align their businesses with the 2015 Paris agreement to limit global warming.
Responding to the pressure, Europe’s top companies outlined strategies to curb greenhouse gas emissions in the coming decades, with BP and Italy’s Eni ENI.MI planning to rapidly cut oil output by 2030.
BP CEO Bernard Looney, reacting in a LinkedIn post to the drop in BP shares this week, said that there is “a very significant need to change bp.”
“I think – if anything – the share price performance of the sector is a robust case for change in itself,” Looney wrote.
“The majors are struggling to convince any investor at the moment,” said Jason Kenney, analyst at Santander, who has a “buy” rating on all European oil majors.
“There is a phenomenal give-up on the valuation of these companies… it is astonishing.”
Investors are fleeing the sector because of uncertainty over the global economic recovery in the near term and doubts about the profitability of companies’ transition plans in the longer term, Kenney said.
“With the COVID-19 backdrop and the uncertain economic outlook, it is challenging to be confident,” Kenney said.
WASHINGTON (Reuters) – The U.S. Supreme Court on Friday agreed to hear an appeal by energy companies including BP PLC, Chevron Corp, Exxon Mobil Corp and Royal Dutch Shell PLC contesting a lawsuit by the city of Baltimore seeking damages for the impact of global climate change.
The justices will weigh whether the lawsuit must be heard in state court as the city would prefer or in federal court, which corporate defendants generally view as a more favorable venue. The suit targets 21 U.S. and foreign energy companies that extract, produce, distribute or sell fossil fuels.
The outcome could affect around a dozen similar lawsuits by U.S. states, cities and counties including Rhode Island and New York City seeking to hold such companies liable for the impact of climate change.
Baltimore and the other jurisdictions are seeking damages under state law for the harms they said they have sustained due to climate change, which they attribute in part to the companies’ role in producing fossil fuels that produce carbon dioxide and other greenhouse gases.
The plaintiffs have said they have had to spend more on infrastructure such as flood control measures to combat sea-level rise caused by a warming climate. Climate change has been melting land-based ice sheets and glaciers.
The Supreme Court in 2019 declined the companies’ emergency request to put the Baltimore litigation on hold after a federal judge ruled that the case should be heard in state court. In March, the Richmond, Virginia-based 4th U.S. Circuit Court of Appeals upheld the judge’s decision.
In the absence of federal legislation in the bitterly divided U.S. Congress targeting climate change, the lawsuits are the latest effort to force action via litigation.
The Supreme Court in a landmark 2007 ruling said that carbon dioxide is a pollutant that could be regulated by the Environmental Protection Agency. Under Democratic President Barack Obama, the agency issued the first-ever regulations aimed at curbing greenhouse gases. But efforts in Congress to enact sweeping climate change legislation have failed.
The court took action in the case three days before it begins its new nine-month term short one justice after the Sept. 18 death of Ruth Bader Ginsburg. President Donald Trump has nominated federal appeals court judge Amy Coney Barrett to replace Ginsburg.
Reporting by Lawrence Hurley; Editing by Will Dunham
Shell on Wednesday announced a major reorganization that will see thousands of jobs lost. The last major reorganization dates back to 2016 when Shell cut 10,000 jobs after the acquisition of BG Group.
English translation of an article published by the Dutch equivalent of the Financial Times.
Thousands of jobs at stake in Shell reorganization, not spared
Shell on Wednesday announced a major reorganization that will see thousands of jobs lost. The restructuring is also reportedly hitting the top layers of management. The restructuring is needed to reduce costs as oil prices have fallen sharply and the outlook has deteriorated. Shell is also working on it. a new strategy. This will be revealed early next year.
Shell announces a major reorganization on Wednesday morning, which will probably also cause thousands of jobs and the top layers of management will not be spared. The oil and gas multinational announces its cost-cutting measures in a trade update over the past third quarter. Well-informed sources say that.
It is not clear whether the position of Shell CEO Ben van Beurden is under discussion. In May, one of the largest shareholders suggested that Shell should start thinking about the succession of Van Beurden, the day after the oil and gas company cut its dividend for the first time since World War II. The 62-year-old Van Beurden has been CEO since January 2014.
It is to be expected that, as with the other major oil groups, at least many thousands of jobs will be lost. Shell employed 83,000 people worldwide at the end of 2019. According to one source, this is the largest reorganization in the company’s recent history. The last major reorganization dates back to 2016, when Shell cut 10,000 jobs after the acquisition of BG Group.
A spokesman for the company said on Tuesday that it would not respond to speculation and rumors.
Record net loss
Shell’s reorganization comes as no surprise. Earlier this year, it announced that it would be cutting the company considerably after the corona pandemic and the low oil price had punched a hole in the results. A write-off of more than $ 20 billion due to sharply depreciated oil and gas assets even led to a record net loss of $ 18 billion in the second quarter. In the previous three months, Shell already lowered its dividend by two-thirds for the first time since World War II.
The write-offs and losses illustrate the crisis in which the oil and gas industry finds itself. ShellRDSA’s share prices of € 10.36 + 0.14% and BPBP £ p212.55-2.59% have fluctuated at the lowest level in decades this year. At the beginning of this year, the Shell share was still trading at more than € 27, but less than € 11 was left on Tuesday.
There is a great need to cut costs, now that the effects of the corona pandemic persist and there is no prospect of a rapid recovery in demand for oil and oil products.
In an interview with the FD in July this year, Shell CEO Ben van Beurden outlined the scale of the crisis: “We have reduced our investment program by $ 5 billion to $ 20 billion a year. We originally wanted to grow that to $ 30 billion. So there is a huge gap between the ambition we had and what we think we can do now. There must also be a lot of costs out of the organization. So yes, we will have to slim down. ‘
Job losses in the oil sector
Number of employees on 12/31/2019
Preserved jobs: Planned layoffs
Cut jobs
Shell is not alone. The American oil company Chevron announced in May that it would cut 10% to 15% of its jobs and the British BP announced in June that 10,000 jobs will be lost at the company.
In the meantime, the pressure from governments and NGOs on oil and gas companies such as Shell is increasing to ‘green’. Due to climate measures by governments and changing consumer preferences, oil and gas are also facing increasing competition from other energy sources with lower CO₂ emissions, such as wind and solar energy and electric driving.
Shell will unfold a new strategy in February, but may already be lifting a tip of the veil on Wednesday.
Op-ed: A $100 billion Big Oil divestiture plan is coming
Tore Guldbrandsøy, senior vice president, and Ilka Haarmann, analyst, at Rystad Energy
KEY POINTS
The largest oil and gas companies, including ExxonMobil, Royal Dutch Shell, Chevron and BP, are projected to sell a combined $100 billion in oil and gas assets around the world as they focus on top-performing regions, particularly the U.S. shale, according to a new analysis from consulting firm Rystad Energy.
Climate change and renewable energy investments are forces that these Big Oil firms need to respond to strategically, but their own carbon divestiture campaigns will be motivated by factors distinct from the push from climate activists.
Energy transition has climbed towards the top of the agenda in the boardrooms of the world’s largest oil and gas companies. With electrification and renewable energy on the rise, Big Oil is striving to adapt to a transformation that could eventually render their business obsolete if they don’t latch on to the opportunities it brings. The result could be a massive sell-off of assets as the biggest petroleum players concentrate their oil and gas production to the countries where oil and gas is cheapest and easiest to produce.
The transition to renewable energy poses a threat to oil and gas production in the longer term as solar and wind power is expanding on the energy supply side, while lower-cost electric vehicles and better battery technology are driving big changes on the global oil demand side. Big oil companies have strong skills within energy and own assets globally that they can use to remain competitive as the transition proceeds. Some oil players may also choose to just stick with oil and gas only, but then they clearly need to be among the best in this game.
Regardless of strategy, the big oil companies need to scale down their global presence in oil and gas by focusing on countries with growth potential where oil and gas production can deliver significant cash flow and profit at the lowest possible cost and carbon footprint.
Where $100 billion is up for grabs globally
Our analysis of the geographic spread and need for increased focus for the large listed companies, also referred to as “Majors+” — U.S.-based ExxonMobil, Chevron and ConocoPhillips, and European players BP, Shell, Total, Eni and Equinor — concludes that these eight companies together may want to sell asset worth more than $100 billion to concentrate on their most promising country holdings.
The oil majors have a long history of going wherever there is money to be made on oil and gas, and have established presence in almost every corner of the world. However, competition has stiffened in many countries as national oil companies and governments have taken more control of national resources and the number of small and medium-sized companies has increased. We see this for example in Indonesia and Malaysia, with state-owned companies Pertamina and Petronas, respectively, or in Norway and the United Kingdom, where independents have increased their role significantly.
This trend has been going on for many years, but now the energy transition is putting even more pressure on the majors as they see that renewables will also require a growing part of future investment budgets. Equinor expects 15-20% of its investments to be directed towards new energy solutions by 2030. BP total capital expenditures in 2020 are expected to be around $12 billion, with the majority spent on upstream oil and gas targets, but it plans to increase its investments in low carbon projects to around $3-4 billion a year by 2025 and $5 billion a year by 2030.
The wide geographical presence of the Majors+ means that they are also spreading their technical and management resources out over a large number of countries. We have looked at the size of the cash flow and growth potential in each country per company, and combined this with how the country growth potential ranks globally. Based on this we see that the biggest eight publicly listed oil and gas companies may seek to exit 203 country positions, shedding all the assets held in a country.
All the companies would keep a presence in the U.S., which has by far the largest growth potential due to the shale revolution. Canada would also see many companies stay for similar reasons, but most would exit the carbon-intensive oil sand production. On the other end of the scale, we expect quite a few countries where only one oil major would be likely to stay. For example: Argentina (BP), Ghana (Eni) and Guyana (ExxonMobil). In some of these countries it could be tempting for others to stay or increase their presence as the competition may be more limited, such as in Guyana, where ExxonMobil has established a very strong position.
In recent months we have seen that the majors already are putting larger portfolios up for sale. ExxonMobil has exited Norway and is planning several country exits including the U.K., Romania and Indonesia, while Royal Dutch Shell tried to exit a key LNG asset in Indonesia in 2019. This shows that they are well aware of the need to focus their portfolios to improve cash flow, efficiency and competitiveness as the energy transition accelerates — but the steps they have taken so far may be too small or too slow.
Exiting countries would free up cash that the majors could use to invest in renewables, if that is their key growth strategy, or to pay dividends to their shareholders, even in challenging Covid-19 times. If they don’t want to go down the renewable route, the capital could be used to strengthen prioritized country positions by buying assets from their peers or swapping assets with other players.
U.S.-based Big Oil is behind
A key reason why some companies are less aggressive on investing in renewables is the strategic belief that there is a need for oil and gas for a long time, and as long as they are among the best in oil and gas related to profitability and emissions, they will do well. Another reason could be that with all the changes going on within the renewable business, they may choose to be a follower rather than an early mover, who do not always end up as the winners.
We expect many of these majors to sell more of the assets with high-emission intensity to meet long-term targets for reducing emissions and help finance more investments in renewables. This gives a double effect if emissions are measured per energy unit being produced. This strategy is already underway for European majors such as Total, Shell and Equinor, which have committed to reduce the carbon intensity from the energy products they sell by 50% to 60%. Eni aims to cut absolute emissions by 80% by 2050 and BP aims to be net zero on an absolute basis across the carbon in its upstream oil and gas production by 2050.
Compared with their Europe-based peers, the U.S. majors ExxonMobil, Chevron and ConocoPhillips are communicating lower ambitions on carbon emissions.
For these companies, the outcome of the upcoming U.S. presidential election may have a significant impact on their strategy, as we expect the policies of a Democratic administration may seek to reduce greenhouse gas emissions from petroleum production and other sources more rapidly than those of a continued Republican administration. However, it is not necessarily straightforward for a new administration to make many changes too quickly in energy politics on the climate side, as they also may need to consider effects on economics and energy security.
The challenge and opportunity for the Big Oil going forward will be to maneuver with energy transition speeding up, with a big push for the renewables and reducing emissions, but still also a large demand for oil and gas, all in a context of changes in the global power balance and effects of the ongoing Covid-19 epidemic.
—By Tore Guldbrandsøy, senior vice president, and Ilka Haarmann, analyst, at Rystad Energy
Bloomberg: Fossil Fuel Firms Not Doing Enough on Emissions, Funds Say
Laura Hurst: Wed., October 7, 2020, 8:55 a.m. GMT+1
(Bloomberg) — None of Europe’s largest oil, gas and coal companies are on track to limit global warming to within 2 degrees Celsius, according to a report by money managers overseeing more than $22 trillion.
Energy and mining companies have been under increasing pressure, from both environmental groups and their own investors, to demonstrate how their business models align with the Paris climate agreement and to show they’re taking action to curb their emissions.
Only seven out of 59 companies studied — Royal Dutch Shell Plc, Repsol SA, Total SE, Eni SpA, Glencore Plc, Anglo American Plc and Equinor ASA — have set emissions reduction targets in line with pledges made in the Paris Agreement, according to a report by the Transition Pathway Initiative. The TPI is a global program based at the London School of Economics, which assesses climate risks and companies’ preparedness for a low-carbon economy.
However, even these so-called Paris Pledges will still leave the world heading for 3.2 degrees Celsius of warming, according to the United Nations Environment Programme.
Just three oil and gas companies studied — Shell, Total and Eni — are approaching a 2 degree Celsius pathway “but still need further measures to be assessed to align with this benchmark,” the TPI said in a statement.
“We’re seeing a direction of travel that is going toward decarbonization that is really positive,” Bill Hartnett, stewardship director at Aberdeen Standard Investments said in an interview. “However, there is a lot of devil in the detail.” The asset manager, which is a funding partner for TPI, sees the report as providing a framework to allow it to engage with fossil fuel companies so that net zero ambitions can be formalized into commitments or targets over time, Hartnett said.
“We need to look at the detail of this report, but we are pleased that the TPI recognizes both the leading nature of our ambition and that we are aligned with the emissions reduction pledges of the Paris Agreement,” a Shell spokeswoman said. “We continue to engage with TPI over their methodology so that hopefully their models will in future be able to show how Shell’s ambition to be a net zero emissions energy business by 2050 is aligned with society’s move toward the 1.5 degrees goal of Paris.”
London-based BP Plc’s emissions are seen steadily declining over the next three decades. However, they’re still expected to remain above what’s needed to comply with the Paris Agreement, despite the company unveiling further details of its climate goals last month. BP said it hadn’t seen the full report and didn’t know if TPI’s analysis reflected its new strategy announced in August and September. The oil major said it believed its net-zero ambitions set it on a path consistent with the Paris goals.
BP aims to eliminate all net greenhouse gas emissions by 2050. However the company isn’t aligned with any of the Paris benchmarks because its climate target does not cover traded products, according to Valentin Jahn, research associate for TPI, part of the specialist team at the Grantham Research Institute on Climate Change at the London School of Economics. These comprised more than half of its externally sold energy in 2019, Valentin said.
Glencore declined to comment on the report. The company said in February it would cut so-called scope 3 emissions — those generated by their consumers — by 30% over the next 15 years. Anglo American said it was committed to responding to climate change and that it aimed to be carbon neutral across its operations by 2040.
Equinor announced this year it would eliminate emissions from its global operations by 2030 and would reduce the carbon intensity of its products by at least half by 2050. “We believe the measures demonstrate that our company is acting in line with the Paris ambitions and our plans are more ambitious than in most jurisdictions,” an Equinor spokesman said.
Repsol said it was firmly committed to becoming a “net-zero emissions company” and that it would “continue to engage with TPI to demonstrate our progress in this respect.”
“We are pleased to see that TPI, in its most recent report, has given Eni a top evaluation,” an Eni spokesperson said. “In the pathway to keep the temperature increase to 2 degrees or below, we consider that the best way for companies to align with such goal is to set absolute emissions targets.”
Total said it supports the goals of the Paris accord and that its ambition is to be carbon-neutral by 2050. The French energy company says it has already reduced its average carbon-intensity of the energy products it sells by 6% since 2015.
Transatlantic Divide
The research also highlights the growing divide between European and North American companies’ approaches toward mitigating climate change. Neither of the two U.S. oil giants, Exxon Mobil Corp. and Chevron Corp., have overarching emissions goals.
On the contrary, Exxon Mobil has been planning to increase annual carbon-dioxide emissions by as much as the output of the entire nation of Greece, an analysis of internal documents reviewed by Bloomberg shows.
“There has been some movement, with seven European companies now aligned with the Paris pledges, and Shell, Total and Eni getting close to meeting the 2°C benchmark,” TPI co-chair Adam Matthews said. “But U.S. fossil fuel giants have yet to take meaningful action to reduce their emissions and the gap with their European peers is stark.”
Utilities Progress
Utilities are making better progress on curbing emissions than oil, gas and coal producers. According to the TPI, 39 of 66 firms analyzed are already aligned with the Paris pledges, while a third are on track to keep global warming below 2 degrees Celsius by 2050, the study showed.
“The electricity sector is heavily regulated with regards to its emissions in some regions such as the EU,” said Professor Simon Dietz, one of the authors of the report. “More broadly, the technologies needed for decarbonizing electricity production are already there and often competitive on cost with fossil fuels, so the core business model is not under threat.”
By Julian Lee | Bloomberg: Oct. 11, 2020 at 1:54 p.m. GMT+1
Covid-19 may do for Big Oil what the Chicxulub asteroid did for the dinosaurs when it struck Earth 66 million years ago.
BP Plc plans to cut 10,000 jobs, equivalent to 14% of its workforce; Shell will shed 9,000 workers, or 11%; and Chevron will reduce its payroll by 6,000, a 13% reduction.
Much like the “terrible lizards,” Big Oil was already in decline before the novel coronavirus hit. The world in which they thrived is changing around them and they face multiple threats to their future health. But the outbreak’s impact has accelerated the process.
The pandemic has slashed oil demand, taking prices down with it. Producers everywhere were slow to react. Now the recovery is taking longer than initially expected, as infection rates remain stubbornly high in the U.S. and they spike again in Europe.
For this horrible year, the International Energy Agency sees global oil demand 8.4 million barrels a day lower than it was in 2019. In 2021 it will still be 2.5 million barrels a day down on last year. The other major oil forecasting agencies see a similar future. That makes the next couple of years an uncomfortable time for all oil producers.
In the second quarter, when the pandemic had its most dramatic impact on oil demand and prices, European oil majors were able to offset some of their losses with huge profits from in-house trading teams. It was a period of extreme price volatility. They won’t have that buffer in their third-quarter results.
The struggles faced by Big Oil are clearly reflected in their share prices. Exxon Mobil Corp.’s value is now just half what it was at the start of the year, and Chevron Corp. is down by a little less than 40%. Royal Dutch Shell Plc has fallen even further.
It’s been a particularly bad few weeks for Exxon. First it lost its place in the Dow Jones Industrial Average, leaving rival Chevron as the index’s only oil company. Last week it briefly ceased to be the largest U.S. oil company by market value for the first time since it began as Standard Oil more than a century ago. That crown, too, passed to Chevron.
Exxon is facing a backlash for its unwillingness to adapt to changes in the planet’s physical environment. The Church of England Pensions Board sold all its holdings in the company after it failed to set goals to reduce emissions produced by its customers. Oil rivals, particularly those based in Europe, have moved more quickly to set themselves ambitious carbon-reduction targets, although it’s important to maintain a healthy skepticism over their ability to reach them.
Big Oil is also getting smaller. BP Plc plans to cut 10,000 jobs, equivalent to 14% of its workforce; Shell will shed 9,000 workers, or 11%; and Chevron will reduce its payroll by 6,000, a 13% reduction. Exxon will also cut headcount, although it hasn’t given a figure.
While the pandemic will hopefully subside, the pre-existing threat from the shift away from carbon-based fuels won’t. Both BP and French oil major Total SE now see global oil demand plateauing at close to 100 million barrels a day by 2030, before starting to fall. Shell also expects demand for oil products to peak, “whether it is this decade or next is anybody’s guess,” De La Rey Venter, a Shell executive, told the FT Commodities Global Summit last month.
Even the Organization of Petroleum Exporting Countries can now see a peak coming, a notion it had previously called misguided. OPEC’s latest World Oil Outlook, published last week, says the world’s consumption of liquid fuels will reach a plateau around 2040.
OPEC’s outlook points to one more challenge for Big Oil. It forecasts that oil production from non-OPEC countries will stagnate and fall after a rebound from pandemic-hit production levels by 2025. When it does, the world will need OPEC members to pump more oil, even as demand stagnates. While the oil majors can theoretically explore for and pump crude anywhere, they’re excluded from the one country that offers the most attractive combination of ample reserves and low costs — Saudi Arabia.
Some dinosaurs lingered for another million years after the Chicxulub asteroid struck. Others evolved into more than 10,000 species of birds. The Covid-19 pandemic won’t bring about the imminent demise of Big Oil companies. But it will almost certainly hasten their metamorphosis, and those that can’t change will go the way of Tyrannosaurus Rex and Brontosaurus.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.
With the crude oil price stagnating around $40 for the past few months and no solution to Covid-19 yet in sight, investing in oil is a risky business and oil companies are out of favour with investors.
Premier Oil is merging with Chrysaor, and rumours abound that Tullow Oil might be next in line for a takeover. No less than 36 US oil and gas companies had declared bankruptcy by August. But with pressure piling on, even the majors are in trouble and as both Royal DutchShell (LSE:RDSB) and BP (LSE:BP) appear to be struggling, could a merger be on the cards?
It’s not out of the question. Back in 2004, a recognised energy analyst, Fadel Gheit, argued BP would make an ideal merger partner for Shell. Of course, it never transpired, and both continued to forge their own paths. But for BP and Shell, those paths seem to be increasingly similar.
Shifting from investment in oil
There is massive pressure on oil giants to clean up their act and move into renewable energy. The pressure comes from governments, activists, shareholders and consumers. All of whom are increasingly aware of the need to ‘save the planet’. Rystad Energy reports that the oil majors will need to streamline their portfolios massively if they want to improve cash flow, cost efficiency, and maintain their competitive edge.
Shell is restructuring and focusing closely on reducing costs to reach its net zero target by 2050. It confirmed this will mean changing the types of products it sells, such as low-carbon electricity and biofuels, hydrogen and more. BP is doing the same. They are now working towards very similar goals and a merger would allow for major cost-cutting initiatives to progress. It would also help them achieve their carbon-neutral targets more efficiently.
No strangers to M&A
It may come as a surprise, but in the UK between 1932 and 1975, BP and Shell were merged in a joint marketing venture known as Shell-Mex and BP. It stopped making sense as the two companies were building independent paths internationally.
In 1998, BP merged with Amoco, in a deal considered the largest oil industry merger ever, worth around $48bn. At which time, BP Amoco became the largest UK company, with a market cap above $140bn. It also became the largest producer of oil and natural gas in the US. Shell is no stranger to mergers either, most recently its acquisition of BG Group, a UK oil and gas production company, which completed in 2016.
As BP and Shell have long been considered rivals, there may be alternative companies that shareholders would deem a better fit for an M&A process. Other supermajors I think may consider a proposition are Chevron, ConocoPhillips, Eni, ExxonMobil, or Total.
BP has a price-to-earnings ratio (P/E) of 13, earnings per share are 15p and its dividend yield is around 8%. Shell’s P/E is 6, EPS is £1.52 and the dividend yield is 5%. BP currently has a market cap of $42bn and Shell’s is around $35bn, confirming they’re no longer the giants they once were. Nevertheless, I think they still have plenty to offer and I’d buy shares in either of these companies. They have decades of experience under their belts, are restructuring to ensure survival, and they maintain a global reach.
The post Investing in oil: I wonder if a BP-Shell merger could be a possibility? appeared first on The Motley Fool UK.
Kirsteen owns shares of BP and Royal Dutch Shell B. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
SHELL have come under fire after denying union claims of huge job cuts at two of its plants raising ‘critical’ safety concerns – that were later confirmed.
Details seen by the Herald confirm Unite concerns that proposals affecting the energy giant’s Northern Systems and Plants (NSP) operations in Fife and Aberdeenshire would result in 63 out of 77 Kaefer jobs being axed at the Mossmorran plant with a further 46 out of 52 jobs being proposed for redundancy at St Fergus.
Shell had insisted last night that they “do not recognise the figures” and that “the number of Kaefer contractors involved in maintenance (including critical)” being reduced across the Mossmorran plant in Fife and the St Fergus gas terminal near Peterhead was just 15 bringing the size of the team down from 125 to 110.
Unite raised its concerns claiming that the proposals were to cut vital maintenance contractor jobs by more than 80 per cent.
Shell dismissed the union’s jobs and safety claim to the Herald, saying the reduction “in our core maintenance team” across both sites will be just 12%.
But last night Kaefer consultation documents over the Shell NSP confirmed that 109 posts would go leaving just 20.
Unite union rep Bob MacGregor said: “Shell have instructed Kaefer to reduce the maintenance workforce by those numbers. Our members who have been working on the maintenance of the Shell plant for more than a decade believe that the safety critical work that is outstanding cannot be done with the remaining workforce if they reduce by the proposed numbers.”
Shell insisted: “The safety of our plants, our teams and our communities is paramount and will not be compromised. Maintenance will be done at the right time by the right specialists. They will now be contracted for specific projects, rather than being based at the plants full time.
“At this time of economic uncertainty, we know that this news will be very difficult for contractor colleagues whose jobs may be impacted as a result.”
The union raised concerns about the cuts with trades impacted by the proposals include scaffold inspectors and supervisors, riggers and rigging supervisors, forklift drivers, general assistants and mechanical supervisors.
The concerns came a matter of days after protesters frustrated at the impact the Mossmorran plant is having on people’s lives staged a socially distanced demonstration and called for it to be shut down.
The protest on Saturday, mirrored by a similar demo outside the Scottish Parliament in Edinburgh – was called following the latest unscheduled period of flaring at the start of the month, with the Scottish Environment Protection Agency (Sepa) receiving hundreds of complaints about noise, vibration and light pollution caused by the process. It has been followed by further protests.
The Mossmorran Natural Gas Liquids (NGL) plant is part of the northern North Sea Brent oil and gas field system and is located on the outskirts of Cowdenbeath.
The Mossmorran facilities comprise two plants: the Fife NGL Plant operated by Shell and the Fife Ethylene Plant operated by ExxonMobil.
Unite said it had been in active consultation with the contractor Kaefer for weeks to stave off the compulsory redundancies, which it said was being enforced by the oil giant.
But Unite said Shell “remain intent” on pressing ahead with the proposals despite Unite representatives at both plants raising major health and safety concerns over the current and future condition of the Fife and Aberdeenshire plants due to the “dramatic reduction” in staffing levels.
The trade union is also warning that fire and safety responses to any major incidents at the Mossmorran and St Fergus plants could be severely impacted.
On the Mossmorron job cuts proposed by Shell and their main contractor Kaefer, Bob MacGregor, Unite industrial officer said : “Unite is deeply concerned that the level of cuts being proposed by Shell at the Mossmorran plant in Fife will result in potentially critical health and safety concerns.
“There are a number of ongoing issues at the plant which we have worked hard to resolve with the companies involved onsite. However, these proposals are of such a brutal nature that we are being informed by local union representatives this could impair the condition and maintenance of the installations. We call on Shell to step back and reengage with Unite to find alternative solutions because lives are at risk here.”
Vic Fraser, Unite industrial officer, said of the St Fergus proposals: “Unite has been working hard for weeks to stave off these job cuts by Shell. Nearly 90 per cent of the jobs across vital trades are being proposed for the axe with some trades being totally wiped out on the site. It is not that there is no work to be carried out here, there is, but rather Shell have decided that the Fabric and Maintenance work on site will be paused perhaps until 2022.
“Alongside a backlog of maintenance work from earlier this year and you start to see our major concerns. We are always told safety comes first but our members are not only concerned for their livelihoods but fear for colleagues left to work there, the local community and any environmental impact a potential incident on site could have.”
But Shell said the jobs that were going were because they had reached the completion point of some recent projects at the gas plants, for which contractors were brought in to support.
“The projects were scheduled to finish at this time, meaning those contractors would have no longer been working at Mossmorran and St Fergus anyway,” it said.
“In addition, we have re-phased the maintenance schedule for the coming years which will enable our plants to continue running at high safety and integrity. The bulk of that work will be managed by Shell’s core maintenance team. They will be supported by contractor workers – such as painters and scaffolders – who’ll be brought in to work on maintenance campaigns as required.
“Many of these contractors are currently engaged at the plants full time, when there is not always enough work for them to do. For example, during winter when we don’t schedule much routine exterior maintenance because of the likely poor weather.”
After the Herald put the documents to Shell, a source said: “We’re not refuting the overall numbers that Unite are putting forward about positions being reduced. We’re taking issue with the sense in the [Unite statement] that they are all safety critical roles and that people should be worried about the future of the plants as a result.
“The majority of reductions are to do with project work which is now completed. Only a small number are to do with core maintenance and conducting safety critical work.
“All that safety critical work will still be done. But on a project basis rather than having the workers engaged continually.”
An update on climate change litigation – no signs of cooling
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Op-ed: A $100 billion Big Oil divestiture plan is coming
Bloomberg: Fossil Fuel Firms Not Doing Enough on Emissions, Funds Say
Energy transition has climbed towards the top of the agenda in the boardrooms of the world’s largest oil and gas companies. With electrification and renewable energy on the rise, Big Oil is striving to adapt to a transformation that could eventually render their business obsolete if they don’t latch on to the opportunities it brings. The result could be a massive sell-off of assets as the biggest petroleum players concentrate their oil and gas production to the countries where oil and gas is cheapest and easiest to produce.
The transition to renewable energy poses a threat to oil and gas production in the longer term as solar and wind power is expanding on the energy supply side, while lower-cost electric vehicles and better battery technology are driving big changes on the global oil demand side. Big oil companies have strong skills within energy and own assets globally that they can use to remain competitive as the transition proceeds. Some oil players may also choose to just stick with oil and gas only, but then they clearly need to be among the best in this game.
Where $100 billion is up for grabs globally
Our analysis of the geographic spread and need for increased focus for the large listed companies, also referred to as “Majors+” — U.S.-based ExxonMobil, Chevron and ConocoPhillips, and European players BP, Shell, Total, Eni and Equinor — concludes that these eight companies together may want to sell asset worth more than $100 billion to concentrate on their most promising country holdings.
The oil majors have a long history of going wherever there is money to be made on oil and gas, and have established presence in almost every corner of the world. However, competition has stiffened in many countries as national oil companies and governments have taken more control of national resources and the number of small and medium-sized companies has increased. We see this for example in Indonesia and Malaysia, with state-owned companies Pertamina and Petronas, respectively, or in Norway and the United Kingdom, where independents have increased their role significantly.
This trend has been going on for many years, but now the energy transition is putting even more pressure on the majors as they see that renewables will also require a growing part of future investment budgets. Equinor expects 15-20% of its investments to be directed towards new energy solutions by 2030. BP total capital expenditures in 2020 are expected to be around $12 billion, with the majority spent on upstream oil and gas targets, but it plans to increase its investments in low carbon projects to around $3-4 billion a year by 2025 and $5 billion a year by 2030.
The wide geographical presence of the Majors+ means that they are also spreading their technical and management resources out over a large number of countries. We have looked at the size of the cash flow and growth potential in each country per company, and combined this with how the country growth potential ranks globally. Based on this we see that the biggest eight publicly listed oil and gas companies may seek to exit 203 country positions, shedding all the assets held in a country.
All the companies would keep a presence in the U.S., which has by far the largest growth potential due to the shale revolution. Canada would also see many companies stay for similar reasons, but most would exit the carbon-intensive oil sand production. On the other end of the scale, we expect quite a few countries where only one oil major would be likely to stay. For example: Argentina (BP), Ghana (Eni) and Guyana (ExxonMobil). In some of these countries it could be tempting for others to stay or increase their presence as the competition may be more limited, such as in Guyana, where ExxonMobil has established a very strong position.
In recent months we have seen that the majors already are putting larger portfolios up for sale. ExxonMobil has exited Norway and is planning several country exits including the U.K., Romania and Indonesia, while Royal Dutch Shell tried to exit a key LNG asset in Indonesia in 2019. This shows that they are well aware of the need to focus their portfolios to improve cash flow, efficiency and competitiveness as the energy transition accelerates — but the steps they have taken so far may be too small or too slow.
Exiting countries would free up cash that the majors could use to invest in renewables, if that is their key growth strategy, or to pay dividends to their shareholders, even in challenging Covid-19 times. If they don’t want to go down the renewable route, the capital could be used to strengthen prioritized country positions by buying assets from their peers or swapping assets with other players.
U.S.-based Big Oil is behind
A key reason why some companies are less aggressive on investing in renewables is the strategic belief that there is a need for oil and gas for a long time, and as long as they are among the best in oil and gas related to profitability and emissions, they will do well. Another reason could be that with all the changes going on within the renewable business, they may choose to be a follower rather than an early mover, who do not always end up as the winners.
We expect many of these majors to sell more of the assets with high-emission intensity to meet long-term targets for reducing emissions and help finance more investments in renewables. This gives a double effect if emissions are measured per energy unit being produced. This strategy is already underway for European majors such as Total, Shell and Equinor, which have committed to reduce the carbon intensity from the energy products they sell by 50% to 60%. Eni aims to cut absolute emissions by 80% by 2050 and BP aims to be net zero on an absolute basis across the carbon in its upstream oil and gas production by 2050.
Compared with their Europe-based peers, the U.S. majors ExxonMobil, Chevron and ConocoPhillips are communicating lower ambitions on carbon emissions.
For these companies, the outcome of the upcoming U.S. presidential election may have a significant impact on their strategy, as we expect the policies of a Democratic administration may seek to reduce greenhouse gas emissions from petroleum production and other sources more rapidly than those of a continued Republican administration. However, it is not necessarily straightforward for a new administration to make many changes too quickly in energy politics on the climate side, as they also may need to consider effects on economics and energy security.
The challenge and opportunity for the Big Oil going forward will be to maneuver with energy transition speeding up, with a big push for the renewables and reducing emissions, but still also a large demand for oil and gas, all in a context of changes in the global power balance and effects of the ongoing Covid-19 epidemic.
—By Tore Guldbrandsøy, senior vice president, and Ilka Haarmann, analyst, at Rystad Energy
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