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Big oil energy transition strategies diverge

Some of the global oil majors are adapting better than others to the energy transition

The twin threats of climate change and falling renewable energy costs are still not nudging most oil majors to adjust their behaviour significantly. But there is growing pressure amongst investors for a greater focus on lower-carbon energy and the message seems to be getting through to some of the world’s biggest IOCs.

Royal Dutch Shell’s director of integrated gas and new energy Maarten Wetselaar recently said avoidance of addressing climate change concerns was scaring investors away, with the “industry as a whole behind the curve” on preparing for a transition to lower-carbon energy.

A few days later, Shell declared its intention to become the world’s biggest supplier of green energy by 2030, although it has yet to back this up with a higher capex budget.

But others, such as ExxonMobil and BP, remain firmly focused on hydrocarbons, with the latter’s CEO Bob Dudley recently confining his ambition to cut oil and gas production costs in order to stay competitive with alternative energies.

This came after BP’s chief economist Spencer Dale said in January that even under a “Rapid Transition” scenario of radical switching to cleaner fuels compatible with meeting the Paris climate goals, oil demand would still only be reduced by around 28 million bpd in 2040 to 80 million bpd. “If we can produce amongst the cheapest oil of the 80 million bpd demand in 2040, then we can carry on producing that oil,” he said.

In its reference case – the one the company actually expects to happen – BP sees oil demand peaking in 2035, before holding steady at around 108 million bpd to 2040, when oil’s share of the global energy mix will slip to around 27% from 34% just now.

Cost focus
Among all majors the accelerating competition from renewables is leading to a greater focus on costs, with capex this year at around two-thirds of 2014 levels. That said, lower spending this year is forecast to yield the same results in output terms, highlighting the dramatic improvement in productivity since the price crash.

As part of the cost drive, some companies are dropping lower margin or higher emissions prospects such as oil sands. But this also effectively consigns those reserves to remain in the ground, which raises questions over the traditional metrics used to value oil and gas companies – in particular, a company’s production-to-reserve ratio, or reserves life.

This used to be a measure of value in the ground in terms of what was required to sustain output, but is now seen by many as exposure to potentially stranded carbon assets that are either too expensive or polluting to develop.

Shell, which has perhaps faced the greatest shareholder pressure over the issue, has only replaced its annual production with new reserves twice since 2011. And in February, it reported a slump to new lows of just 8.4 years production from current reserves following divestments, which is the lowest amongst the energy majors.

ExxonMobil’s have been rising sharply the over the past few years on the back of new discoveries such as those offshore Guyana, while BP and Eni’s reserves are also on the up.

Limited exposure
So far, majors have invested only relatively small sums in low-carbon areas, although Total and now Shell do have significant positions and are planning further expansion.

Wetselaar said last week that Shell wanted to become the “biggest diversified power company in the world by the early 2030s,” by expanding new fuels, electric vehicle (EV) infrastructure and energy supply, along with renewable distributed electricity and trading.

The move is not only motivated by social and shareholder pressure; the company clearly also sees commercial opportunities in these areas. “We are not interested in the power business because we like what we saw in the last 20 years; we are interested because we think we like what we see in the next 20 years,” Wetselaar told Bloomberg.

The energy revolution has already come to the utilities sector, however, where companies such as Innogy and Iberdrola will provide stiff competition.

Trendspotting
Recent deal-making has given an indication of the direction of travel. Shell bought leading US EV smart charge company Greenlots in January, having acquired European charge point firm NewMotion in 2017.

The Anglo-Dutch company has also been offering cheap off-peak power in California since 2013, with the state government aiming for 5 million EVs on the roads by 2030. Furthermore, alongside network operator IONITY, Shell is installing super-fast chargers across Europe that take 10 minutes to top up the next generation of EVs.

Shell is among the largest traders in green energy and has positions in renewable generation, with over 1.6 GW of solar and over 5 GW of wind operating or under construction. The company is also building four hydrogen stations in the Netherlands and is partnering in a German project to set up 400 hydrogen filling stations.

Despite such progress, however, Shell still only spends US$2 billion per year on its green energy business, less than 10% of what it spends on upstream oil and gas.

The outlook for natural gas is more positive than for oil. Most forecasters anticipate its market share will expand rapidly and eventually take over from oil as the primary hydrocarbon within a decade or two given its lower CO2 and other emissions (compared to oil and coal).

Shell and Total are also leading the pack in gas investment, though BP and ExxonMobil are also targeting rapid expansion in this field.

Auto anxiety
Undercutting even BP’s most pessimistic scenarios, a February report by the Bank of America (BoA) anticipated that global oil demand could start falling within the decade – well ahead of the forecasts of most oil and gas companies. BoA based its forecast on plans put forward by vehicle manufacturers, with the switch to EVs forecast to happen relatively quickly over the next decade or two.

For example, VW announced plans this month to build 22 million EVs in the next decade and decarbonise its entire supply chain by 2050. And Ford, which is investing US$4.5 billion in EVs by 2020, has an additional 13 EV models scheduled to hit showrooms by then.

Other companies such as Toyota are focused more on hydrogen (fuel-cell) and hybrid vehicles – but still intend to phase out conventional cars completely by 2050.

Changes in mobility patterns (ride-sharing, self-driving) and advancements in other technologies such as fuel-cell vehicles could also cut transport fuel demand much more quickly than anticipated by the oil industry.

Nevertheless, EVs and plug-in hybrids still only represented 2% of global car sales in late 2018, and the automotive industry could be proved wrong. If carmakers are correct about the rapid transition – or if there is a quicker, policy-driven shift to low-carbon energy – Shell and Total look best placed to benefit amongst the majors.

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