Contemplating oil’s mortality

It’s always disappointing to learn that some legendary sayings by famous people are actually misquotes. The observation by a very much alive Mark Twain that ‘Reports of my death are greatly exaggerated’ must rank as one of the most cited of the American writer’s many humorous quips. But he never actually said, not to mention penned, those words. It hasn’t deterred living celebrities from referencing them when they inadvertently find themselves in the obituary columns.

The more prosaic story is that in 1897 Twain (who lived until 1910) was hanging out in Europe when a journalist from the New York Journal invited Twain to comment on rumours about him dying in poverty in London. Twain is quoted as saying: ‘I can understand perfectly how the report of my illness got about. I have even heard on good authority that I was dead. James Ross Clemens, a cousin of mine, was seriously ill two or three weeks ago in London, but is well now. The report of my illness grew out of his illness. The report of my death was an exaggeration.’

The popular version of Twain’s remark has a much better ring to it and can be applied in many contexts, for example, the oil and gas industry. Analysts are currently falling over themselves to deem that fall-out from the Covid-19 pandemic disruption will hasten the end of the oil era. It is said that ‘peak oil’, the surplus kind not shortage, may already have been reached, oil companies need to more rapidly adapt their business models to embrace energy transition, etc, etc.

Common sense suggests that the death knell talk for the oil business is being over-done, is indeed exaggerated. Of course the Covid-19 global outbreak continues to be a shock to the system, but the idea that everything will change in the aftermath seems improbable. Take these examples from everyday living. Everyone was talking about the devastating impact of Covid-19 on holiday cruises: surely no one would contemplate again the idea of being confined on the potential death trap of a ship with thousands of others for weeks on end. Guess what? The timeline on recommencing may still be unclear, but cruise lines are apparently reporting plenty of bookings for 2021. Similarly, fear of flying has been spoken of as a trend likely to outlive the pandemic. The number of would-be tourists in Northern Europe already queuing up to wing it to warmer climes when allowed suggests otherwise.

The issue regarding the oil industry is how much have the basic dynamics of oil supply and demand changed in the last few months. Not a lot could be the answer. Every estimate of future oil consumption post Covid-19 is based upon massive assumptions about human behaviour and frankly guesswork.

As a consequence, we are currently being barraged with a smörgåsbord of scenarios from which you can take your pick. There is of course no right answer here and you have to sympathize with those analysts tasked to tell our oil future. Countries, companies, investors and the like all have to have some notion of what’s ahead. Yet, in these troubled times, making sense of the factors involved is truly mind-boggling.

Uncertainty is so pronounced that putting specific numbers on, say the average price of oil in 2021 or the amount of production from non-OPEC+ next year, is bound to be speculative.

What we can do without fear of contradiction is list some of the key factors that will have a bearing on the post-pandemic oil and gas natural gas industry and the services that support it. There is no particular order because no one knows which of a plethora of observable trends will have most influence.

BP’s eye-popping $6.7 billion loss in the second quarter (total impairments of $17.4 billion) and the slashing in half of the dividend was not what sparked the latest rash of headlines predicting the age of oil is over. The rest of the supermajor gang – ExxonMobil, Shell, Total, Eni, Chevron and ConocoPhillips – have all been reporting equally shocking results during the pandemic crisis. Meantime the investment community has for some time been downgrading the status of energy stocks. The energy component now makes up less than 3% of the S&P 500 Index, compared with more than 10% in 2009. How about this irresistible jewel culled from the musings of Bloomberg: ‘Once the undisputed king of Wall Street, Exxon today is worth less than Home Depot, which has less than half the revenue.’ It was recently placed 31^st on the S&P 500.

What caught the attention of investors, trend spotters and environmentalists was the unveiling by Bernard Looney, newly appointed CEO of BP, of his company’s new strategy first outlined in February. BP plans to cut its fossil fuel production by 40% by 2030, increase its low-carbon spending ten-fold in the same timeframe to $5 billion a year out of a total budget of around $15 billion, and boost its renewable power generation to 50 gigawatts.

In Europe, Shell, Eni, Total, and Equinor have also announced plans to retreat from oil and gas production, but nothing quite as dramatic as the BP strategy. Are we therefore left to conclude that oil companies themselves see the beginning of the end? Across the Atlantic, ExxonMobil and Chevron appear to be taking a more robust view of their oil and gas assets although still claiming energy transition credentials. More harshly some critics have pointed out that 20 years ago BP under Lord Browne rechristened itself ‘Beyond Petroleum’ and turned the company’s gas stations green, but that didn’t work out.

We do know that for the time being the supermajors and the national oil companies will not in the short term be looking for new exploration plays. The priority will be to focus on efficiency and further development of existing and near-field reserves to maintain production. This still leave oil companies with the dilemma of knowing how much to invest in the future oil needs of the world. It is an impossible calculation.

The emerging ‘green’ influence in oil company strategy stems from stakeholder sustainability concerns, regulatory requirements and, let’s face it, appeasing increasingly hostile public opinion. That’s why we are seeing more serious attention to measures such as reducing greenhouse emissions from existing production facilities, deployment of renewables in field operations and CO₂ sequestration.

Oil companies look to be betting on peak oil demand sooner rather than later and are effectively diversifying as the global thirst for oil diminishes. But what if they are mistaken? A very compelling market commentary entitled ‘On the verge of an energy crisis’ by investment advisors Goehring & Rozencwajg suggests everyone, including the International Energy Agency, has got the metrics wrong. In their view a spike in oil prices, and by extension the fortunes of the oil industry, is on the horizon and may last years. This is based on the not unreasonable premise that the supply balancing provided by US shale is no longer a given. They have for some time argued that the shale reserves have matured faster than expected. In addition, non-OPEC+ is not all it is cracked up to be, it is in fact in decline. Furthermore, they say oil demand has not been impacted nearly as much as originally feared, Outside OPEC+, the needed increases in supply will not be achieved. This is partly because the pandemic caused the shutdown of a lot of production already on its last legs. Goehring & Rozencwajg concludes that ‘energy will be the most important investment theme of the next several years and the biggest unintended consequence of the coronavirus’.

The popular idea that we are set for a period of cheap oil and stranded assets that companies will never exploit is open to serious challenge in other respects. As the events of earlier this year have shown, the supply side is extraordinarily vulnerable to international power plays and the vulnerability of many oil producing regimes, such as Venezuela, Libya, Iraq, Iran and even Saudi Arabia and its neighbours. The ugly competition between Saudi Arabia, Russia and the US for market share is not going to go away.

In some respects the demand side is even more unpredictable. Post-industrialized countries, notably in Europe, may gradually be weaning themselves off oil dependence, but that is a big ask for regions that now matter most, i.e., China, India and ultimately the African continent where industrial development is the priority.

Climate change activists have been quick to acknowledge the paradox of a continuing low oil price environment, should that occur. It may dampen oil company E&P investment but consumers may be less compliant. For example, arguably the biggest contribution individuals can make to ‘save the planet’ is to switch to an electric vehicle. Up to now, especially in North America, this has really been a discretionary choice open mainly to those who can afford a Tesla. Price has been the predominant deterrent, although worries over the range possible and the lack of charging points have also played their part. So, assuming no huge hikes in petrol at the pump, the transition to electric vehicles could be stalled.

Accurately or not, Canadian energy commentator Geoffrey Cann noted that after the pandemic there will still be 1.2 billion gasoline cars on the world’s roads, 300 million heavy trucks hauling goods to market, 53,000 merchant and military ships plying the world’s oceans, 30,000 aircraft flying the unfriendly skies, and 697 refineries around the world able to process north of 100 million barrels of oil every day.

‘What is remarkable,’ Cann states, ‘is the resilience (so far), of the world’s energy delivery systems which stand in sharp contrast to the fragility of the healthcare system, the collapse of the retail sector, the gutting of the tourism sector, the stalling of the services industry. Our energy systems are built to last, and frankly, during a pandemic, society is most grateful that is the case.’

That should perhaps be the starting consideration when contemplating the end of the oil age.

‘Common sense suggests that the death knell talk is indeed exaggerated.’

‘Climate change activists have been quick to acknowledge the paradox.’