Not all Big Oil firms are alike. Some are engaged in a rapid green migration, many are sitting on the fence and others are still in climate denial. Meanwhile, the value of fossil fuel assets are declining but the industry is camouflaging this by selling assets and debt financing to keep shareholders happy.
by Will Dubitsky
It is fashionable today for the fossil fuel and other private enterprises, financial institutions and national governments to set a net-zero emissions target for 2050. That 2050 is so far away, leaves plenty of wiggle room for near-term objectives to engender contradictions and greenwashing.
Accordingly, cognitive dissonance is very present in the fossil fuel sector. Big Oil is investing in the green economy and fossil fuel initiatives alike.
But contrary to popular belief, not all oil and gas companies are alike. This is illustrated below.
Fossil fuel sector transition, not all firms alike
The fossil fuel sectors are in a slump. But this is being camouflaged. In 2020, the five supermajors — ExxonMobil, Chevron BP, Total and Shell — collectively accumulated US$20 billion in free cash flow (revenues minus operating expenses) while having paid out US$49.9 billion to shareholders by way of dividends and share buybacks. This is not a Covid-19 momentary anomaly.
Over the last decade, these same companies earned US$325 billion in free cash flows while paying out US$561 billion to shareholders. In part, this is a reflection of senior executives and directors having compensation packages worth millions tied to oil and gas production. The trend is growing for executive pay to be linked to stock and other market performance indicators.
These strange economics were made possible by acquiring long-term debt and selling assets.
Notwithstanding the entrenched corporate cultures, there is an emerging transition among many oil and gas firms towards fossil fuel assets divestments, oil and gas production decreases and a brisk diversification towards clean tech.
This has been made possible because each Big Oil firm has a different agenda. The Big Oil industry range goes from phenomenal rapid diversification to clean solution initiatives, sitting on the fence coupled with greenwashing while playing on both sides, and climate denial.
The 2021 first quarter (Q1), in particular, offered encouraging spellbinding Big Oil transition developments alongside the business-as-usual mindset. These developments entail a major about face, especially since there is a big hill to climb. Oil and gas industry-wide investments dedicated to clean solutions are expected to rise to 4 percent in 2021, up from 1 percent in the previous year. But the clean tech financing of the European majors is likely to reach more than 10 percent this year and their plans for the coming years offer reasons for hope. ExxonMobil board composition changes indicate their corporate culture is in for some large bumps. Indeed, revolts during May 2021 corporate annual general meetings (AGM) have entailed shock therapy to impose the acceleration of oil and gas industry actions on climate change.
Most astounding is the makeover of Equinor, the Norwegian state-owned oil company, which in the first quarter of 2021 reported 49.3 percent of its earnings from renewables, the rest from exploration and production of oil. The renewables earnings come from divestment of advanced stage renewable projects assets to invest in early stage new projects, otherwise known as “asset rotation.”
Equinor stands apart because its trajectory must be aligned with government policy. On the Equinor web site, the firm describes its ambitions as that of being “a leading company in the energy transition” that will update its transition roadmap every three years. For Equinor, the green economy is an urgency. Short- and medium-term plans for achieving net-zero emissions by 2050 will be announced this month, June 2021. To guide Equinor on its climate plans, 3 different projection scenarios have been developed, Rebalance, Reform and Rivalry. In all of Equinor’s projection scenarios, electrification of the global energy landscape and a decline in oil and gas demand are integral components. As well, protecting biodiversity is included in the company agenda.
During Q1 of 2021, the Spanish oil firm, Repsol SA, dedicated 40 percent of its capital expenditures to low carbon projects. Between 2021 and 2025, Repsol intends to assign 30 percent of its investments on low carbon businesses and promote circular economy initiatives.
The Q1 metamorphosis news includes France’s Total plans to increase its clean tech investments by four-fold in the next 4 years. With a plan to reduce reliance on oil products while increasing its focus on clean tech, on May 28, 2021 France’s Total rebranded itself to become TotalEnergies. TotalEnergies is involved in a joint venture with Stellantis (formerly Fiat Chrysler and Groupe PSA (Peugeot, Citroën)) that gave birth to the Automotive Cells Company (ACC). ACC has a US$6 billion project with the support of the governments of France and Germany and the European Commission to set up two electric vehicle battery production plants, one in Germany, the other in France and two R & D facilities in France.
Impressive too, the BP game plan includes the divestment of US$25 billion in fossil fuel assets by 2025, the reduction of oil and gas production by 40 percent by 2030, the sale of its petrochemical division for US$5 billion, an increase in its renewables capacity 20-fold by 2030, and the intention to invest US$5 billion annually in clean tech by 2030. Just to-date, BP has a very long list of clean tech and green investments including a big stake in the U.K. largest solar developer Lightsource; electric vehicle charging networks in the U.K., the European Old Continent and China; major wind and solar power initiatives; and a recent endeavour to set up a new U.S. utility, BP Retail Energy, that will sell clean energy directly to industrial, commercial and residential clients. The latter aligns with the June 1, 2021, BP/Lightsource clinching of a deal with 7X Energy for US$220 million to acquire a 9-gigawatt (GW) U.S. solar pipeline (portfolio for projects to be developed) involving 12 states, to be completed by 2030. The BP U.S initiatives are commensurate with the BP goal of operating 20 GW of renewables capacity by 2025.
Then there’s Shell, an oil and gas company sitting on the fence with much greenwashing in its public announcements. Shell’s February 11, 2021 media release on its plan to achieve net-zero emissions by 2050, is a classic example of a company struggling between longstanding entrenched traditional corporate culture and the need to reinvent itself.
On one hand, the company announced it reached peak oil production in 2019; will reduce its oil output by 1 to 2 percent/year, implying divestments; will lower its debt by US$65 billion though the time frame is not mentioned; continue to spend US$2-3 billion/year on renewables and energy solutions, offshore wind and biofuels among them; and grow its EV charging network to more than 500,000 charging points by 2025, up from the current 60,000. Like BP, Shell has been on a frenzy for quite some time to acquire and/or partner with clean tech companies and support for green initiatives.
On the other hand, Shell blows its credibility on its net-zero ambitions with an intention to extract 75 percent of its proven oil and gas reserves by 2030, and another 3 percent after 2040. The idea is to be sure the green transition doesn’t leave the company with stranded assets.
Shell’s greenwashing initiatives to reach the 2050 target are especially evident in its in its longwinded and repetitive Energy Transition Strategy 2021 to reach the 2050 net-zero target. This strategy includes increasing investments in natural gas/liquified natural gas (LNG); hydrogen, 98% of which is sourced from natural gas steam reformation; the prohibitively costly, outrageously subsidized, highly fossil fuel intensive and business-as-usual solution known as carbon capture utilization and storage technologies (CCUS) that offer no net impact on carbon reduction; biofuel blends; and the planting of trees to provide carbon credit offsets. Moreover, Shell places much of the onus of the transition on consumers, commercial clients, and governments, rather than take full responsibility for its actions. The latter transition-washing components are behind Shell’s claim that it expects half of its energy mix to be clean energy at some time during the next decade.
As for LNG, it is largely sourced from shale gas extraction, production and transportation which is as bad as coal in terms of greenhouse gas emissions (GHG) and, when displacing coal-fired electricity power plants, delays the transition to renewables by 40 to 60 years associated with the lifecycle of gas-powered facility. Yet the transition strategy refers to LNG as clean energy.
Accordingly, the Shell short- and medium-term emission reduction plans are modest, a 6-8 percent reduction in carbon intensity by 2023, 20 percent by 2030 and 45 percent by 2035, based on 2016 levels. Carbon intensity refers to the amount of GHG per unit of production. Hence, absolute emissions would go up if production increases.
In a landmark court decision, on May 26, 2021, the Hague court in the Netherlands ruled that Shell must comply with the Paris Agreement by reducing its absolute emissions by 45 percent by 2030 based on 2019 levels. Shell intends to appeal the decision brought before the court by Friends of the Earth Netherlands, other groups and 17,000 Dutch citizens.
At the wrong end of the spectrum, but with a chance for an internal revolution to leapfrog ahead of the others, there is ExxonMobil. That’s because of the “before and after” the 2021 AGM of May 26, 2021.
At the 2021 ExxonMobil AGM, the pro-climate hedge fund, Engine No. 1, won three seats on the corporate board. The response of the Chief Executive Officer, Darren Woods was that the dissident directors “would derail our progress and jeopardize your dividend”. To dilute the presence of Engine No. 1 on the board. ExxonMobil hopes to add two new director positions.
The new Engine No. 1 directors are not the only headaches for the “traditional” ExxonMobil directors because the AGM accorded non-binding support for disclosure of political and climate lobbies. Almost two-thirds of AGM votes favoured the climate lobby clause.
The 2021 AGM augers for dramatic change of the “spoiled child” in the industry because to-date ExxonMobil has been in denial about climate change and living down to the abominable stereotype image of Big Oil. Before the AGM, ExxonMobil expressed the belief that there isn’t a consensus on the climate, meaning there are only potential impacts. For the company, climate represented a “risk” due to public perceptions. Since ExxonMobil has been reasoning that consumers will inevitably continue to need the benefits of oil and gas for the foreseeable future, the company has seen itself as merely responding to demand, despite a public that is informed about anthropogenic global warming. In other words, the public is to blame for the “risk,” a reassuring message for major shareholders.
Stuck in a dated paradigm, ExxonMobil still continues to massively invest in oil and gas initiatives. The former board still believes high oil prices and demand will in the end prevail though the company has reached historic debt levels. Consequently, the company had not seen a need to invest in renewables.
Evidently, post 2021 ExxonMobil AGM, things hopefully will start to change. We’ll see.
Nonsense aside, these examples demonstrate the fossil fuel traditional assets are losing value and the future lies with a transition to a green economy.
In effect, the equity value of fossil fuel assets has dropped by 20 percent from 2012 to 2020, or a drop of US$123 billion, while clean energy investments gained US$77 billion in value.
Since 2019, Shell has devalued its oil and gas reserves by US$20 billion.
In 2020 clean energy initial public offerings (IPOs) exceeded high carbon IPOs for the first time.
In 1980 the oil and gas industry accounted for 28 percent of the U.S. stock market, but by January 2021, it dropped to 2.3 percent.
The combination of decreased profits, poor stock performance and poor market potential have seen the oil and gas sector going from 29 percent of the S & P 500 in 1980 to 2.6 percent in 2020.
The MSCI Low Carbon Target Index, a benchmark for investors to manage risks associated with a migration to a green economy, has been outperforming its counterparts since 2010.
Tipping point of disruptive economics has arrived
All this is happening while we are at the precipice of disruptive industrial revolution transition to a green economy. Canada, highly dependent on resource economics, is one of the countries most at risk.
First, peak oil is anticipated by around 2023, largely due to the advent of a massive and rapid shift to electric vehicles (EVs) beginning 2022-2023. This is inevitable thanks to the domino impacts on global automakers associated with stringent vehicle legislative initiatives in the European Union (EU) and China.
In June 2021, the EU will reveal tougher vehicle standards to come by way of new regulations. President Biden will surely add his own initiatives.
Furthermore, the Biden Infrastructure Plan (aka The American Jobs Plan) acknowledges the wide gap between China and the U.S. in EV and battery production, China being in a position to acquire four times the global market share of that of the U.S. To that end, the plan calls for US$174 billion to support the development, manufacturing and purchasing of EVs, in addition to US$46 billion for government organizations to buy EV fleets and funding for 500,000 EV charging stations by 2030.
These considerations have given rise to varying estimates of the numbers and timing of EV models that will be on global markets, particularly since automakers frequently announce an acceleration of their EV ambitions. A modest projection is that there will be around 400 EV models available around the globe by 2025, modest because they are already many EV models available now in China which is way ahead of the global EV transition. Equally important, this projection may be an understatement because EV purchase price parity with legacy vehicles will likely occur in the 2022-2024 period. This means EVs will become the less expensive alternatives due to lower maintenance and energy expenses.
Bloomberg New Energy Finance (BNEF) EV Outlook 2021 suggests that EVs will represent the majority of passenger vehicle sales by 2030. This guestimate is based on a business-as-usual projection, a highly unlikely scenario with numerous additional actions of governments almost certain. For example, in Europe, in a dead heat with China for being the largest EV market, EV sales accounted for 11% of the market in 2020. The BNEF European EV prediction for 2021 is 14-18% of light-duty sales. With the more stringent EU vehicle emission requirements to come very shortly, the EU may once again accelerate the transition by global automakers.
With road transportation representing 60 percent of oil consumption, global oil demand has no way to go but down.
The descent of the oil and gas sectors at-large would be deepened should the Biden plan go forward with a plan to terminate subsidies for the fossil fuels industry and transfer the savings to support clean tech companies.
Second, renewables are now less expensive than natural gas for most of the world.
While the electrical power sector had been a buttress for natural gas suppliers, the changed economic paradigm is such that, for the sixth year in row, 2021 will see new renewables investments in the sector far exceed those for oil and gas. The 2021 anticipated renewables share of additional capacity power market is 70 percent.
The gas industry has their hopes pinned on exports to Southeast Asia. However, as much as US$50 billion of proposed gas-fired electrical generation plants are at risk of being cancelled in Vietnam, Pakistan and Bangladesh.
Vietnam stands out as a model of the rapid changes in the Southeast Asia energy paradigms. Rooftop solar capacity increased by 9 gigawatts (GW) in Vietnam in 2020. This is a very large addition of capacity for a single year considering the total production of Hydro-Québec from hydro and other sources is 47 GW. This is but one reflection of Vietnam’s incredible growth in solar power capacity, 100-fold increase in the last 2 years. A convergence of several factors is at play, foreign banks restricting support for fossil fuel projects, lower solar prices and a rapidly growing domestic solar panel manufacturing sector.
Market disruption becoming the “norm”, Annova LNG decided to discontinue construction of its Brownsville, Texas liquefied natural gas (LNG) terminal because it had not signed a single contract during the 6-year development of the project.
To sum up, the question is no longer whether there will be a transition to a green economy, but rather that of the pace of the transition. Will that pace be consistent with the International Energy Agency (IEA) Net-Zero by 2050 May 2021 watershed climate action roadmap to restrict global temperature rise to 1.5°C by 2030 and beyond? We’ll see.
Will the fossil fuels companies be ready
Some fossil fuel companies are presently becoming diversified energy companies prepared for a massive migration to the green economy aligned with the Paris Agreement, some are partially engaged and others will be losers left with fossil fuel stranded assets, late to catch up.
Clearly, government actions to modify energy, economic transportation and other paradigms, especially robust legislative and policy initiatives, are critical to influence the transition pace.
The European Commission climate legislative package to be made public later in June 2021 is one to watch.
Regardless of the transition pace, the International Energy Agency forecasts an ongoing decline of the oil and gas sectors through to 2050. Too many fossil fuel companies and their investors have not yet fully grappled with the fact that the cycles of lows followed by highs are behind us.
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