ENERGY MATTERS © VOL. 12
an opinion editorial written exclusively for ANZMEX
6 February 2020
By Chris Sladen
Energy matters – Turning this tanker around
The energy transition is gathering pace and big oil and gas companies are in the crosshairs as culprits for climate change, representing Goliaths from a fast fading era. The effects of climate change are increasingly evident with extreme weather records broken around the world in 2019, and 18 of the last 19 years the warmest on record, and concentrations of greenhouses gases are the highest in millions of years. Still, the world demands more energy as well as climate recovery. Oil companies are becoming a dying species. The world’s largest oil companies, which includes many in Mexico, must now lead an energy transition and reinvent themselves. The company of the future will do well by doing good. So, will big oil companies be able to change, to re-invent themselves and provide cleaner energy, and still be able to pay dividends to shareholders and taxes and royalties to Governments?
The oil industry analogy that is frequently used is the expression “turn this tanker around” – it is a reference to the lack of manoeuvrability of very large oil tankers travelling the oceans at speed. Turning an oil company around and adapting its whole business model is like changing the course of a super tanker at sea. It is a process that takes time, it is gradual, it needs to be smooth, it is a vessel that needs to be steered carefully, keeping an even keel and avoiding heavy weather and possibly capsize.
It is a complex challenge. Oil companies are expected to change, and quickly, however their shareholders and Governments do not want lower dividends and taxes; on the contrary, they want to have even more. It is reasonable to anticipate that carbon taxes will go up and fossil fuel subsidies will be cut. So, oil companies will have to transition at a pace that enables them to meet fiscal obligations and generate the same or more value.
In many oil companies, resources that currently sit as assets in their company books may never be used. This implies there will be massive write-offs. Over half would need to be left untouched to meet the 2 degrees centigrade global warming limit set during the 2015 Paris climate accord. Investors will soon start to question how long these assets can hold their value? Most of the world’s oil and gas reserves are held by national oil companies, more than they ever could produce and sell in a generation. Will some countries cancel contracts held by private oil companies to enable their national oil company to continue producing?
Yet the track record of oil companies changing themselves is very patchy. Yes, some have made real progress in eliminating flaring, redesigning oil & gas wells to be more economic, focussing more on natural gas than oil, and improving efficiency at their refineries. This all helps reduce emissions, but it is a long way from a game changer in how energy is provided and used.
As the world starts to seriously focus on the energy transition and climate change mitigation, many oil companies are announcing plans to tackle the growing energy demand with low carbon supply sources. CEOs are under enormous pressure to shift away from oil. But you cannot just abandon ship. Some analysts predict that no new oil fields will be sanctioned for development after 2030. Just as some poorer countries are starting to find reserves, such as Guyana, Suriname, Mauritania and Senegal, the world is turning away from fossil fuels.
Big oil companies have also been announcing many ‘bets’ on new energy technologies, investing in multiple start-ups. These are often billion-dollar bets hoping that one or more might be winners. This includes electric mobility, wave power, battery storage, rapid charging for cars, hydrogen made from water, algae, giant wind towers, satellites to detect methane leakages, trading algorithms, and artificial intelligence to name a few. But is this really enough to find a new direction for giant companies that have lived off crude oil for decades, where they have become embedded in oil-rich basins often becoming a pillar of oil-rich producing countries? For decades they have often fed giant economies that are hungry for energy and refined oil products.
In recent years, less than 5% of oil company investment has targeted clean energy. Superficial advertising campaigns about green initiatives are not going to work for much longer. A few oil companies, including many national oil companies, will no doubt largely ignore the energy transition altogether and keep pumping oil like they always have; they are banking on continued demand and end-users not changing their consumer behaviour. But to put an end to oil consumption is actually very simple. Consumers should stop buying gasoline, diesel etc.; after all, it is the consumer that is addicted.
Still, the tide is turning. We have become the first generation to understand that we are destroying the planet and perhaps the last generation that can do something about it. Many well-known equity investors have already decided to go green and no longer invest in oil stocks. This implies a rising cost of capital for hydrocarbons companies and ever-cheaper money for renewables. Some newspapers are now refusing to take adverts from fossil fuels companies. Museums, theatres and art exhibitions are starting to steer away from oil company sponsorships. A few countries have banned any new oil exploration. Some oil companies are being sued for not taking enough action on climate challenges.
Yes, the oil industry has shown its ability to adapt over the last 50 years, applying technology to improve finding and producing oil, making better refined products and speciality petrochemicals. This is combined with a never-ending search for better efficiency, operational savings, better products, and fiscal engineering. Today’s challenge is now very different. It is about a turn away from oil & gas and towards clean energies. To achieve this, many thousands of entrenched oil & gas professionals will either need to reinvent themselves or need to step aside to enable a new crew of clean energy low-carbon professionals to take over.
The behaviours of the past are coming to an end. As part of this change, energy company CEOs will need to communicate much much more, not only with stakeholders but also frequently with their staff and their shareholders. They will need to be accessible and listening. They will need to have a steady hand on the tiller, the captain will need to be seen out on deck, not hidden in their cabin issuing orders. Inexpensive technology is moving us into a new world of media. New metrics that can demonstrate how quickly oil companies are changing course will be required. For those oil companies that do change, their stock price will disconnect from the oil price. The need for a real plan and to implement it has never been more important; it is no longer about doing more or doing less of what was done the year before. It is about steering toward a truly different place.
About the author:
Chris Sladen runs an advisory service offering insights to inform, shape a decision, policy & regulation, and guide the next steps for energy ventures, acquisitions & divestments, energy transition and climate strategies. Chris has a unique global experience having worked in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, Europe and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris has published extensively over five decades. Chris’ articles for Energy Matters reflect his experience and enthusiasm and are not paid for in any way.
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