ENERGY MATTERS © VOL. 26
an opinion editorial written exclusively for ANZMEX
2 November 2020
By Chris Sladen
Energy matters – Talking with the CEOs
I don’t know about you but during all these lockdowns I talk to myself a lot more than in the past. Conversations that took place years ago, repeat over and over again in my head. And I have many strange dreams, definitely more than I used to.
I had a grand plan to interview 4 or 5 CEOs from big oil companies who had committed to Net Zero carbon emissions and then write an article that compares their answers and insights. But I kept getting fobbed off. My Zoom appointments were always getting bounced, so in the end I decided to do a live interview with just myself. Plus I could do the whole thing in my pyjamas. Here is what happened:
Chris: how do you plan to transition from being a big oil company to being a big energy company with zero emissions?
Big oil CEO: You have to lead the change, unless you want to be led by change. It is quite a challenge because we all know that the returns on power projects, wind, solar, bioenergy are much lower than good quality oil and gas projects. Carbon capture and storage has big potential; we can do it, but at the moment it just adds a lot more to project costs, so that too creates lower returns.
Chris: do you believe you can transform the company?
Big oil CEO: We have to believe in what we are doing and that we can win. The reality is that today we are a big hydrocarbons company. It will take a decade or probably more to transition. We have to change the organisational structure completely to build new teams, new skills, new operating practices, and develop new customer products. We even have a vice president for forestry now and next it will be kelp and algae – who would have predicted that a few years ago? It will not be smooth, there will always be bumps in the road. There always are. I wake up each day knowing that somewhere in the world our business has encountered a new problem.
Chris: that’s really interesting. Can you say a bit more?
Big oil CEO: we try to portray a new direction, that we are changing, rebounding, but investors want to see the results now, with strong financials, evidence of delivery. They want dividends every quarter; it is a treadmill and you cannot get off. In the midst of uncertainty you have to keep delivering. And learn how to do things remotely. Proving we are transforming and performing is a balancing act. A compelling business case and huge cash generation are essential.
Chris: what about all the job cuts?
Big oil CEO: Part of my job now is terminating many thousands of colleagues and good friends who helped build the company. Many of them worked 12-15 hour days, shifts and 6-7 days per week. We are sacrificing a lot of great people, whole teams of well-trained people led by world class leaders who make the extraordinary look normal. Many have dragged their families around the planet because they believed in what we were doing. It is hard to look them in the eyes and say goodbye.
Chris: what about the share price?
Big oil CEO: our share-price has been savaged, our profitability has evaporated and our ability to pay dividends has been shredded. I could do a fire-sale of assets to keep paying the dividend but what kind of company would do that? We are trying to keep a global company running. Of course this time we can blame the low oil prices, large accounting write-downs, demand destruction due to the pandemic and global recession. It is disruption like we have never seen before. We have sold off a bunch of our older assets; there are other lean & mean smaller companies out there that are much better with mature assets. We believe there are better times ahead.
Chris: but in the past, say, around 2004 when oil averaged about $40/barrel or less, you were very profitable back then?
Big oil CEO: that’s a very valid point, Chris. Part of our problem in recent years is we did not think oil prices would go low for so long. We misunderstood the supply/demand balance. Some companies were fit for $50/bbl, well I mean we tried to be fit at fifty but then lost our way. We lost focus particularly on efficiently finding, developing and producing oil and gas. It should be the engine room but we added a lot of stuff, and I mean a lot of stuff, that doesn’t create any value whatsoever; it is easy to add stuff but hard to get rid of it once you have added it. We were adding costs when we should have been trimming. We have not invested enough in research and technology, but then again, do we ever? Our costs were out of control because we had $70-90/bbl oil throughout 2010-2015 and shortly after again in 2018. It all started to get a bit dysfunctional. We had so many management consultants that we had to add managers to manage the management consultants! It becomes addictive and then you lose your originality. Various analysts in 2018 forecast oil could be $200/bbl just like they had in 2008. Its irresponsible – it freaks people out. The oil price has never ever got anywhere near $200/bbl. Anyway, with our equipment suppliers in the oilfield services companies, we had locked ourselves into long-term contracts at high day rates. We were worried about securing equipment. It takes years to unwind these types of contracts and commitments. Costs are still out of control, to be honest its a fire-fight everyday. But we have won these types of fights before.
Chris: So, what is your view of the oil price?
Big oil CEO: many analysts consider the oil price will be back up to $55-60/bbl by late 2021. Even so, there are many risks to a return to these levels; today the greatest issue is how much growth in demand will there be? Investment levels in new production are way down, many projects in an appraisal phase are barely moving forward, and any exploration that is easy to defer is being deferred. Many contracts have entered force majeure due to the pandemic. Where regulators are sympathetic to the big picture we are thankfully receiving extension periods. But you know very well Chris, governments pull in different directions when the going gets tough, especially if they need to be re-elected. And flip-flop. The few exploration wells that are being drilled are mostly commitment wells. The sum of all these deferrals and investment slow-downs should be seen in 3-4 years time with much less new supply coming to market. The rationale is that if new supply is scarce then prices will rise. With big oil companies also switching their investments to focus more on renewables this could lead to less investment and availability of oil supply. When demand exceeds supply we could see very high prices again but we also know that with very high oil prices this is when consumers often switch to alternative fuels or seek efficiency gains.
Chris: so, would this be the moment to take over a competitor?
Big oil CEO: there has been a lot of consolidation over the last 6 months. Many famous mid-size names have disappeared or been absorbed. Smaller exploration-led companies carrying high debt are in a real mess right now. What we are usually seeing is all-stock transactions because nobody has cash and we have all got too much debt. Paying down debt is so difficult. A few cash rich companies and high net worth individuals are starting to take advantage of the adverse market conditions and I expect to see private equity increasingly active. There will be a lot more consolidation in coming months. My experience is that in these types of situation, it takes about 12 months for earnings to dry up, dividends to get reset, stock prices to bottom out, redundancies to happen and cost cuts to work their way through. The longer that demand destruction and recession is happening, the harder it gets. We are only just over 6 months into this.
Chris: understood, though you did not really answer my question?
Big oil CEO: OK Chris let me add. Our stock price is down around 50%. We could wake up tomorrow and find we have been bought. People say it could never happen because we are so large, but it does happen. We have seen it many times in the past; actually we have done it to others many times in the past. From my perspective, it is survival of the fittest. You can use a bunch of fancy business speak if you want, but its dog-eat-dog during times like this, just as it was back in the late 1990s and early 2000s. There are a few companies we have an eye on, if a deal can be done; of course there is, but I cannot tell you any details. If we can upgrade our portfolio we should. At the moment, oil prices are holding steady albeit low; if oil prices collapse then the unthinkable can happen. Negative oil prices were always hypothetical gossip from traders gathered around the coffee machine until they actually happened.
Chris: do you think we can reach Net Zero?
Big oil CEO: we need a coming together in which everyone recognises they have a responsibility to reach carbon neutral. We are entering a phase of significant change that needs more vigorous action. At the moment some oil companies are changing direction to head towards Net Zero, many others say they are committed to change, and some do not plan to change. We believe in action with ambition; having just aspiration and words is not enough. It is not about one company reaching Net Zero, it is about all companies reaching Net Zero. Governments can help by setting direction and achievable targets, providing clear regulation and a realistic tax structure; the power sector has become hideously complicated with regulated tariffs and returns. I’m not allowed to say it but sometimes it would help if governments stopped making grand promises and got out of the way. In the end Net Zero will be delivered by businesses and investors, underpinned by technology.
Chris: you have big investments in US shale; what do you see as their future?
Big oil CEO: you have to remember it is a factory model. It is about continually drilling and fracking wells, and putting them into production. The factory is not closed down but the size of the production line has been cut right back. We have shut down a lot of wells that were in the process of being planned, drilled and developed and when oil and gas prices recover we can speed up the production line. You have to remember that both oil and gas prices are low. The old paradigm was that you want shale that contains liquids-rich gas, and it is the liquids that make you money. This paradigm is more challenged now. Millions of jobs are at stake.
Chris: you have a lot of deepwater projects around the world. Are these viable anymore?
Big oil CEO: these are capital intensive projects but in the end it is about quality of investment. Like always, it starts with finding the right combination of the best rocks and fluids. The costs have come down a lot in recent times and the technology continues to improve. Many of the older generation of deepwater developments had low breakeven oil prices and a lot of projects are now sunk capital anyways. We are not done with deep water; we have made good discoveries recently; Chris you know from your time in Mexico that out in deep waters around the world there are lots of giant prospects at low risk; the challenge is to find the best rocks and a good set of contract terms.
Chris: if shale and deepwater seem to be OK, what don’t you like?
Big oil CEO: Projects such as oil sands are more exposed – these are capital intensive and high carbon. Stranded oil in low permeability reservoirs is just too difficult. Heavy (low API) oil that is sulphur rich is also challenged. Its not great for our refineries and customers don’t want sulphur rich products. Projects in environmentally highly sensitive locations should become no-go areas; there are so many other good opportunities, our industry doesn’t need them. Refinery margins suck; who in their right mind would build a brand new refinery now? No one wants jet fuel anymore until planes start flying again. In natural gas, sour gas production (with high hydrogen sulphide) has always been questionable, and the whole industry needs to eliminate methane emissions and all gas flaring. Flaring is just burning money to make emissions and makes Net Zero even harder, in my view.
Chris: thanks, that leads neatly to my final question about safety? You haven’t mentioned it once during this interview?
Big oil CEO: you are spot on Chris. I should have mentioned that first! When the oil price collapses, when economies are crashing, and staff are being trashed, companies get distracted and often take their eyes-off-the-ball on safety. With the pandemic, there has been a global shift in focus to health, a shift from the S to the H of HSE if you like. It is not just physical health and quarantines but mental health also. Especially when we still don’t know what the new normal is. I hope you are doing OK Chris?
Chris: many thanks for asking, I’m pretty lonely right now. It is clear to me that you probably don’t get to sleep very well given everything that is going on. Anyway, thanks again, it was unreal. I hope I didn’t put too many words in your mouth.
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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ANZMEX ORG A.C. is a politically neutral business council with no political affiliation. The views expressed in this column are not necessarily representative of the official views of ANZMEX or any of its officers or staff.
