Out of the Black

Out of the Black


By Amy McLellan

National oil companies used to be easy to understand. They controlled the subsurface riches while international oil companies held the technology, staff expertise and capital to exploit those riches.

Recent decades have seen those distinctions blur. National oil companies deployed their wealth to build in-house expertise that now rivals the best of the oil majors: Brazil’s Petrobras delivers best-in-class deepwater results; Equinor (the new name for Statoil, 67 percent owned by the Norwegian state) is a leader in Arctic technology; while Qatar Petroleum is the world’s biggest liquefied natural gas producer.

Nor are national oil companies confined to their home territories. Many have spread their wings to find additional reserves to power fast-growing economies. The Chinese state oil companies are perhaps the best example of this, with interests that span the globe, from Angola to Sudan, Canada’s oil sands to the UK North Sea. Whereas once this incursion was feared – in 2005, for example, the U.S. Congress blocked CNOOC’s plans to buy Unocal – there are today few countries that resist their buying power.

Equally, the reserves advantage enjoyed by national oil companies has been eroded over the last decade, as new drilling and production technologies have unlocked huge volumes of oil and gas held in once-inaccessible shale rocks. The rapid deployment of horizontal drilling and hydraulic fracking has propelled the U.S. into a top-10 oil power in terms of reserves – although it is still dwarfed by the likes of Venezuela, Saudi Arabia and Canada – and it is poised to overtake Russia and Saudi Arabia as the world’s biggest producer.

Towards Peak Oil Demand

So far, so much oil. Yet the world is changing. Global oil demand continues to rise – the Paris-based International Energy Agency forecasts oil demand this year of 99.2 million barrels per day, rising to 104.7 million barrels per day in 2023. But a convergence of climate regulation, technology and consumer appetite signals that the coming decades will see demand growth start to slow, and even reverse.

There’s no consensus about when the world will hit peak oil demand – the IEA’s own modeling ranges from 2025 to beyond 2040 – and even when demand does peak, the drop-off will not be sharp. According to Spencer Dale, chief economist of BP: “The world is likely to demand large quantities of oil for many decades to come.”

Yet an economy or balance sheet built solely on the fossil fuels that powered the 20th century may find itself increasingly obsolete in the second half of the 21st. As Sheikh Yamani, the former Saudi oil minister who helped weaponize oil in the power plays of the early 1970s, famously observed almost two decades ago, “the Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”

International oil companies, particularly in Europe, have spent the last two decades talking a good game on renewable energy. BP reimagined itself as Beyond Petroleum back in 2000, a huge rebranding exercise that within just a few years was rightly called out as window dressing. Even today, the five biggest oil firms spend just 3 percent of their US$100 billion combined annual spend on renewable power projects.According to figures from Wood Mackenzie, achieving the same 12 percent market share the majors have in upstream oil and gas would require US$350 billion in wind and solar investment out to 2035, something the energy consultancy admits looks an unlikely scenario. Tom Ellacott, senior vice president, research, corporate analysis at WoodMac, noted in a report last year that “even this bull scenario would lift renewables to just 6.5 percent of the majors’ production in 20 years’ time.”

This investment is a hedge that Big Oil cannot afford to ignore, argued Ellacott, warning of the future erosion of the upstream value proposition and anticipated hardening of investor sentiment towards carbon in the coming decades.

Indeed, that hardening is already well underway. One recent study from Cambridge University warned that oil companies’ vast oil reserves will become “stranded assets” before 2035, as faster-than-expected technological change in the global power generation and transport industries leads to a collapse in fossil fuel prices.

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Looming Legislation Concerns

Legislators and big investment houses are also worried. In June 2018, the UK House of Commons’ Environmental Audit Committee called on the government to force listed companies and big investors, such as pension funds, to report on climate risk and how it will affect their business.

BlackRock, the world’s largest investment firm, and other big investors – including Aviva and Legal & General—have signaled they want more transparency on climate change risk. A number of U.S. oil giants, including the usually defiant ExxonMobil, have recently been forced by shareholders to report on the climate risks to their business.

Furthermore, lawyers in the U.S. are limbering up for what they think could be tobacco industry-scale damages. Lawyers are pushing for an investigation into whether Exxon misled shareholders about what it knew of climate change risks, while a slate of towns and cities in the U.S. are suing Chevron, ConocoPhillips, Exxon, BP and Shell for “knowingly and recklessly created an ongoing public nuisance that is causing harm now and in the future risks catastrophic harm to human life and property.”Under this kind of scrutiny, it’s no wonder industry is now taking the “decarbonization” of its portfolios seriously. Shell, for example, is readying for peak oil demand by making heavy bets on natural gas to ride out the transition, as well as buying assets across the energy chain, including a Dutch car-charging network and UK energy supplier First Utility. It has pledged to invest US$1 billion to US$2 billion a year by 2020 in its “New Energies” business to help halve the net carbon footprint of its energy products by 2050, an amount CEO Ben Van Beurden earlier this year defended as being “pretty modest” but “not a pittance.”

French oil giant Total has been busy buying up solar assets, while in December 2017 BP agreed to pay US$200 million for a 43 percent stake in Europe’s biggest solar developer, London-based Lightsource, marking its return to a sector from which it withdrew six years ago. It remains to be seen whether this portfolio rebalancing is happening fast enough to keep pace with technological change and the legislative mood.


New Name, New Targets

State-owned companies face their own unique pressures in this changing world. They must walk a careful balancing act between ensuring their oil is produced and consumed for the benefit of the state, while also diversifying their economies to prepare for a low-carbon future.

Earlier this year Statoil rebranded itself as Equinor to reflect what Chairman Jon Erik Reinhardsen says is the “biggest transition our modern-day energy systems have ever seen.” In practice the Norwegian continental shelf will remain the backbone of the company, but by 2020 it will be spending 25 percent of its research budget on energy solutions and energy efficiency, and by 2030 it wants 15 percent to 20 percent of its annual investment to target new energy solutions.

Meanwhile, bankers around the world are licking their lips at the planned initial public offering of Saudi Aramco, now expected in 2019, and which is the centerpiece of Saudi Arabia’s Vision 2030 strategy to diversify its economy beyond oil. Crown Prince Mohammed has said he expects the IPO to value Aramco at a minimum of US$2 trillion, meaning a sale of 5 percent could raise US$100 billion to help fund Vision 2030 projects.

These include huge investments in solar power for, as analysts at Arthur D Little point out: “The Kingdom of Saudi Arabia’s location and climate make the country perfect for solar energy, due to levels of solar irradiation higher than that of all of Europe, with far cheaper and less populated land.” The kingdom recently announced a venture with Japanese investment giant SoftBank to build the world’s largest solar power generation project with a series of solar parks designed to add a massive 200 gigawatt of capacity by 2030.


Diversifying if Possible

Other state-owned companies are tentatively diversifying. Kuwait Petroleum Corp.’s KPC Energy Ventures has been exploring low-carbon fuels while Petrobras, back from the brink of a debt crisis, is once-again investigating offshore wind in Brazilian waters.

Clearly, not all state-owned oil companies are in a position to take this long-term view. Venezuela’s PDVSA is in meltdown while others are too beholden to other competing objectives, such as keeping domestic oil affordable and job creation, to risk investing in unproven renewable energy projects. But it seems clear the clock is ticking towards a lower carbon future from which no oil company, investor- or state-owned, can escape.

Throughout all of this, logistics and project cargo specialists will need to keep watch on developments. Of course, the age of renewable energy still requires the construction of new infrastructure and connected networks. Be it shipping a vast offshore wind turbine, decommissioning obsolete oil and gas infrastructure or getting lithium-ion battery farms in place to ensure the reliability of green energy grids, the project cargo industry will need to ensure it has the hardware and people to deliver solutions to match every client’s needs.


Freelance journalist Amy McLellan has been reporting on the highs and lows of the upstream oil and gas and maritime industries for 20 years.

Image Credit: Jan Arne Wold / Woldcam / Statoil



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