Mind the energy gap

Nations are building a new green-energy infrastructure to boost economic activity following the Covid-19 pandemic. So, what will the oil majors do as the race to net-zero accelerates?

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  1. Charles Stanley

They cannot both be right.

Opec and the wider oil industry tell us they will be ‘back to normal’ soon, whilst advanced country governments want to speed along the track to net zero. Opec thinks it will be back to selling 100 million barrels of oil a day by the end of this year, recovering the lost output of the pandemic period.

The cartel looks forward to many more years of earning good money from providing oil and gas for the world's transport, heating and industrial processes. There are huge reserves, amounting to some 47 years output at current extraction rates. The industry is still looking for more reserves, which it usually finds. Opec plans to gradually restore the production cuts initiated when the pandemic slashed demand. It favoured a period of demand outstripping supply so there is a stock reduction and firmer prices.

The major governments assure us the world economy is going to move out of fossil fuels. They look forward to an electric revolution, removing the need for most oil and gas to power vehicles and heat homes. The talk is of stopping oil and gas companies searching for more reserves and persuading or making them wind down their conventional fossil-fuel businesses in good time to reach a global net-zero by 2050.

This year is about detailed plans with intermediate targets for 2025 and 2030 that bite. Companies such as Total and BP have sought to set out their own plans to transit from dependence on oil and gas to the provision of a wider array of renewables and clean energy. Total rebranded its company as Total Energies to express its intent. BP has had several launches of its green ambitions.

Oil pressures build

In recent days, the government and the investment community got tougher with the oil majors. They are looking for big steps, not greenwash. The national plans for carbon reduction are to include tougher shorter-term targets.

In a Netherlands court, Shell was told it had to cut its output of CO2 by 45% on 2019 levels as soon as 2030. Doing that would require major change. It will appeal and probably look at how far the enforcement powers of Netherlands jurisdiction run. It will also be influenced by it as a sign of the times and trends. Exxon lost three ballots relating to board appointments and has ended up with 3 out of the 12 people on the board representing a new activist group of shareholders who want the company to draft a much more demanding plan for energy change.

We can see what these oil majors are likely to do. They will look to sell off some of their production assets and oil reserves to private interests or companies in less green jurisdictions, whilst investing heavily in green energy sources. They may well look to the way large mining companies have handled the green aversion to coal investment. Anglo American is offering shares in a coal company to all existing shareholders, so shareholders themselves decide whether to divest coal or not. RTZ has sold its coal mines and BHP has pledged to. Oil companies can start to do the same with their oil interests as they transit to electricity companies.

BP has set itself the target of getting to 20GW of renewable electricity by 2025 and 50GW by 2030. To do so it is paying high prices for everything from wind farm blocks in the Irish Sea to solar farms in the US and Greek renewables. Some say it is paying too high a price in its enthusiasm to reposition. Shell has bought solar interests in Spain, is entering a joint venture in green hydrogen in Hamburg and has bought Ubitricity charging points in Europe. ENI aims for 60GW of renewables by 2050.

Markets have to decide how feasible it is for the world's oil majors to transform into energy companies mainly reliant on renewable electricity and other forms of green energy including hydrogen.

Opec thinks the pace of change will be slow, with traditional oil and gas demand held up by the growth of emerging economies whilst advanced countries try to cut their demand. They think their existing business model has many more years’ life in it. The advanced country governments are impatient to see more rapid progress.

What is for sure is the governments, the oil majors and many investing institutions will direct huge amounts of new capital into alternative energy. This will bring forward more wind and solar farms, more hydrogen plants and more batteries. It will also sustain already-high valuations and often chase them higher, offering opportunity for the early backers. It may leave some of the later investors holding new energy investments that offer low yields given their high starting valuations. Smaller entrepreneurial businesses will find willing buyers in this climate if they seek to cash in on some sky-high valuations brought on by a shortage of targets.

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