What’s Next For Big Oil?
Something unthinkable is happening in Big Oil, and it's not the slump in demand or the cut in spending or layoffs. With the exception of the slump in demand, we've seen it all before - actually more than once.
No, it is inconceivable that Big Oil apparently plans to stop being Big Oil.
It is no joke. Three of the world's largest oil and gas companies plan to become net zero carbon emitters by 2050. As Energy Intelligence recently found in an industry analysis, there are only two ways to achieve net zero: reducing oil and gas production and trapping the carbon dioxide already emitted.
The field's three top performers seem to be concentrating on the first path. Shell, BP and Total are planning - together with the Italian company Eni and the Spanish company Repsol - to significantly increase their renewable energy production over the next few decades at the expense of oil. And the US super majors, reluctant to join the green energy wave, could at some point simply be forced to do so by their shareholders and the new world order after the corona virus.
It would be an understatement to say that the pandemic had to play a role in transforming the energy industry as we know it. The pandemic and the associated slump in industrial oil demand played a major role in this transformation. The scale and speed of this slump in demand was literally unprecedented, but now that the precedent has been set, Big Oil is preparing for the future.
Related: $ 40 oil is the new normal
According to Energy Intelligence, the industry is facing a major disruption that will change the business models used for decades. But there is no way around it. According to Energy Intelligence analysts, the traditional integrated business model is on the way out because this recent crisis has shown that it leaves a lot to be desired in many ways. The restructuring is also in order and is already under way to increase the resilience of companies to future crises. However, the main reason for this disruption is diversification into alternative energy sources.
“The global carbon budget is limited and is quickly running out. We need a quick transition to net zero, ”said BP's Bernard Looney at the launch of the company's net zero program, which was announced in February before Covid-19 was really successful.
“We all want energy that is reliable and affordable, but that's no longer enough. It also has to be cleaner. To achieve this, trillions of dollars must be invested in renewing and rewiring the global energy system. It will take nothing less than redefining the energy as we know it. "
Reimagining is the most precise way to put it, but it's only the beginning. The oil and gas industry has to change into something else. And it will be neither easy nor quick. "Leave it in the ground" is much easier said than done.
"We see that if you want to reduce energy consumption by 25% or hydrocarbon based energy consumption, you need draconian measures to achieve this reduction," said Shell's Ben van Beurden in a recent interview with Bloomberg.
"You have to lock people up. You have to close the economy. It shows the extent of the challenge, how complicated it is and what the consequences would be if you really wanted to have a very simple approach to eliminating oil and gas. "
So what the industry is planning - and is already using in some cases - is a more complicated approach. One aspect of this approach is to restructure the business into completely new business areas, without the traditional upstream and downstream business areas and to prioritize the new business areas. Another reason is the much greater focus on every business other than oil and gas. Electricity generation and distribution, biofuels, hydrogen, charging electric vehicles - all of that is there.
A third aspect of the oil and gas transition is technology. Tech will not only help Big Oil become more efficient - it could also prove crucial to their net zero ambitions, as Energy Intelligence points out in its analysis.
Related: The oil and gas sector could already be in decline in the terminal
So there is a change going on, and although it may not be the change that the most radical environmentalists want to see, like the immediate cessation of all oil and gas exploration, which is impossible, it is a change for the better. And the most important thing is that Big Oil has the perfect incentive to continue this change. Of course not out of altruism. Nonprofit.
The thing is, the transition to clean energy isn't just a challenge. This is an enormous business opportunity, as BP CEO recently said Daniel Yergin of IHS Markit. This is an opportunity for Big Oil, as only companies of this size have the resources and resources to be reliable and clean energy suppliers for companies as large as the technology giants.
This is not the most pleasant truth, but it is still a truth. If Google wants clean energy for its data centers, Looney says it will want a reliable energy provider, and it will most likely mean a large provider that has the capacity and backup capabilities to meet the technology giant's needs.
So Big Oil could stop being Big Oil and become Big Energy in the next few decades. Even the US supervisors will likely get into the wave if they find out exactly how profitable the alternatives of oil and gas can be. After all, not all European majors can be wrong, can they?
By Irina Slav for Oilprice.com
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