Monday Insight: Covid ‘asteroid’ threatens the dinosaurs of Big Oil

Monday Insight: Covid ‘asteroid’ threatens the dinosaurs of Big Oil

Covid-19 may do for Big Oil what the Chicxulub asteroid did for the dinosaurs when it struck Earth 66 million years ago.

Much like the “terrible lizards”, Big Oil was already in decline before the coronavirus hit. The world in which they thrived is changing around them and they face multiple threats to their future health. But the outbreak’s impact has accelerated the process.

The pandemic has slashed oil demand, taking prices down with it.

Producers everywhere were slow to react. Now the recovery is taking longer than initially expected as infection rates remain stubbornly high in the US and spike again in Europe.

For this horrible year, the International Energy Agency reports global demand is 8.4m barrels a day lower than in 2019. In 2021 it will still be 2.5m barrels a day down on last year. The other major oil forecasting agencies see a similar future. That makes the next couple of years an uncomfortable time for all oil producers.

In the second quarter, when the pandemic had its most dramatic impact on oil demand and prices, European oil majors were able to offset some of their losses with huge profits from in-house trading teams. It was a period of extreme price volatility. They won’t have that buffer in their third-quarter results.

The struggles faced by Big Oil are clearly reflected in their share prices.

Exxon Mobil value is half what it was at the start of the year, and Chevron is down by a little less than 40pc. Royal Dutch Shell has fallen even further.

It’s been a particularly bad few weeks for Exxon. First it lost its place in the Dow Jones Industrial Average, leaving rival Chevron as the index’s only oil company.

Last week it briefly ceased to be the largest US oil company by market value for the first time since it began as Standard Oil more than a century ago. That crown, too, passed to Chevron.

Exxon is facing a backlash for its unwillingness to adapt to changes in the planet’s physical environment. The Church of England Pensions Board sold all its holdings in the company after it failed to set goals to reduce emissions produced by its customers.

Rivals, particularly based in Europe, have moved more quickly to set themselves ambitious carbon-reduction targets, although it’s important to maintain a healthy scepticism over their ability to reach them.

Big Oil is also getting smaller. BP, whose CEO is Kerry native Bernard Looney, plans to cut 10,000 jobs, equivalent to 14pc of its workforce; Shell will shed 9,000 workers (11pc); and Chevron will reduce its payroll by 6,000 (13pc). Exxon will also cut headcount,but hasn’t given a figure.

While the pandemic will hopefully subside, the pre-­existing threat from the shift away from carbon-based fuels won’t. BP and French oil major Total now see global oil demand plateauing at close to 100m barrels a day by 2030, before starting to fall.

Shell also expects demand for oil products to peak – “whether it is this decade or next is anybody’s guess”, De La Rey Venter, a Shell executive, told the FT Commodities Global Summit last month.

In September, BP’s share price hit a 25-year low after Mr Looney and other executives detailed the company’s plans to adapt to a low-carbon future without sacrificing returns.

“Investors remain sceptical, particularly as this move is being forced on the company by climate change,” said Mirza Baig, global head of governance at Aviva Investors.

Mr Looney took over as CEO in February, but the so-called BP Week last month was his big moment, designed to put flesh on the bones of a bold plan to become a “net-zero” energy company by 2050. It was also an opportunity to persuade shareholders to stick with the company after it slashed its dividend by half in August.

At the heart of BP’s reinvention is a reduction in oil and gas production and simultaneous growth in its renewables business. Mr Looney promised investors he could do this while delivering returns of 8pc to 10pc. That’s not as high as the double-digit returns oil developments can sometimes bring in, but greater than many clean-energy projects.

Even the Organisation of Petroleum Exporting Countries (Opec) can now see a peak coming, a notion it had previously called misguided. Opec’s latest World Oil Outlook, published last week, says global consumption of liquid fuels will reach a plateau around 2040.

Opec’s outlook points to one more challenge for Big Oil. It forecasts production from non-Opec countries will stagnate and fall after a rebound from pandemic-hit production levels by 2025. When it does, the world will need Opec members to pump more oil, even as demand stagnates.

While the oil majors can theoretically explore for and pump crude almost anywhere, they’re excluded from the one country that offers the most attractive combination of ample reserves and low costs – Saudi Arabia.

Some dinosaurs lingered for another million years after the Chicxulub asteroid struck. Others evolved into more than 10,000 species of birds.

The Covid-19 pandemic won’t bring about the imminent demise of Big Oil companies. But it will almost certainly hasten their metamorphosis, and those that can’t change will go the way of the Tyrannosaurus rex and brontosaurus.

(Bloomberg)

Bloomberg

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