The Johan Sverdrup oil field in the North Sea operated by Equinor is the third largest oil field on the Norwegian continental shelf with 2.7 billion barrels of oil equivalent. Equinor plans to reduce the carbon intensity of the energy products it sells by at least 50% as part of the energy transition related to climate change.
CARINA JOHANSEN | AFP | Getty Images
In the meeting rooms of the world’s largest oil and gas companies, the energy transition is high on the agenda. With electrification and renewable energy ascendingBig Oil is eager to adapt to a transformation that could ultimately make their business obsolete if they don’t take advantage of the opportunities it presents. The result could be a massive asset sell-off as the largest petroleum companies focus their oil and gas exploration on the countries where oil and gas are cheapest and easiest to extract.
The transition to renewable energies poses a long-term threat to oil and gas production as solar and wind power grow on the energy supply side cheaper electric vehicles and better battery technology are driving big changes on the global oil demand side. Large oil companies around the world have strong energy capabilities and assets that will enable them to remain competitive as the transition progresses. Some oil players may also choose to stick with just oil and gas, but then they clearly need to be among the best at the game.
Regardless of strategy, major oil companies must reduce their global footprint in oil and gas by focusing on countries with growth potential where oil and gas exploration can generate significant cash flow and profit with the lowest possible cost and carbon footprint.
Where there are 100 billion dollars to be won worldwide
Our analysis of the geographic spread and need for increased focus for the large publicly traded companies, also known as “Majors +” – based in the US ExxonMobil, Chevron and ConocoPhillipsand European players BP, Bowl, total, Eni and Equinor – concludes that together, these eight companies may want to sell more than $ 100 billion in assets to focus on their most promising country holdings.
The oil companies have a long history of being wherever money can be made with oil and gas and are present in almost every part of the world. In many countries, however, competition has intensified as national oil companies and governments have more controlled national resources and the number of small and medium-sized enterprises has increased. We see this, for example, in Indonesia and Malaysia with the state-owned companies Pertamina and Petronas, or in Norway and the United Kingdom, where independents have significantly expanded their role.
This trend has been going on for many years, but now the energy transition is putting even more pressure on the majors as they see that renewable energies will also require a growing portion of future investment budgets. Equinor estimates 15 to 20% of its investments are geared towards this new energy solutions By 2030, BP’s total investments in 2020 are projected to be around $ 12 billion, with the majority being spent on upstream oil and gas targets, but this is planned Increase investment in low-carbon projects by 2025 to around 3 to 4 billion US dollars per year and by 2030 to 5 billion US dollars per year.
The major geographic presence of the Majors + means that they also spread their technical and management resources across a large number of countries. We examined the size of cash flow and growth potential in each country per company and combined this with the global ranking of country growth potential. Based on this, we see that the eight largest publicly traded oil and gas companies may be trying to exit 203 country positions and lose all of the assets held in one country.
All companies would remain present in the US, which has by far the greatest potential for growth due to the slate revolution. Many companies would stay in Canada for similar reasons, but most would abandon the carbon-intensive oil sands production. At the other end of the scale, we expect a few countries where only one oil major is likely to remain. For example: Argentina (BP), Ghana (Eni) and Guyana (ExxonMobil). In some of these countries it might be tempting for others to stay or increase their presence as competition may be more restricted, such as Guyana where ExxonMobil has built a very strong position.
The world’s eight largest publicly traded oil and gas companies could lose up to $ 100 billion in assets worldwide, according to a new analysis by Rystad Energy. However, this does not mean that they are moving away from fossil fuels in a hurry.
In the last few months we have seen that the majors are already offering larger portfolios for sale. ExxonMobil has left Norway and plans several country exits including the UK, Romania and Indonesia Royal Dutch Shell attempted to dispose of a major LNG asset in Indonesia in 2019. This shows that they are aware of the need to focus their portfolios to improve cash flow, efficiency, and competitiveness as the energy transition accelerates – but the steps they have taken so far might be too small or too small too slow.
Leaving countries would free up cash that the majors could use to invest in renewable energy if that’s their main growth strategy, or to pay dividends to their shareholders even if they challenge Covid-19 times. If they don’t want to take the renewable energy path, the capital could be used to bolster prioritized country positions by buying assets from their peers or swapping assets with other players.
Big Oil from the USA is behind
A major reason some companies are less aggressive about investing in renewable energy is the strategic belief that oil and gas have been needed for a long time and that they are among the best oil and gas in terms of profitability and emissions. You will do fine. Another reason could be that with all the changes in the renewable energy space, they are choosing to be a supporter rather than an early stage promoter who doesn’t always come out as a winner.
We expect many of these majors to sell more high emission intensity assets to meet long term emission reduction goals and fund more investments in renewable energy. This has a double effect when the emissions are measured per unit of energy produced. That strategy is already underway for European majors such as Total, Shell and Equinor, who have committed to reducing the carbon intensity of the energy products they sell by 50% to 60%. Eni wants to reduce the absolute emissions by 80% by 2050 and BP strives for a net zero on an absolute basis via the carbon in its upstream oil and gas production until 2050.
Compared to their European-based counterparts, US majors have ExxonMobil, Chevron and ConocoPhillips communicate lower ambitions for CO2 emissions.
For these companies, the outcome of the upcoming US presidential election can be expected to have a significant impact on their strategy the politics of a democratic government could seek to reduce greenhouse gas emissions from oil exploration and other sources faster than continued Republican government. However, it is not necessarily easy for a new government to make many changes in energy policy on the climate side too quickly, as they may also have to consider economic and energy security implications.
The challenge and opportunity for the future big oil will be to accelerate the energy transition, promote renewable energies and reduce emissions, but also to increase the demand for oil and gas, and all of this in the context of the changes taking place in the EU globally Power balance and impact of the ongoing Covid-19 epidemic.
– –By Tore Guldbrandsøy, Senior Vice President, and Ilka Haarmann, Analyst at Rystad Energy