It’s been a rough year for oil, to say that least. And the worst isn’t over yet. Even though oil demand, and therefore oil prices, have been slowly recovering, that upward trajectory is now running out of steam and we’re headed toward a slump amidst what will almost certainly be a yearslong recession in the wake of the economic fallout from the devastating spread of the novel coronavirus.
Even as oil demand and prices have recovered, the tried and true economic model is no longer a failsafe option for oil and gas companies. Pumping crude just isn’t paying the bills. This is not solely due to the COVID-19 pandemic--it’s been a long evolution in the sector. “Over the past decade, the ‘oil’ companies, whose profits were mostly derived from pumping crude out of the oil fields they discovered, transformed themselves into ‘oil and gas’ companies,” oil strategist Julian Lee wrote for Bloomberg Opinion this week. “Now they are evolving once again to become ‘energy’ companies. Shell’s latest report shows that almost half of its production was natural gas, compared with less than 40 percent in 2005.”
The op-ed, entitled “Think Big Oil Makes Its Cash Pumping Crude? Not Anymore,” argues that Big Oil’s money is now in trading, not in extraction and refining. “The swing is likely to become even more pronounced,” Lee writes. “Companies like Shell aren’t going to stop producing oil, but it will become less important as the world increasingly embraces less carbon-intensive forms of energy. As they become more focused on natural gas, electricity and, very likely, hydrogen, their ability to offset any weaknesses in their core activities through trading profits are likely to be severely curtailed.”
This tracks with global trends toward a decarbonized economy that has been significantly heightened by the novel coronavirus’ extreme disruption to business as usual. This unforeseen pause to the previously unstoppable momentum of the global energy industry has driven world leaders to reconsider their options for a greener future. The World Economic Forum has strongly advocated for the development of a “new energy order”and a “great reset”. What’s more, according to reporting by NPR, “around the world leaders see opportunity in the global pandemic to address the other big problem humanity faces: climate change.” These leaders include the United Nations, the International Energy Agency, and the European Union, all of which are currently considering or actively drafting green stimulus packages. Even dozens of surprising blue chip companies are pushing for a green energy stimulus.
Big Oil, particularly in Europe, has already seen the writing on the wall, and accepting the decline of conventional fossil fuels has saved them, protecting them to some extent from the battering oil prices took in April. But it may not be enough going forward, if oil and gas truly do go the way of the dodo any time soon. “Trading saved European Big Oil from the full impact of this year’s oil crisis,” Lee writes for Bloomberg Opinion. “It’s not the first time that massive profits from in-house trading desks ameliorated poor operating results from the core business of finding and producing hydrocarbons — and it won’t be the last. But the companies may struggle to carry this safety net into the era of decarbonization.”
But so far, trading has managed to save European companies from the far more devastating fate that their production-focused U.S. counterparts have suffered in recent months. Royal Dutch Shell Plc even turned a profit in the April-June quarter despite their oil and gas production being down 7 percent for the year and 11 percent in the quarter, which was “offset by aggressive cost and capital-expenditure reductions, plus a ‘very strong’ trading result.” By contrast, Chevron, which avoids pure trading, just reported “its worst quarterly loss in at least three decades and warned that the global Covid-19 pandemic may continue to drag on earnings.”
The clear takeaway here is that Big Oil needs to evolve to survive--even if that means turning into Big Trade, or even Big Renewable.
By Haley Zaremba for Oilprice.com
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