Doug Sheridan notes…
The Board of the FT writes, who is right about the future of oil? The International Energy Agency (IEA) has predicted that global demand for oil, along with natural gas and coal, will peak this decade, in a historic turning point. US supermajors beg to differ.
ExxonMobil’s purchase of shale producer Pioneer Natural Resources this month and Chevron’s deal this week to acquire Hess amount to the biggest consolidation in Big Oil for two decades. The tie-ups are a bet that the IEA’s vision of shrinking demand is wrong, or at least a bid to position these enlarged US giants among the last producers standing to meet the demand they believe will still exist by mid-century.
The IEA first published a pathway in 2021 to reach net zero emissions by 2050, and limit the global temp rise to 1.5C above pre-industrial levels. This envisaged oil consumption falling 75% from now to below 25MMBpd. Its latest central scenario, which assumes gov'ts meet existing pledges on climate action but do no more, sees demand topping out before 2030, then dropping to about 55mn b/d in 2050.
The agency’s most pessimistic scenario, under which countries plough on with today’s “stated policies,” would leave oil demand still at 97mn b/d by mid-century—but lead to a disastrous 2.4C of warming by 2100.
Assuming low-cost OPEC producers and Russia keep output at similar levels to today, they would meet much of the 2050 demand in a net-zero scenario. Producers elsewhere would be fighting for scraps. But if consumption is closer to the IEA’s central scenario, that would leave a fair bit even for higher-cost US producers to go at.
Since traditional oil investors prefer the high-risk, high-reward model of oil ventures to the lower if steadier returns from renewable energy, a chasm in valuations has opened between US groups and European rivals that have begun, to varying degrees, to shift to clean power.
There is certainly a case for highly cash-generative oil and gas giants, with all their engineering knowhow, to play a role in the energy transition—even if critics question their ability and readiness to do so. But the US consolidation will increase market pressure on the likes of bp, Shell and TotalEnergies to demonstrate that their more hybrid strategies are sound. An alternative model is for oil companies to shovel cash to investors who then channel it to clean energy specialists.
To Sum It Up: If oil companies are not ready to plough their returns into green energy themselves then, for the sake of the planet, it will be up to markets to do it instead.
Our Take: The FT Editorial Board, rather than acknowledge the writing on the wall regarding oil and gas demand going forward, has tried to rewrite the narrative, pretending major players simply need to think in terms of reallocation of capital to green ventures. But that's what the last few years have been about, and it's a strategy that has been found to be woefully wanting.