Emily Pickrell, UH Energy Scholar
In some circles, the question is increasingly being raised whether, among the many victims of the COVID-19 virus, may be the large, multinational oil and gas companies.
Indeed, the 2020 reductions in travel and work hit energy companies hard. At the same time, a growing awareness of the potential devastation from climate change – think fires in California, freak storms in Texas - has focused attention on the importance of reducing our reliance on fossil fuels.
Both have meant a sour 2020 bottom line for Big Oil.
ExxonMobil, for example, once one of the most powerful companies in the world, reported a staggering loss of $22 billion in 2020. BP, Shell and Chevron were not far behind, with $20 billion, $22 billion and $5 billion in losses to show for the year.
These returns, combined with a growing U.S. acknowledgement of climate change and the need to address it, has led some energy pundits to question Big Oil’s future.
“The world’s largest oil companies are emerging diminished and humbled by the pandemic-fueled oil bust,” wrote Paul Takahashi in a Feb. 26, 2021 article for the Houston Chronicle. “They face an uncertain future, under pressure from governments looking to curb greenhouse gases, investors seeking better returns and others simultaneously wanting both.”
Additional forces, such as a growing market for electric cars, could further cut into Big Oil’s revenues, reducing global oil demand by 25% according to a Columbia University 2019 study on electric vehicle trends. Meanwhile, some pundits have offered up President Joe Biden’s push to rejoin the Paris Agreement as bad news for Big Oil, never mind the recent one-year moratorium on new oil and gas leases on federal land.
Certainly, the companies themselves have shown a marked decline of interest in holding the same oil reserves they once did, even though it is their main commodity. ConocoPhillips, for example, averaged between a 15 and 20-year supply of reserves up until about 2015. Now it has enough reserves for about 10 years. Shell has been even more aggressive in its depletion of reserves, holding about seven years of production at the end of 2020.
“The erosion of petroleum reserves is a sign that even Big Oil is capitulating to the decline of its key product,” wrote David Fickling, a commodities writer for Bloomberg. “If you still think crude will see bright prospects in the 2030s, you should be exploring and developing the oilfields to supply it.”
Many energy writers have taken a dim view as well, one writing last spring about how the astonishing price crash – down to an unbelievable and certainly unsustainable $20 per barrel – could be a preview of the collapse of the industry.
Fast forward one year later and that prediction no longer looks so prescient.
“It is entirely wishful thinking that fossil energy is going away and that Big Oil is going to lose its place,” said Ramanan Krishnamoorti, chief energy officer for the University of Houston. “Big Oil, with or without industry mergers, is likely to dominate the U.S. energy landscape, with oil prices likely to exceed $100 in three years and gas prices likely to increase above $4 in less than a year.”
It’s a calculation that is based partly on the slow-pace of global transition to electrical vehicles: They make up about one percent of the U.S. light vehicle fleet, despite Tesla’s relentless ability to appear in the news. And while brand name companies like GM have announced plans to phase out gasoline vehicles in the coming decades, it will require significant development of the electricity grid to do so.
Not impossible, yet the recent near-collapse of the Texas grid has made it vividly clear the kinds of problems increased reliance on shared infrastructure could create.
Even if we are bullish on the global appetite for going from weaning itself off gas guzzling transportation, there is still the uncomfortable fact that cars only account for about 25% of oil consumption. The other 75% - including truck and airline transportation, petrochemicals and other industrial use - may well prove harder to replace.
And while oil exploration has gone down in recent years as prices have made it less profitable, this trend has already encouraged price increases – all of which will benefit the large oil companies. Indeed, as of March 15, West Texas Intermediate crude traded just below $60, more than double its $25 per-barrel price this time last year.
Yet as prices start to recover, energy analysts like Pavel Molchanov point to a weak expected future price for oil, and say it is a reflection of the oil companies’ lack of investment in future reserves. Molchanov takes it to mean that while oil prices might eventually recover, he is not yet willing to gamble on the timetable.
“It will be at least another year before the industry can get out of its current austerity mode,” said Molchanov, an equity research analyst with Raymond James. “Even a year from now, it is not remotely realistic for capital spending to get back to the levels of pre-pandemic spending. It may get closer to those levels but there is still so much fear, so much stress, so much uncertainty and the Big Oil companies exemplify this. They have to think about dividends and protecting the balance sheet.”
Finally, even as oil prices look healthier than in 2020, the Big Oil companies are trying to carve out their role in a transition to a decarbonized future. These companies could play an important role, because they have the resources and know-how to do so.
“In those policy-created markets and in that general world of progress towards decarbonization driven by government, you could absolutely see a role for big oil companies,” said Ed Crooks, a senior energy analyst for Wood Mackenzie, an energy consulting firm. “Big oil companies have a number of transferrable skills and capabilities that could work very well in renewable energy as they have done in oil and gas.”
These skills include a keen understanding of energy markets and managing good government relations. Plus, the companies have the equipment and know-how to work offshore – helpful for the push to offshore wind, for example. Also beneficial is their experience in managing multi-billion dollar projects, and their access to capital.
It will be a balancing game – but changing conditions is what the energy industry does best, seeking new technology, new drilling environments, changing worldwide economic circumstances. The death of Big Oil has often been foretold, but in this time of adaptation to climate change, they could end up being one of the transition’s biggest allies.
Emily Pickrell is a veteran energy reporter, with more than 12 years of experience covering everything from oil fields to industrial water policy to the latest on Mexican climate change laws. Emily has reported on energy issues from around the U.S., Mexico and the United Kingdom. Prior to journalism, Emily worked as a policy analyst for the U.S. Government Accountability Office and as an auditor for the international aid organization, CARE.
UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.
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Pandemic Year Has Not Accelerated The Death Of Big Oil - Forbes
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