Crude oil commodities have mostly been an optimistic investment market for the better part of a century. Given that the sporadic turmoil and skepticism has been exclusively due to geo-political issues, the relative in-elasticity has rendered billions in private investments over the years; Consequently, the likes of ExxonMobil, Chevron, BP, and the Royal Dutch Shell have shared a puritanically-capitalistic outlook—more lately, as concerns over climate change amplify. Smaller companies have unsurprisingly shared some of the market optimism by association. Naturally, recent trends for big and small oil show continuous growth in shareholder dividends; With ExxonMobil, Shell, and BP showing a continuous rise in dividend yield throughout 2018 and 2019. This is especially interesting considering the very unexceptional,and rather diminishing quarter results by the same companies after the dip in international oil prices.
Recent quarter results are have made corporate executives increasingly nervous. Amidst the ever-constricting government and international regulations, this added impediment is daunting. Domestic anxiety, and pressure from Paris has drastically shrunk the previously robust and indefatigable oil prospects. On the flip side, this nervousness might seem unfounded, given that the oil demand is in no way in peril, but there is a catch: Market optimism in oil and gas is important. Unlike conventional commodities, where trends can be predicted with relative certainty, oil has a more clandestine nature, where supply and demand factors can be easily overshadowed by more complicated international interests in determining market dynamics.
With global temperatures rising at twice the previously accepted rate, and climate change strategy being one of the fundamental aspects of discussion on international policy forums, this is a watershed-moment for oil companies. Will company executives hold on to the essential investor confidence with wealthy pay outs, while internal strategy is revised?
Oil companies will choose to favor one of two strategies as the socio-political pressure to value stakeholders over shareholders intensifies.
The sustainable approach conforms to the status-quo: Drilling and Exploration (DE) remaining a top priority for oil companies. DE significance is validated, as the rampant hysteria regarding over-exploitation in the energy industry is confined to developed countries exclusively. To elaborate, Greta Thunberg’s home country has a nominal GDP of around 57,000 USD with a corresponding HDI of 0.93. Conversely, the worlds second highest populated country—India, has a nominal GDP of 1,940 USD, with an HDI of 0.673. The dichotomy is unmistakable, population in emerging economies do not have the same capacity as a Swede or Brit to spend offsetting an externality. More interestingly, an average Asian today consumes just 1/10 the energy in kWh of the average American. This steep climb up the energy consumption ladder by the emerging world cannot be offset by alternative sources of energy—at least with the current output figures.
The world will witness an unprecedented middle-class expansion in the next 10 years: 10 times the entire North American population. Energy companies with their unwavering capitalistic fervor would choose to capitalize on the emerging world, where the growing middle-class—at least initially—would prefer lenient regulations, much like the U.S. post World War II. With the U.S. and Europe reaching peak production and peak demand, more lucrative markets will prompt mass capital and labor influx. This expansion is predicted to create an additional 9 million barrels a day demand. Which is roughly the total oil production of Saudi Arabia today. In adopting such a vision, the industry would have to focus on investing in sustainable energy rather renewable energy; The switch from matter intensive to energy intensive fuels, along with large-scale carbon offsetting will have to accompany core strategy if this plan is expected to work. With investments in artificial intelligence and meta-data systems, production efficiency can reach unprecedented levels.
Renewables will continue to remain a part of the energy portfolio as a more of a façade than central strategy. Since prevalent renewable sources are not expected to cross 50 Watts per square meter of output anytime soon, large-scale solar and wind projects can cause more environmental havoc, than they could possibly compensate for.
The renewable approach stems from the argument that consumer preferences may have a more profound impact on corporate strategy than previously thought, a fitting example is the commercialization of electric vehicles by Tesla. Considering the irreparable biosphere destruction—mostly in developing countries—from cobalt and lithium mining operations, claiming that a Tesla provides an outright renewable automobile option is an overstatement. The sustainability aspect of Tesla is arguably dubious, but the drive for its demand hinges on the image of electric vehicles being “zero-emissions” rather than actually being environmentally friendly; i.e. generating a low carbon footprint, and emulating to generate a low carbon footprint seem to be collectively interchangeable. BP’s new CEO Bernard Looney on Friday also expressed BP’s fresh strategy to become entirely carbon neutral as a corporation. Although this statement was not followed by a formal course of action just yet, the urgency can point out the desire for big oil to masquerade their public image. BP’s transition hints that executives favour spending more on production efficiency, carbon offsetting programs, and—most importantly—adapting to suit consumer preferences.
With the North American continent reaching energy independence as a result of the NAFTA, the illustrious U.S. influence on global energy markets seems to be diminishing. With production in Africa and the Middle East continuing to soar, the increasing demand and supply has a potential to be externalized out of North America all together.
Established operators are adopting sustainable models of development and investing in overcoming the emissions deficit. Such measures will also be incentivised by tax-breaks and subsidies. Despite oil still having robust and notorious lobbying schemes, renewable projects still receive 12 times the subsidies and grants as compared to the fossil fuel industry—6 billion dollars annually in the U.S. Alternatively, U.S. oil companies also do not have much incentive to divest into Gulf oil territories. Logistical and geo-political concerns preclude this possibility entirely.
Despite the differences in both aspects discussed above, the common element would be the lingering prevalence of oil and gas. In an increasingly regulated industry, several considerations would factor in when choosing sustainability over renewability or vice versa, but if social environments and markets are suitable, oil companies would steer clear of the renewable bandwagon. Where the markets and public perceptions are fickler, oil companies will improvise, and adapt to newer models of energy, or risk being sidelined and excluded—much like the approach adopted by BP