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The Retreat of the Major Oil
Companies. June 7, 2021
Iraqi workers
walk on pipelines of an oil refinery near the city of Basra in 2009.
In November of that year, Iraq awarded the right to develop the West
Qurna-1 field to a consortium led by Exxon and Shell.
Photographer: Nabil Al-Jurani/AP Photo
The Retreat of Exxon and the Oil Majors Won’t Stop Fossil Fuel
National oil
champions are likely to fill the gap left by private-sector
players—meaning emissions won't shrink as fast as the supermajors
By Rachel
Adams-Heard
When Exxon
Mobil Corp. decided
to get out of a big oil field in Iraq, the government took on the
unusual role of salesman. Iraqi officials pitched West Qurna-1 to
likely buyers from among Exxon’s supermajor peers, including
arch-rival Chevron
Corp. There
weren’t any takers.
That left Iraq with narrowed options: sell to one of China’s
state-backed oil majors, or else buy back Exxon’s stake itself. The
sale process remains unresolved but either outcome would stand as a
powerful indicator of what’s become of the global oil market. With
supermajors from the U.S. and Europe in retreat around the world,
national oil champions are set to fill the void.
The
supermajors — a group that, in addition to Exxon and Chevron,
includes BP
Plc, Royal
Dutch Shell Plc, TotalEnergies
SE, and Eni
SpA —
are shrinking even while fossil-fuel demand holds strong. These
companies are under growing pressure to pay down debt while cutting
greenhouse gas and, for some, transitioning to renewable energy. Recent
weeks saw
Exxon and Chevron rebuked by their own shareholders over climate
concerns, while Shell lost a
lawsuit in the Hague over the pace of its shift away from oil and gas.
Photographer: Peter Boer/Bloomberg
Members of the Dutch environmental group MilieuDefensie celebrate the
verdict of the organization's case against Shell on May 26 in the
Hague.
National oil companies, or NOCs, are largely shielded from those
pressures. When the owners are governments, not shareholders, there
aren’t dissident board members like those
now sitting inside Exxon. That
means state oil producers like those who populate OPEC+ can be the
buyers of last resort for fossil-fuel projects cast off by the
shrinking supermajors.
·
READ MORE: What
Happens When an Oil Giant Walks Away
State companies can also gobble market share by simply producing oil
that their private-sector rivals won’t. Saudi
Aramco and
Abu Dhabi National Oil Co. are spending billions to boost their
respective output capacities by a million barrels per day each, and
Qatar Petroleum is spending more than $30 billion to increase its
liquefied natural gas exports by more than 50%. (Aramco and Abu Dhabi
National Oil declined to comment.)
Taken together, NOCs make up just over half of today’s worldwide oil
supply. By 2050, Rystad Energy sees that share growing to 65%.
Big Oil Is Getting Smaller
The majors' spending on oil and gas production has fallen
Source: International Energy Agency's World Energy Investment
2021; Note: 2021 spending is an estimated figure
It’s an unmistakable trend that’s drawing heightened attention to some
of the largest and most secretive entities in the world. Many
government leaders are seeking to lower planet-warming emissions, with
nine of the 10 biggest economies staked to net-zero goals. At the same
time, these opaque government-sponsored oil producers — insulated in
most cases from both investors and environmentalists, and under little
obligation to disclose climate data — are taking over the job of
filling the millions of barrels consumed each day.
“We
hear government officials and NOC officials say, ‘We look at the
divestment of international oil companies from some projects as an
opportunity for us to grow,’” said Patrick Heller, an adviser at the
Natural Resource Governance Institute. “And I do think that’s
potentially really risky.”
Listen: U.S. Oil Reporter Kevin Crowley discusses the retreat of the
oil majors on Bloomberg Radio
Some observers worry that campaigns by activists to have oil majors
divest from fossil fuels could end up accelerating a shift to
government owners who operate with less transparency and,
occasionally, worse environmental records. Jason Bordoff, director of
the Center on Global Energy Policy at Columbia University’s School of
International and Public Affairs, argued in a recent essay that such
efforts could result in “unintended
consequences” without
the necessary drop in demand.
For
all the focus on companies like Exxon and Shell, the majors recently
accounted for only 15% of the world’s supply of oil, according to the
International Energy Agency. Some of them are set to see their
production drop, too, in part due to selling off chunks of their
existing businesses.
BP
has spent the past two years pursuing divestment deals partly to help
meet its net-zero goal,
and next it plans to sell a stake in an Omani gas block to Thailand’s
national energy firm for $2.6 billion. Shell, with its own pledge to
zero-out emissions, recently said it would hand back leases to the
Tunisian government instead of producing more oil from them. Such
deals reach beyond oil and gas extraction: Mexico’s Pemex is
set to buy a Texas refinery from Shell. (Pemex declined to comment.)
Photographer: Simon
Dawson/Bloomberg
An oil drilling
rig on one of the causeway islands at the Saudi Aramco’s Manifa
oilfield. Aramco and Abu Dhabi National Oil Co. are spending billions
to boost their respective outputs by a million barrels per day each.
While
state-sponsored oil companies vary greatly — from Norway’s
climate-conscious Equinor to
Russia’s Gazprom,
a top three emitter for decades — overall NOCs make an outsized
contribution to global emissions. Consider methane, a greenhouse gas
that’s far more potent than carbon dioxide in the short term.
Countries where state-owned entities dominate energy supply make up
three-quarters of all methane emissions from oil and gas, according to
the IEA. The vast majority of those methane emissions are attributable
to just 15 countries, including Russia, Saudi Arabia and Iraq.
Pressure driving
supermajors to shrink isn’t coming solely from climate activists. The
IEA drew widespread attention last month when it released its
first report laying out a roadmap for a global net-zero economy by
2050. In that scenario, demand for fossil fuels plummets and
investment in new oil and gas fields needs to stop. Methane emissions
from fossil fuel, meanwhile, would fall 75% by 2030.
In the
near-term, the majors have “ample spare capacity,” Bordoff said in an
email interview. “But if investment by the majors remains depressed
and oil demand continues on its current trajectory, markets will
tighten.” As oil prices rise, he sees state-owned or smaller,
private players
stepping in to fill the gap. “A shift in production to major
nationally owned companies — such as in Latin America or the Gulf or
Russia — carries geopolitical supply risks,” Bordoff said, “while
smaller independents have often demonstrated poorer safety and
environmental practices.”
Divestments and
reduced spending on exploration means oil majors will simply run out
of proved reserves — the quantity of hydrocarbons that they can
produce — within 15 years, Rystad said in a recent report, “unless the
group makes more commercial discoveries, and fast.”
Even Exxon, which hasn’t set a net-zero target, has severely curtailed
its ambitious
growth plans to
save money and reduce debt. The company is keeping production at the
lowest level in two decades through 2025, a drop of 25%
compared to pre-pandemic estimates. Exxon's asset sales are “financial
transactions, not an effort to reduce emissions from our portfolio,”
the company said in a statement. “Our business plans call for reduced
emissions intensity, which emphasizes improved operational
efficiencies and emissions performance, rather than the divestment of
individual assets.”
Fossil Fuel Rolls on as Exxon and the Oil Majors Retreat
Fossil Fuel Rolls on as Exxon and the Oil Majors Retreat
Fossil Fuel Rolls on as Exxon and the Oil Majors Retreat
Chevron has also backed away from new megaprojects in favor of more
flexible U.S. shale. Both companies forecast flat output this year
compared to last. BP will cut its oil and gas production by 40% by the
end of this decade, while Shell sees a gradual decline in oil output
of around 1% to 2% each year.
As
a group, the majors are holding spending at 2% lower than last year,
the IEA reported last week, despite overall capital expenditures on
exploration and production rising 8% in 2021. Spending on new oil and
gas fields “has traditionally been well above the levels from their
peers in the Middle East, Russia and China,” the IEA said. “This is no
longer the case.”
But
global demand isn’t falling as rapidly, at least according to current
projections. In fact, it’s expected to rise over the next 15 years
based on recent estimates from clean-energy researchers at
BloombergNEF. That leaves about 55 million barrels of oil a day of new
supply needed by 2050, BloombergNEF says, equivalent to global demand
in the middle of the 1980s.
Upstream Oil Investment Required
Significant new production will be needed even if demand eventually
falls
Source: BloombergNEF
State-owned oil companies see this as an opportunity. “A lot of oil
and gas host governments and NOCs believe that the industry is
underinvesting in exploration and production, and some believe they
can step up and fill the gap,” said Ben Cahill, a senior fellow in the
Energy Security and Climate Change Program at the Center for Strategic
and International Studies.
Not
all will be able to do so. Cahill said companies like Pemex,
Venezuela’s PDVSA and
Algeria’s Sonatrach will
struggle just to maintain their output. But that leaves giants like
Aramco, Russia’s Rosneft and Qatar Petroleum in a position to double
down on their core business.
Iraq’s oil ministry said in a statement it’s committed to attracting
new investments with international oil companies. This year Iraq has
been discussing a
$7 billion energy deal with Total, for example, even as Exxon has
sought to shed its stake in an oil field. “Everyone knows that many
international companies have changed their strategies,” said Asim
Jihad, an oil ministry spokesman. “Iraq respects the will of the
companies operating in Iraq.”
National Oil Champions Have Weaker Climate Plans
A higher Bloomberg Intelligence Climate Transition Score indicates
better preparation for a low-carbon future
Source: Bloomberg Intelligence
It’s hard to glean a complete picture of what that will mean for
emissions, in large part because many state-owned companies don’t
disclose greenhouse-gas data. Aramco recently
revamped its disclosures and
still doesn’t report data from join ventures or the emissions from
customers burning its fuels. Overall, disclosure from state-owned oil
companies are highly variable and lack the transparency of the majors.
But
what little is known indicates there’s low-hanging fruit on greenhouse
gas from NOCs. In some cases it would cost nothing for petrostates to
slash methane emissions, according to a previous IEA report.
Photographer: Andrey Rudakov/Bloomberg
Russia’s Rosneft may find an opportunity to double down on their core
business, along with its giant national oil company peers Aramco and
Qatar Petroleum.
“NOCs are sort
of the biggest keys when it comes to looking at country-level
emissions,” said Ratnika Prasad, director of energy strategy at the
Environmental Defense Fund, which recently commissioned a report by
Carbon Limits on methane emissions by state-owned oil companies. “It’s
easy to see how taking action on NOC emissions, especially methane,
will yield pretty quick and more effective climate results.”
Pressuring
government-run entities to take action introduces new, daunting
hurdles. After years of campaigning, there’s a playbook of sorts for
forcing change at the Western supermajors. Activist groups such as
Follow This and As You Sow encourage climate-conscious citizens to buy
stock in publicly traded companies like Exxon or Shell. Then
shareholder activists push climate-friendly proxy measures during
annual shareholder meetings.
Strategic pivots
by Shell and BP toward low-carbon fuels came after years of
intensifying shareholder pressure, and the same process appears to be
playing out inside Exxon right now. The Texas oil giant lost an
unprecedented battle with an activist investor Engine No. 1 at its
annual meeting this year. With
just 0.02% of Exxon’s shares,
the previously unknown group won backing from large institutional
investors and placed three of its own candidates on Exxon’s board.
State-owned
entities lack an equivalent mechanism, unless a significant portion of
their shares is listed on a stock exchange. Any drive to lower
emissions is tied to the ambitions of the countries that own them.
“NOCs are at the core of economic life in a lot of oil producing
countries,” said Heller. “The health of the NOC is in some cases seen
as synonymous with the health of the economy overall. So that does
contribute to status-quo thinking.”
There’s some
cause for optimism. Countries with the most prolific state-backed oil
companies have signed on to the Paris Agreement, with some taking
their commitment a step further and participating in voluntary
coalitions aimed at reducing emissions. The Oil and Gas Climate
Initiative counts five national oil companies, including Aramco and
China National Petroleum Corp., among its members. That organization
requires a target to reduce the average methane emissions per barrel
of oil produced by 2025, although this doesn’t ensure that absolute
emissions will fall.
To some degree, this is a phenomenon that Exxon has been warning
against for years. As BP and Shell have sold off assets in a pivot to
renewables, Exxon has said such moves only work to move production —
and emissions —
elsewhere.
Exxon CEO Darren Woods drew criticism from climate activists last year
for labeling rivals’ asset sales to lower emissions nothing more than
a “beauty competition.” His wider point underscores the long path
ahead for the world as it grapples with climate change.
“This is not a company challenge, this is a global challenge,” Woods
said in March 2020. “This idea of moving things in and out of the
portfolio from one company to the other actually isn't getting us any
closer to a solution.”
But
Mark van Baal, founder of Follow This, said that by pressuring the
majors it’s still possible to drive an overall reduction in
emissions—even without directly challenging the NOCs. State-owned
entities will follow if majors push ahead on investment in renewable
energy, he said, lowering the costs for everyone. “We need the most
innovative oil and gas companies to change and put their full weight
behind renewables to speed up the energy transition,” van Baal said.
“Others will follow.”
— With assistance by Dave Merril, Gerson Freitas Jr, Eric Roston,
Khalid Al Ansary, and Anthony Di Paola
Green Play Ammonia™, Yielder® NFuel Energy.
Spokane, Washington. 99212
www.exactrix.com
509 995 1879 cell, Pacific.
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