Absolute Zero: The Oil Industry Will Not Change Despite Climate, Covid, Oil Price Implosion and Share Price Collapse.
An energy transition axiom: Oil and gas majors will not lead the transformation, they will maintain their existing business model until it cannot carry on, and not a moment before.
Let’s get frank and honest: Net Zero, CCS, small renewable investments and so on are a footnote to the oil and gas industry’s main aims: huge investments in traditional oil and gas assets, and pay-outs to shareholders.
Expect them, therefore, to remain unbending in the months and even years ahead; proud of not adapting to the new world of energy ahead.
And thus being a postscript to the real solutions of the energy problems we will face, and solve, in the very near future.
Absolute Zero
The international fossil fuel industry’s campaign of Net Zero emissions is a late-phase strategy to avoid competing directly with the increasing strength of renewables (wind, solar, EVs, storage).
Pre-Covid, most large oil and gas companies already admitted their basic model of huge investment in oil and gas projects, feeding large dividends, was pretty much binding, despite huge downsides of pollution and climate impact.
It was a proudly static model assuming energy supply-demand cycles would always smooth-out any sharp downturns, that dependence on fossil fuels was a fundamental law, and that the climate impact would be ultimately accepted.
Post-Covid, the industry will not change: it will continue to invest in traditional oil and gas projects, and protect dividends at all costs.
Because, to oil and gas companies the maintenance of dividends is more than strategy: it is an ideology with a dollar sign attached.
Goal Zero
When the oil and gas industry talks about Safety, it prides itself in setting absolute goals of zero.
BP set the standard in the 1990s with, after much internal debate, aspiring for three Zeroes (or Noes): No accidents, No harm to people, No damage to the environment.
After a while others followed: Shell pronounced Goal Zero in the 2000s.
Both companies fell far short of these aims: BP spectacularly so in terms of Texas City Refinery – 15 fatalities, multiple injuries, major environmental damage, and the Macondo drilling catastrophe – 11 fatalities, multiple injuries, $50bn plus of environmental claims.
But the aspiration, the goals, were clear to galvanise employees, investors and society
They fell short, but they aimed for a north star of Absolute Zero.
All these Zero goals were set in the immediate term, added to quarterly management performance scorecards, corporate pay-out plans to executives, and discussed in slide 1 of management presentations to investors, straight after a Safety Moment spoken to the room.
Clarity, brevity and simplicity
But yet – sometimes simplistic.
Typically the targets avoided more subtle Health, Safety and Environment (HSE) issues such as long work hours, contracting diseases on company business, mental health from stress and so on – safety was more about the tangible concrete Safety of physical harm and man-machine interface injuries on managed sites.
Data was measured mostly in lost-time injuries, meaning broken arms or twisted ankles, and less about stress-related absences in large offices, or food-poisoning or viral infection in some remote work location with limited facilities.
And so to global HSE CO2 emissions from oil and gas activity: 36 billion tonnes emitted each year, pushing atmospheric CO2 levels over the past century to levels unseen in a million years.
It is such a huge problem that even the giant oil and gas sector has recoiled from its consequences.
They have approached it from a detached distance; not defining it as safety in the conventional engineering, construction, broken-finger sense, but more of generic societal issue: We are all to blame, producers and users.
Their approach is therefore one of gradual acceptance of some accountability, but in a measured, calculated and legalistic manner.
Pre-Covid: Net Zero
Hence the idea of Net Zero.
For oil and gas firms, the “goal” was not Absolute Zero, but “Net Zero”, and in about 30 years time.
Net Zero has become a complex formulation mired in definitions of accountability via “Scopes 1-3” (so non-intuitive that BP’s own CEO felt compelled to draw a diagram at a presentation rather than simply describe what it meant).
On top of this there are self-policed “ESG” (environment, sustainability, governance). checklists – a phrase that is after several years still generally undefined, and in the oil and gas industry in particular still often vague and imprecise.
As Carbontracker notes, none of these Net Zero targets are mandated, legally enforceable, or even within the remit of more than say 10-20% of the current CEOs tenure
No wonder the world’s most prominent climate activist sees Net Zero efforts as ad-hoc evasions masquerading as solemn intent.
To take one key example as to why Net Zero in oil and gas will likely turn out to be bogus, consider Carbon Capture and Storage, CCS.
There seems to be a wide-spread evaporation of mathematical analytical capability when the oil industry and even environmental groups confront CCS.
According to the IEA and IPCC to reach Paris goals would require something like 2 billion tonnes of CCS capacity by 2030, and 7 billion by 2050.
So how are we doing?
Well, according to the Global CCS Institute there are 19 facilities in operation, 4 in construction, 28 in design stage. To date that equals about 100 million tonnes of CO2 capture.
Whilst this meets the IEA’s Goal 1, to reach the 2 billion C02 removal target by 2030 requires an increase of 20 times.
Assume each CCS facility on average sucks up 2 million tonnes pa (many do less), that requires us to build 100 CCS plants per year, or a CCS facility every 4 days.
Currently four are in construction.
We could do the maths for the 7 billion target in 2050 but frankly why bother?
This is a fiction, a bedtime story.
So much so several major oil firms back in 2016 pledged just 1 billion dollars, over 10 years, to CCS research and development, assuming a big headline number would deflect criticism of low effort.
One billion dollars in oil and gas investment over 10 years is a rounding error.
The same companies who made that pledge spend 100 billion dollars per year on traditional oil and gas (CO2 emitting) projects: that is they spend 1 billion dollars every 4 days, versus every 10 years on CCS, a difference factor of a thousand times.
So the CCS spend represented (if it was ever spent) only 0.1% of their budgets. 99.9% went to non-CCS emitting projects.
Corporate sound and fury, signifying zero.
Net Zero is the antithesis of the clear-cut internal oil and gas formulations about Safety (Goal Zero, No Accidents)
Net Zero is the oil and gas discussing in real time its existential, makeshift approach to climate change and new technologies of wind, solar and battery storage.
A stream of stressed consciousness.
So, whilst BP and Shell try to engage on the topic, many other major oil and gas companies engage in inaction.
Exxon accepts that in its main recent scenarios – 10 out of 13 to be precise – that the world will breach 2 deg C – and more or less leaves that comment there.
Chevron in its latest analyst presentation is more blunt: it won’t address climate change because it can’t afford it.
Its presentation uses the standard oil and gas triptych:
o Exponential energy demand growth forever, straight line (climate impact not highlighted) – (that 2020 data point might want revising by the way, as oil demand contracts rather than grows)
o Oil demand growth forever whilst supply declines rapidly in hypothetical curves (justifying endless investment) see Carbontracker’s Decline Rate Delusion
o Petrochemical growth fills in any gaps that left by oil fuel demand decline – with continued plastics pollution (see upcoming Carbontracker report in April)
This simplistic narrative drives the operating playbook for oil and gas firms:
o Assert immortal demand for oil – hence capex > 95% in classic oil and gas investment for fields that will have to be viable for 20-25 years (ie until ca 2050)
o Generate high-profile but negligible financial investments in alternative energies: carbon-capture, solar, EV infrastructure, biofuels and others make up < 5% of capital expense: eg Exxon’s full page-worth advertising of its work on algae in a 40-page annual report , despite it representing 0.2% of annual capex
As Liam Denning in a Bloomberg analysis of the oil majors’ latest presentations puts it:
“Guys, no. Just stop”
The financial reality underlying this narrative highlights why the oil majors have, really, nowhere to go, and the stories about Net Zero are really just pretence:
The 21st century oil major has to force-feed stakeholders with cash to remain investable (even though they represent less than 4% of the S&P 500).
For Chevron, this means that all free cash flow ($13bn) is paid out to shareholders.
This is a bind from which the majors could escape, but will almost certainly choose not to.
The industry may wish to change at the margin, and may sometimes try: but its core structure, its basic model has to serve an investor base that needs huge cash pay-outs to stay even half-interested in the sector
Hence dividend yields (dividends as a percentage of market capitalisation) range 5-10%, or essentially junk bond status with the latest oil price collapse.
But – stop these dividends, and an already dire market sentiment will dissolve.
That is not a back-drop where investments in alternative energies are likely to thrive – even though with their 5-6% pa steady returns, they may start to look attractive against a environment of $30/bbl or less.
No – the only way to keep the current dividend stream flowing is to invest in traditional oil and gas fields which provide the near-term cash needed to feed the dividend pay-out expectation that has been created – and pray for the return of “cycle”.
Yet analysts already point to no clear demand on the other side of today’s collapse – whatever cycle remains will likely be weak and confronting the steady rise of new technologies.
Hence a prediction: International oil company dividends will not be cut even if the markets demand it
Even as the market admonishes them for continuing to borrow or sell to pay these dividends, the oil majors will cling to the business model Chevron has outlined.
An anticipation, based on faith, of cyclical demand upswing will be used as justification.
Because, to oil and gas companies the maintenance of dividends is more than strategy: it is an ideology with a dollar sign attached.
Absolute Zero
An energy transition axiom: Oil and gas majors will not lead the transformation, they will maintain their existing business model until it cannot carry on, and not a moment before.
The time for (most) oil and gas majors to have fundamentally changed has gone.
Thus, investments in renewables, whilst increasingly viable with low oil prices, will be largely ignored in favour of hunkering down, paying out dividends as a priority, and specialising in charts of fast demand growth from 2021 onwards.
Liam Denning of Bloomberg has noted it would need oil and gas companies to do otherwise would be “the innovator’s dilemma on steroids”.
Or, put another way, almost impossible.
Latest news seems to bear this out – renewables will be put to the back of the fridge.
Let’s get frank and honest: Net Zero, CCS, small renewable investments and so on are a footnote to the oil and gas industry’s main aims: huge investments in traditional oil and gas assets, and pay-outs to shareholders.
These goals still dominate the numbers, and will continue to so until something sudden stops them: something bigger it seems than share price collapse, climate change, oil price implosion and the post-Covid world of social energy distance.
Because international oil and gas companies have a belief in immortality, deceiving even themselves, since it is often dressed up as workaday engineering pragmatism able to muddle through any type of catastrophe.
Expect them, therefore, to remain unbending in the months and even years ahead; proud of not adapting to the new world of energy ahead.
And therefore being a postscript to the real solutions of the energy problems we will face, and solve, in the very near future.
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