An industry ‘operating on borrowed time’: Energy experts on the increasing risks ahead for Big Oil

A general view of Gunvor Petroleum or Rozenburg refinery in Rotterdam, Netherlands. Europe’s largest port covers 105 square kilometers (41 square miles) and stretches over a distance of 40 kilometers (25 miles).

Dean Mouhtaropoulos | Getty Images News | Getty Images

LONDON — Big Oil endured a brutal 12 months by virtually every measure last year and the global oil and gas industry faces significant challenges and uncertainties as it seeks to recover.

In 2020, the coronavirus pandemic coincided with a historic demand shock, falling commodity prices, evaporating profits, unprecedented write-downs and tens of thousands of job cuts.

The torrent of bad news prompted the head of the International Energy Agency to suggest it may come to represent the worst year in the history of oil markets.

As oil and gas supermajors seek to reassure investors about a return to profitability in the coming months, energy experts are split on how quickly the industry will transition away from fossil fuels.

“This is an industry that is facing mounting uncertainty,” Carroll Muffett, chief executive at the non-profit Center for International Environmental Law, told CNBC via telephone.

“The uncertainties associated with the pandemic are going to continue largely unabated at least through the first half of this year as vaccinations continue to roll-out, but the uncertainties that are arriving from the long-term disconnect between this business model and climate realities, those are only growing — and they are not going to abate,” Muffett said.

The latest setback for the oil and gas industry came as S&P Global ratings — one of the most influential rating companies — warned last week that it may cut the credit score on a number of major producers, including ExxonMobil, Royal Dutch Shell and Total.

Even if 2019 proves not to have been peak oil, this is an industry that is really operating on borrowed time.

Carroll Muffett

Chief executive at CIEL

The rating firm said it believes “the energy transition, price volatility, and weaker profitability are increasing risks for oil and gas producers.”

The industry faces growing pressure from policymakers around the world, with the administration of U.S. President Joe Biden quickly making tackling the climate emergency a top priority.

‘You don’t just change that overnight’

“Was 2019 peak oil? That’s very likely. Even if 2019 proves not to have been peak oil, this is an industry that is really operating on borrowed time,” Muffett said. “That’s why you see at least some of the majors starting to recognize that they need to more aggressively build a portfolio beyond oil.”

He highlighted that Shell and to some extent BP had both sought to pivot to a strategy less dependent on oil and gas, whereas Exxon had ostensibly decided to stick to a more rigid business model. “You ask which of these companies is more likely to survive and I think the answer is clear.”

Exxon was not immediately available to comment when contacted by CNBC on Tuesday. The U.S. oil major is due to report its latest quarterly results and full-year earnings later in the session.

Speaking via videoconference at the Baker Hughes 2021 annual meeting, U.S. energy historian Dan Yergin said: “I think we are still somewhat in a Covid fog and to be absolutely sure about where things are going is not clear.”

His outlook for the industry chimes with other major forecasters. The IEA and OPEC both said in their latest respective monthly oil market assessments that 2021 was still clouded by pandemic fears.

Yergin, who is also vice chairman of IHS Markit, said he expected global GDP (gross domestic product) to bounce back to where it was in 2019 by the end of the third quarter, with fuel demand likely to climb back to pre-pandemic levels by 2022.

A rise in Covid infections has led to renewed lockdown measures and travel restrictions, limiting mobility worldwide and hampering an oil demand recovery. It’s hoped that a mass rollout of Covid vaccines could help to bring an end to the pandemic that has claimed 2.2 million lives worldwide.

A Surgutneftegas worker near pumpjacks in Surgut Region of the Khanty-Mansi Autonomous Area – Yugra, in the West Siberian petroleum basin.

Alexei Andronov | TASS via Getty Images

“Directionally, it is clear that the world is going towards lower carbon, but I think the scale of it is not fully understood,” Yergin said on the topic of energy transition. “In 2019, we had a $87 (trillion) to $88 trillion world economy that depended upon fossil fuels for 80% of its energy. You don’t just change that overnight.”

Yergin said that while there are different meanings when it comes to energy transition, carbon capture in some form would have to be part of the mix. “Some people just reject that idea, but the numbers just don’t work without it,” he added.

“So, I think there is a transition, it just takes time. I think oil and gas are going to end up being an important part of it for a long time.”

Carbon capture refers to the capturing of planet-warming carbon dioxide emissions in an effort to keep the climate crisis in check. Very little progress on the development of carbon capture technology has been made to date.

Every little bit of renewable installation is just chipping away at the dominance of oil and gas.

Clark Williams-Derry

Energy finance analyst at IEEFA

The IEA said last year that a substantial rise in the deployment of carbon capture technology would be necessary if countries were to meet net-zero emissions targets.

Biden has since pledged to accelerate the development of the technology.

Renewable energy

“Last year was just dreadful and so even if they just go back … to the middle of the pack, that is a step up,” Clark Williams-Derry, energy finance analyst at IEEFA, a non-profit organization, told CNBC via telephone.

His comments referred to the energy sector closing out 2020 in last place on the S&P 500. It has placed at the bottom of the stock market index in five out of the last seven years.

“The energy sector could do better this year than it did last year, who knows,” Williams-Derry said. “At the same time, what we are identifying are long-term threats that the supermajors are facing, and the global oil and gas industry are now facing.”

A SunPower executive on site at the California Valley Solar Farm near Santa Margarita, Calif., in San Luis Obispo County.

Michael Macor | San Francisco Chronicle | Hearst Newspapers via Getty Images

Williams-Derry said that, in addition to the Covid pandemic, the global oil and gas industry was likely to continue to face pressure from renewables. Cheap wind and solar storage are “starting to eat away at their market share and the market dominance of the oil and gas sector.”

“Every little bit of renewable installation is just chipping away at the dominance of oil and gas,” Williams-Derry said. “In my opinion, we are at the thin end of the wedge where those things are just starting to eat into demand and I think that is going to accelerate. This may not happen over the course of one year or two years, but it is a long-term trend that the oil and gas industry has not had to face before.”

The key difference when it comes to the energy industry’s latest downturn was that the rising prominence of renewables now provided a genuine alternative to oil and gas, Willams-Derry said.

He added that this may mean an expected bounce back in world economic growth does not occur in lockstep with rising oil and gas demand.

Source: CNBC