Oil’s well that ends well

Big oil’s going green. Sort of.

The onset of the pandemic last year left oil companies to do some soul searching. That fossil fuels (at least at the scale they’re used right now) have a limited lifespan was already well-known. But the pandemic has helped to run down the clock.

Occidental Petroleum, a US oil major, has made headlines this week when its CEO Vicki Hollub made a pretty big claim: Occidental is doing more to reduce greenhouse gas emission than Tesla.

That the comment made headlines in the Financial Times and Bloomberg was undoubtedly the CEO’s intention. But Hollub’s comment is just a more provocative version of what other big oil companies have been saying since March last year.

In short: “We may be an oil company, but that doesn’t mean we can’t be green too.”

It’s a claim worth unpicking a bit.

Hollub’s claim was based on the fact that the company pumped back more CO2 underground in the process of extracting oil than Tesla prevented through customers’ switch to electric vehicles.

If that sounds slightly convoluted, that’s because it is.

It also conveniently ignores one little detail: the amount of carbon that’s produced from burning oil. If you take that into account, then Occidental is about as far away from Tesla as it’s possible to be.

To be fair to Occidental, it’s a lot more ambitious when it comes to slashing carbon output than some of its US peers. It’s the only oil major in the country with a commitment to net-zero carbon emissions by 2050.

In Europe, this is a commitment that other household names, such as Shell, BP and Equinor, have also made.

There’s a few reasons for these commitments. First and foremost, the oil price over the past year has been… temperamental, to say the least.

Investors are getting pickier too. A growing number of asset managers and pension funds are shifting away from putting their money into “dirty” industries. The same goes for banks too. In HSBC’s next AGM, 15 large institutional investors are planning to push for reduced lending to fossil-fuel related businesses. French oil major Total has opted to leave industry lobby group the American Petroleum Institute, citing lack of progress on climate policies.

And the possibility of a carbon tax is now on the cards. It’s an idea the EU has toyed with before but was shot down by Donald Trump. With Joe Biden in the White House, its fortunes could be different. France has already signalled that it’s open to the discussion on the topic.

Tricky decisions

Oil companies are at a fork in the road.

They need to find a way of either diversifying or cleaning up their business.

Occidental has opted for the latter, as have ExxonMobil and Chevron. Using carbon capture and storage, the company wants to ensure that the pollution created from mining, extracting and burning oil won’t make its way into the atmosphere.

But most have instead have opted to pivot towards renewables.

Industry leaders like BP have decided that now’s the time to wean themselves off fossil fuels and pivot towards renewables – BP promising, for example, to up its wind and solar production to 50 gigawatts by 2030 and reduce oil production by 40% by 2050.

There’s one big problem for those companies pursuing the renewables approach: profitability. Or lack of it.

An oil major would expect pretty solid returns from an upstream project – in the range of 15-20%. In comparison, oil’s cleaner cousins currently offer much more modest returns, in the area of 5-10%.

The cost of producing renewable power is falling. Whether that will be enough to catch up with oil – and whether investors will be happy to wait for that to happen – is another question.

But make no mistake – names like BP, Shell, and Equinor are, at their core, still oil companies. Yes, they’ll be ramping up their renewables output, but their profits will continue to be fossil fuelled.

And investors may forgive them for their sins yet – particularly given that we’re going to continue relying on oil for a good while yet. But as I’ve argued before, oil has some life in it yet. If its price does make a strong recovery, then Big Oil will benefit.

Maybe investors will forgive them for their sins yet.

All the best,

Nathan Tipping
Research Analyst, Southbank Investment Research

PS Oil isn’t the only sector currently undergoing a sea change. Sam Volkering, editor of Frontier Tech Investor, has identified a sector that could transform society – and offer investors some potentially lucrative opportunities along the way. Click here to find out more.

Category: Economics

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