The oil majors undergoing a transformation

This week’s headline was “BP Avoids New Calls for Climate Goals As Activist Pressure Raises”. The pressure of climate change on international oil companies (IOCs) continues to increase, no matter what concessions they make. And this affects their operations and investments, including in the Eastern Mediterranean and of course in the EEZ of Cyprus.

In addition, 2020 has turned out to be an “annus horribilis” for CIOs. Under the combined effects of a global collapse in energy demand, brought on by Covid-19, and the inexorable growth of renewables, all have suffered massive losses and have been forced to write off unprecedented tens of billions of dollars. ‘assets. Given the current low long-term oil and gas prices, these are considered non-developable.

The world has also made a decisive shift in bringing climate change issues to the fore, not only in terms of energy but also politically. Europe has taken the lead in this direction with its ambitious Green Deal. But Joe Biden’s election to the US presidency gave him the extra boost he needed and world leadership.

In view of COP26, to be held in Glasgow in November, the climate crusade has now become unstoppable. With US leadership, the devastating consequences of television broadcasts that bombard the global climate on a daily basis, and rapidly falling renewable energy costs, policymakers, banks and investors are prioritizing action to combat global warming. climate. The world’s largest banks and investment institutions are committed to a low-carbon future. It is becoming a case of not only “peak oil” but also “peak oil”.

CIOs are now forced to adapt and operate in this new, extremely difficult environment – their very existence is threatened. Adjust or wilt.

The recovery from Covid-19 has caused a respite, with increasing demand and prices for oil and gas. But an explosive new report from the International Energy Agency (IEA) outlining a “roadmap to net zero” has tightened the screw even further. As the FT has said, the IEA is “calling time” for the fossil fuel industry. He calls for a halt to new oil and gas exploration – asking investors to stop funding such projects and instead divert all funds to clean energy – and a faster transition to cleaner fuels.

This may not be practical or feasible at the moment, nor is it clear how the world will achieve it. But it is fueling the climate debate and activists lobbying oil companies.

It also affects the role of natural gas as a cleaner transition fuel. The IEA says in its new report that to keep the global temperature at 1.5 ° C this century, global demand for natural gas must peak by 2025 at 4.3 trillion cubic meters per year (tcm / year) and fall to 1.75 tcm by 2050. Low demand and sufficient supply capacity will also lead to low prices, with the IEA now forecasting average LNG prices to remain below $ 4 / mmbtu in the long run. This creates a huge problem for all the oil majors and the financing of new projects.

In Europe, gas is facing an “existential crisis” due to new climate policies which now affect investments in new natural gas projects and plants. European Commission Vice-President Frans Timmermans said in March that there would be only a “marginal role for fossil gas” on the path to net zero emissions by 2050, the demand for gas expected to drop significantly by 2030.

It is in this rapidly changing environment that the CIOs find themselves as they put in place their strategies for their post-Covid-19 developments and operations, with potentially enormous consequences for the Eastern Mediterranean. Not only is gas from the Eastern Mediterranean expensive to develop and reach global markets, but the recent regional turmoil caused by a belligerent Turkey, Libyan instability, the lingering dispute between Israel and Lebanon, and the looming Israeli-Palestinian war. gas platforms off Israel may become too difficult for the besieged oil companies to tackle.

New IOC strategies

On the eve of 2021, CIOs presented their strategies for the future to their shareholders, outlining their plans to address these rapidly evolving global challenges.

In the face of investor anger over its high spending and accumulated debt, ExxonMobil massively cut planned capital spending and put aside plans for a rapid increase in oil production over the next four years, focusing instead on the Permian and Guyana. But she still faces tremendous activist pressure, calling for a board overhaul and major changes in the company’s climate and capital allocation strategy, despite the return to profits.

Chevron is committed to “higher returns, less carbon”, based on a more disciplined and lower investment and cost program, investing only in the most profitable projects and committing in the Permian basin and the energy transition.

To illustrate its plans for the future and its strategic commitments in terms of clean energy to reach net zero by 2050, Total is changing its name to “TotalEnergies”.

Eni has published its “ Strategic Plan for 2021-2024 ”, committing to spend $ 7 billion by 2024 for carbon neutrality by 2050.

Not all of these CIOs have made much reference to their plans for the Eastern Mediterranean so far in 2021, and none have mentioned the Cyprus EEZ.

Consequences

These developments can happen too quickly. The world will not switch from oil and gas to renewables overnight. It will take time. Apart from everything else, the technologies to achieve this are still under development. If, as a result of this pressure, underinvestment in oil and gas projects continues, supply shortages and higher prices could result. What is needed is a transition that matches the development and deployment of new, cleaner energy sources. But the pace of political and activist pressure and change can put this at risk.

In the meantime, with COIs being forced to cut spending and focus on bigger, easier to develop, higher margin projects, East Med could end up falling victim to it. Some activities may return, for example ExxonMobil completing unfinished Block 10 activities, but it is unlikely to return to pre-Covid-19 levels and plans.

The Eastern Mediterranean is no longer a high priority for CIOs, struggling for their survival in a rapidly changing energy world. Their priority is to make the transition a success and their future development strategies go in this direction.

Likewise, the countries of the Eastern Mediterranean need to reassess their own future energy plans. The outdated policies developed over the past decade require a complete overhaul. Plans based on exports to world markets are quickly becoming untenable.

Egypt, with its huge domestic market and low-cost liquefaction plants, may still be able to continue to exploit its natural gas resources, while developing renewable energy.

But Cyprus, Israel and Lebanon will have to rethink the future. Relying on COIs and gas exports may no longer be viable. Future developments are likely to be regional, focused on the switch to clean energy. In order to avoid being left behind – with far-reaching economic and energy consequences – they need new and very different energy strategies and policies.
Source: Cyprus Mail