• Benjamin Holland

Big Oil Bounces Back, but Will it Last?

Updated: Sep 10

Cutting OPEC a break:

Oil prices have risen on the back of recent vaccine-breakthroughs after plummeting in March earlier this year. So far prices have regained ground to $48 a barrel, compared to under $20 earlier this year, as news of the end of COVID-19 as broken the curse of endless uncertainty across global markets. OPEC and friends will meet next week to discuss their production plans in light of the price increase, but it is expected that they will not announce any further increase in production until prices return closer to their pre-pandemic levels of $70 a barrel. Perhaps, though, OPEC will be concerned by the worrying long-term prospects for Big Oil as the Biden victory, and recent changes to EU and UK sustainability targets are casting doubt over this short-term victory.

Long-term Challenges:

Joe Biden has plans of his own for Big Oil. In an attempt to reverse some of Trump’s backwardness on issues of climate change and sustainability, Biden plans to promptly re-join the Paris Climate Agreement, and his huge $2 trillion investment scheme in an “equitable clean energy future” will redefine the energy market by accelerating the development and growth of renewable energy suppliers.

Green hydrogen, one alternative source of fuel that Biden’s plan focuses on, is expected to flourish in the future. Demand for green hydrogen should grow tenfold by 2050, which is just one example of the growing shift towards renewables identified by Goldman Sachs. They expect that demand for renewables will overtake that of oil and gas for the first time in history.

Public commitment to tackling climate change is now stronger than ever, to the extent that governments have devoted significant portions of their COVID-relief stimulus packages to the renewables energy sector. The EU devoted a third of their package to promoting the development of clean-energies in an attempt to accelerate scientific progress and innovation.

The UK too has recently published a new 10-point plan to secure a greener future for Britain. Part of this plan includes the development of a town powered entirely by hydrogen by the end of the decade, whilst also promising to diffuse cleaner energy into aviation and maritime sectors. This commitment to renewables comes at OPEC’s despair as demand for oil is slowly curtailed. By 2030, there will be a ban on combustion engine sales, and the government is subsidising the development of electric cars through grants and the automobile industry is preparing for these changes.

Fiat Chrsyler and Peugeot, for example, announced their plans to merge at the end of last year, and aim to complete their merger by early 2021. Part of the motivation for this is to collaborate the funding of zero-emission vehicles, especially for Fiat who lags behind rivals in their development of low-emission technology. As such, the energy market is changing rather rapidly, and new targets are being announced all the time for a greener future, a greener future where OPEC is left in the dust.

Can Big Oil Adapt?

Clearly, the energy sector is being redefined to meet the grow sustainability demands of government, individuals and business. So what can Big Oil do about this?

Private equity firm Kimmeridge has identified the vicious circle faced by Big Oil. As investors gain a green-consciousness, they divest away from oil, which increases the cost of capital as it becomes increasingly difficult to find new investors, which in turn puts pressure on profits, making any investment even less attractive. Therefore, Big Oil is increasingly being faced with the long-term reality that they must divest away from oil, either through M&A deals, making acquisitions of renewable energy companies, or by investing in their own R&D developments, developing their own approach to renewable energy organically.

Recently, BP has announced has embarked on a $1 billion deal with Equinor, a petroleum-refining company, to obtain ownership of a 50% stake in two new US wind-power projects. BP itself is planning to become a net-zero emission company by 2050 by divesting away from oil and towards renewables.

Indeed, ExxonMobil, Royal Dutch Shell, Chevron and BP, are projected to sell a combined $100 billion in oil and gas assets around the world as they focus on top-performing regions. Big Oil companies have strong skills within energy and all own assets globally that they can use to remain competitive as the transition proceeds. Some oil players may also choose to just stick with oil and gas only, but then they clearly need to be some of the most efficient firms to survive.

Kermit first sang “its not easy bein’ green” in 1970, but the world has changed since then. Many investment banks are finding that ESG investments are providing above-average market returns, it seems that it is increasingly well-paid to promote social and environmental change. All this means that the firms forming today‘s Big Oil are faced with lucratice opportunities to re-invent, re-brand, and re-energise themselves as providers of green energy.

Perhaps it won‘t be long before Big Oil is forgotten and Big Hydrogen is born.