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Is the End Looming for the Oil and Gas Industry?

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In recent years, oil companies have been making public efforts to move away from traditional petroleum products, and towards renewable energy sources. As the world goes green, does this mark the end of the oil and gas industry as we know it?

What has the oil and gas industry been up to recently?

Individual companies have made efforts to rethink their business models, reorienting them towards sustainability. Among the most ambitious of these is BP, which has released plans in 2020 to increase its annual low carbon investment 10-fold to around $5 billion a year and to reduce its oil and gas production by at least one million barrels of oil equivalent a day, or 40%, from 2019 levels.

Others quickly followed, with ExxonMobil releasing its 2025 greenhouse gas emission reduction plan and Shell aiming to reduce the total amount of greenhouse gas emissions associated with their products by 100% by 2050.

On an industry level, twelve companies which represent over 30% of global operated oil and gas production, have joined the Oil and Gas Climate Initiative (OGCI) with the mandate of accelerating the reduction of greenhouse gas emissions. Clearly, this is more than a passing trend.

Why would they do this?

The world is becoming increasingly concerned about climate change. The regulatory environment has not been kind to fossil fuels of late. Firstly, the International Maritime Organisation, a UN specialised agency, has reduced the global limit on sulfur in ships’ fuel oil.

The new limit, also known as “IMO 2020“, essentially requires ships to switch their fuel oils to compliant ones, which can include renewables. The impact of this will likely be felt strongly, as maritime shipping accounts for 6.7% of final oil consumption worldwide.

Secondly, governments have started to impose regulatory requirements on businesses concerning energy use. From 2019, large UK companies will be required to report publicly on their UK energy use and carbon emissions within their Directors’ Report.

Different countries use different approaches to carbon reporting: while the UK uses a corporate entity approach, other countries target sectors with high emissions and companies that produce emissions over a given threshold.

Investment bankers have also started to view climate change as a risk factor in making business decisions. Climate disasters and related financial losses have risen sharply over the last forty years. Some portfolio managers are shifting towards reducing the carbon exposure of their portfolios to manage climate-related investment risks.

Rise of Climate Disasters and Related Financial Losses
Source: Morgan Stanley

As a result, there has been a growing proportion of renewable energy among global primary energy consumption sources. While it remains relatively small compared to fossil fuels, which are still the world’s primary energy source, there is an unmistakably upward trend in percentage growth.

Does this herald the end of the oil and gas industry as we know it?

Well, to answer that question, IB Insider examined the percentage growth in share prices for five industry titans over the past five years: BP (NYSE:BP), Exxon Mobil Corporation (NYSE:XOM), Sinopec Shanghai Petrochemical Co. (NYSE:SHI), Shell (NYSE:RDS), and Saudi Aramco (Tadawul:SR). Share prices are an indication of a company’s current market value and reflect the confidence investors have in the firm and its long-term prospects.

© 2021 IB Insider

Taking each company’s share price in January 2016 as the baseline, the past five years have seen mostly steady growth in share prices for all but Saudi Aramco, which only went public in December 2019. Admittedly, 2020 was a bad year for most firms regardless of their industry. The huge drop that all firms saw in April was undoubtedly a result of oil prices going negative for the first time in history.

However, the most resilient firms, Shell and BP, saw a recovery to 2016 baseline levels by December. All firms look to be on course for positive growth in 2021.

The difficulty is in pinning a rise and fall in share prices to exact happenings; for example, negative growth trends in 2020 mirrored each other across firms, suggesting an overall market gloom rather than an indictment of any individual.

However, let us cast our gaze back to 2016 when we lived in slightly less uncertain times.

The Paris Accords, the climate change agreement on which firms such as ExxonMobil have designed their plans to go green around, was signed in November 2016.

On the same day, the OGCI announced the creation of the OGCI Climate Investments fund, to invest $1 billion over 10 years in companies or projects that reduce methane emissions from gas production. This seemed to have little effect on the direction of share prices, with all firms trading publicly at that time still recording rising trends in percentage growth with minimal deterioration.

There are two possible explanations for this, and the decreasing negative growth firms are experiencing heading into 2021. Firstly, this could mean that sustainability measures and the movement towards renewables are seen as positive steps forward for oil titans, even as this heralds a potential fall in activities and profitability within the petroleum business.

The other, and more likely interpretation, is that the market sees the oil and gas business as remaining profitable, despite the grand environmental plans released by industry leaders.

Why is this the case?

Simply, despite the litany of sustainability efforts, nobody in the industry is actually planning for a movement away from fossil fuels.

While environmental rebrands are promising, the devil, as always, is in the details. BP’s promise to reduce its oil and gas production by 40 per cent by 2030 brings to mind an image of them closing down their oil and gas fields, a major step forward.

However, they are merely planning to sell over $25 billion (£19 billion) of their less profitable oil and gas fields, which could very well be purchased and operated by other corporations.

Similarly, plans released by ExxonMobil and Shell rely on achieving net-zero emissions and not actually zero-emissions, the latter being the actual target needed if the world is to avoid dangerous global warming.

This means that companies do not actually require greenhouse gas emissions to fall to zero but can rely on cancelling them out with other technologies or reforestation.

Alternatively, companies focusing on the pollution per unit of energy they sell can continue their existing production levels as long as they sell more low-carbon energy such as biofuel to compensate.

While many companies have invested heavily in research on carbon emissions and carbon neutrality, notably Sinopec, the fact remains that research can take a long time to come to fruition and does not function as a promise for action either today or ten years into the future.

The oil and gas industry won’t be coming to an end just yet

Not for a long time. The self-preservation efforts of oil companies have ensured that any green plans they release will not impact the industry as a whole so long as oil fields continue to be passed around behind closed doors.

If the 2021 return to baseline has shown us anything, it is that the resilience of and our reliance on the oil and gas industry is not to be underestimated. Sustainability efforts, while necessary, will need to be ramped up significantly to truly constitute a threat to an industry so deeply entwined in our everyday lives.

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