Wednesday, February 27, 2019 05:36PM / By Cyril Widdershoven for Oilprice.com / Image Credit: Oilprice.com
Global oil and gas companies are increasingly facing an uphill battle as global
warming policies are taking their toll. Most analysts and market watchers are
focusing on peak oil demand scenarios, but the reality could be much darker.
International oil companies (IOCs) are likely to face a Black Swan scenario,
which could end up being a boon for state-owned oil companies (NOCs).
Increased shareholder activism, combined with global warming policies of
institutional investors and NGOs, are pushing IOCs in a corner, constricting
financing options for oil companies.
The first signs of a green revolution in the shareholder-investors universe are
there, as investors have forced Dutch oil and gas major Shell to officially
change its strategy, investing in more renewable energy and energy storage. The
Dutch IOC wasn’t forced by to do so because of mismanagement or a lack of
reserves but due to a well-orchestrated investor/stakeholder offensive. Several
other peers, such as BP, ENI or Total, are expected to experience comparable
situations.
And it has become clear that not only oil and gas giants are being targeted,
after one of the world’s largest mining and commodity trading companies,
Glencore, decided to put a limit on its thermal coal investment. The group stated
that this was done after it was confronted by a largely unknown shareholder
network called Climate Action 100+, which claims to be backed by more than 300
investors, managing assets of around $32 trillion. The group was founded a
little over a year ago but has already forced oil majors’ boardrooms to take
radical decisions.
The above shows that international hydrocarbon and mining sectors are facing a
new obstacle, being confronted by large groups of socially and environmentally
engaged shareholders, which are no longer looking at commercial value only.
A
combination of activist institutional investors, international pension funds
and NGOs, is a new force to be dealt with. Stock-exchanged listed companies
will need to address the will of their shareholders, especially with regards to
climate change policies or decarbonization of the economy. After decades of
having focused on creating maximum shareholder returns, things have changed
dramatically, but maybe not for the better.
For Climate Action 100+, which includes investors such as Calpers, Allianz SE,
and HSBC Global Asset Management, making profitable investments remains a top
priority, but they will no longer look accept a passive stance towards climate
change. Without complying with the demands of NGOs and socially engaged
investors, access to new capital for new oil and gas upstream projects will be
reduced. Some even expect that the role of Western IOCs could decline in the
next couple of years, due to political shareholder engagement policies. To
force IOCs, such as Shell or BP, to comply with policies that would halve their
“net carbon footprint” by 2050 could result in a death-wish for these companies
in the long-run.
The demise of IOCs, as we know them right now, could come sooner than many may
expect. This will, of course, come at a cost for energy-hungry regions or
consumers. With a net demand growth for oil and gas in the coming years, the
world will need all hands on deck to support upstream investments to bring the
hard-needed oil and gas reserves and volumes to the market. With less financing
options for IOCs, and also oilfield services, the already existing investment
gap in upstream investment worldwide will only grow wider. In contrast to what
some media sources are suggesting, oil and gas demand will not diminish, on the
contrary, oil and gas prices will rise due to a lack of supply.
That this picture is not a future nightmare scenario but is already the
reality, is shown by the fact that a growing amount of smaller oil and gas companies
have become insolvent. The latter is partly caused by “global warming
constraints” and lower oil prices in general. The first casualties are falling
in Europe, mainly the UK, where 16 companies went bankrupt in 2018, in
comparison to zero in 2012. British accountancy firm Moore Stephenson stated
that lower prices were the main cause. At the same time, increased costs (North
Sea decommissioning) and lower oil price expectations are doing the rest.
If the
international financial markets are going to take over the doomsday scenarios
presented by pressure groups and NGOs, independent oil and gas companies are
going to be hit extremely hard. No investor is willing to invest in a sector or
company that looks to hit rock-bottom in the next decade. Stranded reserves
reports, as presented by the Bank of England and others, are not helping at all
to change perceptions.
Western consumers and politicians, however, should not already start to cheer a
green revolution and the end of the oil era. The future is different and could
be even less positive than currently is assessed. Financial pressure on IOCs is
opening up a Pandora’s Box. By removing market-oriented oil and gas giants from
global markets, the only way to gain access to oil and gas will be the national
oil companies (NOCs). Not only are they the real owners of the overwhelming
majority of hydrocarbon reserves in the world, but NOCs are also not
constrained by shareholder activism or NGO pressure.
The main driver for NOCs is to support the sustainable economic growth of their
home country or government. In stark contrast to IOCs, which are fully focused
on shareholder value and profits, NOCs have a long-term national approach, in
which other factors are playing a role. Saudi Aramco and its peers are not only
the sole owner of the reserves but also of most of the value chain. The ongoing
downstream focus of NOCs can be seen as a push to gain control of the entire
value chain, from exploration to sales.
This position is still of value to institutional investors and national
financial institutions, as the combination of long-term access, ownership and
extensive value chain control, is very attractive. The Fitch AA+ rating of Abu
Dhabi’s ADNOC shows that NOCs have become very attractive, even more than IOCs
at present.
Mainstream investors, hedge- and pension funds, are and will be interested in
financing NOCs, as long as demand and profits are there. Western consumers and
the industry should however also realize that a transformation of power to NOCs
will also mean that market fundamentals will change, and possible unexpected
hiccups in supply will occur at the will of governments, not due to market
fundamentals. NOCs are still controlled and owned by national governments.
Supply
risks will increase if IOCs see their influence in the hydrocarbon sector
diminish. Destruction of knowledge, technical capabilities and additional
financing, could constrain the hard-needed push for new oil and gas production.
Political
and environmental pressure groups should realize that pushing too hard for
change could produce a boomerang effect of unwanted-order. To force IOCs to
change their investment strategies, and abandon highly profitable upstream
projects, while investing in renewables, could be more destabilizing than
anticipated. Between 2014 and 2018, upstream oil and gas investments have been
hit hard, leaving a $1 trillion investment gap. This development will impact
the market within the next 24 months. Lower oil supply will push up prices if
demand continues to grow.
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