The End of the Age Of Oil is Now
With so much startling news in the headlines of late, informed Americans can be excused for missing the proclamation that the Age of Oil has ended.
On July 29th, the French energy giant, Total, S.A., announced that it was writing off more than $7B worth of petroleum reserves in its bituminous sands investments in the Athabasca region of Canada. Other major companies in the hydrocarbon industry have been writing down the value of reserves on their balance sheets due to current low energy prices. However, Total’s move was driven by its assumptions regarding government green policies and investor pressure. The company declared that most of these reserves (usually called ‘tar sands’ or ‘oil sands’) are now classified as stranded assets which will never be brought out of the ground.
Total recently bowed to pressure from the Climate 100+. This investor group, which represents in excess of 450 institutions with more than $40 trillion in assets under management, has been pressurizing companies in ‘brown’ industries to measure and begin to reduce greenhouse gas emissions. Total adopted a plan entitled Climate Ambition to achieve net zero emissions from its products by 2050 and reduce their average carbon intensity by 15% by 2031 and 35% by 2040.
As part of Climate Ambition, Total has is now regularly reviewing its assets and impairing those with reserves that will take more than 20 years to utilize and have high production costs. While there is an enormous volume of oil sands in northwestern Canada, to convert the resource to usable petroleum creates massive pollution and requires a great deal of energy to mine, refine and transport to market. Not only did Total write-off its oil sands investment, it also took the unusual step of withdrawing from the Calgary-based Canadian Association of Petroleum Producers (CAPP) due to the groups’ public positions regarding carbon emissions.
Pulling out of the CAPP was taken poorly in Alberta due to its dependence on the hydrocarbon industry. The Province’s Energy Minister stated, “This highly-hypocritical decision comes at a time where international energy companies should, in fact, be increasing their investment in Alberta, rather than arbitrarily abandoning a source of a stable, reliable, supply of energy.”
If the move by Total was an isolated announcement, investors could potentially consider this a one-time event. However, a week later on August 4th, another oil major, BP plc gave an update on how it too is going to achieve net zero carbon intensity by 2050: The world is on an unsustainable path, the earth’s carbon budget is running out, the use of hydrocarbons is peaking, and BP is going to transform itself from an International Oil Company to an Integrated Energy Company (IOC to IEC). This new IEC is going to get out of the petrochemical business, buy up renewable energy assets and become an early leader in hydrogen cell, bioenergy and carbon capture technologies.
This strategy is akin to a buggy whip maker in 1900 announcing plans to convert its factories to making automobile accelerator pedals, or a pager company in 1990 shifting to producing mobile phones. The record of companies successfully disrupting their own businesses is slim. However, if the Age of Oil is over, what choice does BP have?
The bigger question may be for all the companies in the hydrocarbon space with an even higher carbon intensity in their mix of product output than BP and Total. What do they do? What is the value of a company if investors don’t want to own its shares for both moral reasons and because the assets on the balance sheet may soon be worth zero? Canada’s Suncorp and Husky Energy are highly geared to finding a way to profitably ship the output of its oil sand operations thousands of miles from northwestern Canada to Oklahoma…or China. How is that going to work out if Total declares the oil sands to be useless? Petrobras spends billions of dollars a year drilling for oil in the South Atlantic Ocean. How is that going to work out when BP tells the world that offshore oil drilling is a net negative investment endeavor? Over the last year, BP, Total, Petrobras, Suncor and the XLE (an ETF which tracks the performance of the overall oil and gas industry) have performed very much in line. How long will that last?
It is increasingly likely that the 2020 decline in hydrocarbon usage is not only a blip caused by the COVID-19 pandemic. While the virus may have pulled forward the date when the use of oil peaks, chances are that the world’s investors, consumers and politicians are ready to move away from burning hydrocarbons and thus, end the Age of Oil.
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