Energy Transition: Oil majors risk $60 bn on 28.2 Bboe development plans

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Sopuruchi Onwuka

Massive upstream investment projects planned by multinational oil companies might be affected by pressure on the companies to comply with global demand for low carbon energy and self imposed commitments and pledges to net-zero emission targets.

Whereas big oil firms continue to do their traditional business, they still pledge increased investments in renewables, carbon capture, hydrogen, EV charging networks, and other low-carbon energy solutions, also in response to investor pressure.

Oracle Intelligence reports that the environmental, social, and governance (ESG) investment trend has gone mainstream, and some experts say that peak oil is already upon us. In Europe, multinational oil firms are already repositioning to become energy companies. China which is currently coal intensive is also working on cutting its carbon footprint.

According to investment scenario analyses by Carbon Tracker, International Energy Association (IEA), Rystard Energy consultancy, and filings by nine American and European multinational firms, some $60 billion capital expenditure programmes associated with 15 large projects might not comply with the sustainable development scenario for low emission energy.

The sustainable development scenario, or SDS, refers to percentage of potential capital expenditure consistent with a range of global warming rate of 1.65 degrees centigrade and 1.8 degree Celsius.

Panelists at the CERAWeek by IHS Markit monitored online by Oracle Intelligence concluded that institutional investments now allocate funds in alignment with environmental credentials of company asset portfolios; and strong sentiments also see massive diversion of capital from coal, oil, gas and related infrastructure projects.

The panelists agree that ESG trend was rebalancing the flow of capital for energy projects; draining funds from petroleum projects to support sustainable companies and green projects.

The trend emphasizes how petroleum companies would manage the prevailing energy transition to ensure low emission, cheaper production costs and quick returns within the limited time window.

The situation is worsened by moves by the President Biden’s administration of the United States strengthen regulations to hold operating companies accountable for emission at oil and gas production sites.

United States Energy Secretary, Jennifer Granholm, declared at CERAWeek that President Joe Biden’s administration was placing demonstrative focus on bringing the United States up to speed with the rest of the developed world in terms of leaning into the global green energy transition.

According to the simulated outcome of several analyses by the companies and environmental, investment and market watchdogs, only gas investments would continue to overcome the grim demand risks for hydrocarbon energy at global warming rate beyond 2.0 degrees Celsius.

The report holds that spending plans, asset portfolios, and cost structures have implications oil and gas projects that currently face threats from prevailing transition to low carbon cleaner energy options. The portfolio risks, according to the report, are linked to future demand and price outlooks.

Industry advisory multinational, Wood Mackenzie, stated in a note earlier that the industry as a whole will not be starved of capital because the world will need oil and gas for decades. The company added that upstream oil and gas companies could still attract money more easily if they have clear and transparent ESG strategy as sustainability increasingly shapes strategic decisions.

Vice President, Global Exploration at WoodMac, Andrew Latham, said low-cost, long-life, low carbon-intensive projects would form the core advantaged assets and portfolios that would continue to attract capital.

“Under a faster shift to low carbon energy, projects with the lowest production costs will be most competitive while high cost projects run a greater risk of stranded assets,” the combined analysis showed.

The simulation graded major American and European companies against major demand scenarios relating to global warming rates less than 1.8 degrees Celsius and above 2.0 degrees Celsius.

Companies spotlighted in the anlayses include ExxonMobil, Equinor, ConocoPhillips, Shell and Chevron. Others are BP, Total, Repsol and Eni. The companies still hold combined 28.2 billion barrels of oil equivalents (Bboe) of proven but undeveloped petroleum resources.

According to the charts provided by the analysts, ExxonMobil with 7.7 Bboe of undeveloped reserves stands the highest 88 percent asset value risk at global warming rate above 2.0 degrees scenario. The risk of ExxonMobil drops to 42 percent under the SDS of about 1.8 degrees Celsius.

Equinor, with 2.3 Bboe of undeveloped reserves, is the second highest at 85 percent risk under the 2.0 degrees scenario. The Norwegian multinational however leads risk exposure with 74 percent under the SDS of 1.8 degrees Celsius.

Italian multinational, Eni, remains at the base of the risk scale with 42 percent at 2.0 degrees Celsius and 24 percent under the SDS.

Chief Investment Officer of BlackRock Alternatives Investors and Global Head of BlackRock Real Assets, Jim Barry, said at the CERAWeek by IHS Markit panel that the world’s largest asset manager would make specific commitments about investments that would not happen.

Chairman and CEO of BlackRock, Larry Fink, stated that energy transition would be central to every company’s growth prospects, pointing at climate risk and the energy transition as investment issues.