By Gerard Kreeft
Two recent, but separate incidents illustrate the waning power and prestige of the oil and gas industry and also illustrate how little the industry is understood. Take the tanker crisis in the Straits of Hormuz. In the past, when there was a threat of closing off the Straits of Hormuz, the oil price would shoot up. Now the reverse is happening: As of June 10, Brent crude stood at $64.91; on 25 May, Brent stood at $70,64.
Recently Luminus Management LLC, which owns 5% of the entire shares of EnscoRowan(the rig operator) urged the Board to sell guaranted bonds to fund a special dividend of $2.5Billion to shareholders. As a result the stock sank 7%. Earlier EnscoRowan had decided to suspend regular cash dividends. If completed the company would take on a debt of approximately $10Billion.
The two incidents illustrate the two very different images that the sector has: an important waterway is blocked and the markets don’t seem to care. Then there is the proverbial image of the industry having very deep pockets. For people working in the industry this should raise deep concerns. The first incident illustrates how the sector is viewed as being irrelevant; and the second example, the exaggeration of excess black oil wealth. How should the sector react? How can it position itself in the Energy Transition?
Where Did it Go Wrong?
Perhaps the best example of viewing the status of the industry is to examine the global reserve replacement of the last 20 years (see chart below). Never has the reserve rate been so low. In 2006 it was just under 200%; in 2018 it sunk to 7%. Is this a sign of a rebounding E & P industry?
There are, of course, signs of optimism:
Spending by 2025 is forcast to increase to $275Billion, up from $150Billion in 2018;
Global production is expected to increase to 179MillionBOEPD (barrels of oil equivalent per day) by 2025, up from 162MillionBOEPD in 2018;
54 rig years to be awarded, representing 75 programmes.
While E&P recovery is happening it is important that the industry change its transactional nature. In the good times the IOCs could afford to be generous; in the bad times contracts were draconic and people were sacked. There is good reason to re-assess the sector’s value chain and encourage a spirit of solidarity if it is to survive.
Why? Though the recovery is taking place it is a very fragile recovery. Stock market prices of both Transocean and EnscoRowan are at historic lows; and Halliburton and Schlumberger stock market prices are suffering. Is this the sign of an oil market recovery?
Competition on the Block
What the oil and gas sector must realize is that there is a new boy on the block and his name is ‘renewable energy’. Bill McKibben, the famed environmentalist and author, writing in the New York Review of Books, states that over the last five years insurance companies and sovereign wealth funds have joined in, raising the total value of divestments of fossil fuels to over $8Trillion.
According to McKibben the inroads renewables are making is based both on the sharp fall in the prices of wind and solar. He states that in 2017 wind and solar produced just 6% of the world’s electricity but made up 45% of the growth supply. Moreover, the cost of sun and wind power continues to fall by about 20% with each doubling of capacity.
How can the oil and gas sector deal with this disruptive technology? There are enough historic examples: horses to car, sails to steam and land lines to cell phones. At present the only way of opposing the the oil and gas sector is simply boycotting it. There is a more reasoned and strategic way of dealing with depleting reserves.
Currently oil company reserves are only measured in fossil units (Reserve Replacement Ratio). All of the renewables –be that wind or solar–that any oil company may have cannot be included in the reserve count which is monitored by the SEC (Security and Exchange Commission).
In other words there is no added value for the shareholder. No, renewables are at present a complete waste of shareholder money! If RRR could be measured in a basket of various fuels this could help propel oil companies to become energy companies. Even adding value to their oil and gas properties. Such an approach would make the transition from oil and gas to renewables measured and predictable.
In short many who predict the demise and death of the oil and gas sector should remember the famous words of Mark Twain “ News about my premature death are much exaggerated”. No the sector is not dead, and must continue redefining itself so that it remains relevant within the Energy Transition.
Finally, The oil and gas sector has much to offer to the renewable energy sector:
- Project Management Skills for taking on large and technically difficult projects;
- Financial resources which can be used to kickstart new wind and solar projects;
- Technology skills for developing innovative solutions;
- Knowledge skills to train the next generation of energy workers.
Gerard Kreeft, MA (Carleton University, Ottawa, Ontario, Canada) is founder and owner of EnergyWise. The company is active within the energy transition as a knowledge player, i.e. through the conferences it organizes and manages throughout the globe. Kreeft also is a frequent writer on energy matters. He can be reached at g.kreeft@energywise.nl
Amɑzing! Thanks for the article!