Departures in troubling times can be sudden and abrupt. Therefore no one should be shocked nor surprised about the possible resignation or sacking of Ben van Beurden, Shell’s Chief Executive Officer.
In a lengthy interview in the prestigous Dutch financial publication Het Financieele Dagblad of 4 July 2020, van Beurden goes to great length to explain the dilemma Shell is facing:
- The need to re-organize itself so that it can become a greener company;
- Whether Shell’s headquarters ( now in the Netherlands) should be moved to the UK;
- The struggle of deciding to reduce its golden dividend (the first time since WW II);
- Writing down of some $20 billion in assets;
- How to face the Energy Transition.
Het Financieele Dagblad also reveals that total investments, between 2016 and 2019, were $89Billion, of which
only $2.3Billion was directed to new energy. In March 2020, Shell’s share price on the New York Stock Exchange was $25/ share compared to a high of $70/share in May 2018.
Shell is not alone in the dilemma it faces. The other majors, including BP, Chevron, ENI, ExxonMobil, Equinor and TOTAL, face similar hurdles. Instead of (again) having a discussion on how to green Shell and the rest of the sector, it is more relevant to accept the basic premise, long discussed in Africa Oil + Gas Report, that an oil company, by its very nature, cannot be green.
Oil companies are by their very definition focused on a fossil fuel. Their reserve count (Reserve Replacement Ratio) is purely based on a fossil fuel. Clean energy—wind,sun or hydropower—cannot be part of the mix. The US SEC stock market regulator leaves no doubt about that! At present the RRR rate for the industry is 7%, a historic 20 year low. The norm is 100%, meaning that oil companies previously were able to fully replace all of the oil and gas that they produced annually. There is no evidence that Shell and the rest of the E+P sector are making any effort to broaden the basic definition of RRR to include renewables and thereby also bolstering fossil fuel reserves.
The concept of the ‘Integrated Oil Company’ has become untenable. The extended oil price crisis between Russia and Saudi Arabia, coupled with COVID-19, have had disastrous consequences for the oil majors as well as national oil companies. Exploration budgets have been frozen, people sacked, dividends to shareholders reduced or postponed, and assets written down. Future signs are not encouraging as evidenced by:
- Rystad Energy predicting a write off of 14% of the current world’s oil reserves.
- Goldman Sachs estimates that borrowing costs for fossil-based projects is as high as 20% compared to as low as 3% for clean energy projects.
In a shrinking E+P market, size and valuation still matters. The three pillars of the value chain- Upstream, Midstream and Downstream-provide enough clues about the tensions facing the sector.
There is already an informal integration of sorts within the Upstream portion of the value chain. In most offshore jurdisictions, offshore concessions are shared among the majors and state oil companies in order to minimize project risks.
We will probably witness heightened project co-operation among the majors in an attempt to maintain or reduce project costs. At a regional or country level, we should anticipate increased project co-operation. Areas of co-operation could Include seismic surveys, project management, rig-sharing and marine operations. Such integration will also require the buy-in of the drilling contractors, service providers and marine contractors.
Deepwater exploration and project management could perhaps be delegated to companies who are best in class.
For example in Sub-Sahara Africa, TOTAL, with its deepwater track record in Angola Block 17, could certainly play a strategic role in determining how future deepwater projects are managed. Its Brulpadda Deepwater Project in South Africa( drilled to a final depth of more than 3,600 meters), bears testimony to the company’s deepwater agility. In Nigeria, expect Shell, with its dominant offshore assets, including Bonga to possibly seek more co-operation with other majors. Expect BP’s Orca-1 deepwater play in Mauritania to have a stringent project development budget.
Alliances, Mergers and Takeovers
What will be the tipping point when cost savings and joint-co-operation have run their course? A matter of the last man standing?
Instead, anticipate in the coming months, strategic alliances and acquisitions to ensure market size that matters. The oil majors are notorious in ensuring that energy scenarios are developed and implemented. Think of Shell’s takeover of British Gas in 2015. The planning was meticulous and carefully rehearsed. Major shakeouts on a massive scale can be expected in the coming months.
The Winners and Losers
Imagine this to be a gigantic game of high stakes poker. Not necessarily that the winner takes all but the prizes are there for the taking. Some observations.
In Sub-Sahara Africa, TOTAL, with its Angola Block 17 experience could well be nominated to be the company of choice for exploration, given its technical prowess and ability to innovate.
Nonetheless, other majors also have considerable strengths: Shell’s Bonga Project in Nigeria coupled with its deepwater experience in the Gulf of Mexico. ExxonMobil with its Block 15 experience in Angola and offshore Guyana with its 16 oil discoveries.
Finally, anticipate that one or two of the majors will be become dedicated deepwater exploration companies on behalf of the majors; also look to further integration of oil and gas services.
Natural Gas and LNG
Given that natural gas is viewed as the cleanest hydrocarbon, this portion of the value chain could become even more competitive and crowded:
Shell’s market share of the gas value chain extends from the Middle East through to Asia Pacific and the company operates 20% of the global LNG fleet ; Chevron with its Australian Gorgon and Wheatstone LNG projects is an important gas player in Asia-Pacific and is also a key shareholder in Angola LNG; ExxonMobil developed Asian markets with its Arun LNG project in Indonesia and in the 1990s involved with RasGas(Qatar).
Given that natural gas is viewed as a transitional fuel, all of the majors will want to profile their companies as energy friendly. This scramble could become very ugly as they compete with one another.
in its 2019-2020 analysis of the Chemical industry, Deloitte encourages companies to extract more growth out of their existing assets and resources. For example, investing in high-performance plastics for new vehicle models.
Both Shell and ExxonMobil have key global positions in the chemical sector. In 2002 Chevron and Phillips merged their chemical operations.
It should not be surprising that mega-mergers occur to include the chemical businesses of the majors. Perhaps, not surprisingly BP has just announced selling its chemical business to Ineos for $5 billion.
Finally mega-mergers leading to more specialization offers the oil and gas sector the best chance for maintaining a large market share with economies of scale. Doing-more-with-less could become the new motto of the sector.
Gerard Kreeft, BA (Calvin University, Grand Rapids, Michigan,USA) and MA (Carleton University, Ottawa, Ontario, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. He writes on a regular basis for Africa Oil +Gas Report.