- Commandment 1: Petroleum Classification in Ruins
In the summer of 2020 TOTAL wrote off $7Billion of its oil sands in Canada which was listed as “Probable Reserves”. The under-lying message was if probable reserves can be written off, how safe were the estimates of oil reserves that had depended on this SPE Classification? Which were also approved by the US Securities and Exchange Commission?
Reserves were classified as RRR, Reserve Replacement Ratio, the norm being 100% on an annual basis (see below.)
- Commandment 2: The New Norm
TOTAL was the first major to classify other fuels, wind and solar, as part of its RRR count.
How was this done?
Simply put: Which fuels provided a better rate of return for the company and its shareholders. Being green has a better return on investment!
- Commandment 3: Renewables are the new norm
Note: ETF is an exchange traded fund which is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock.
- Commandment 4: Maintaining Huge Dividends(?)
Shell’s share price on February 23, 2021 was Euro 17; five years earlier on 9 June 2016 it was Euro 23.
Orsted’s share price February 23, 2021 was Euro 127; five years earlier on 10 June 2016 it was Euro 34.
Shell’s dividend yield is higher 3.53% in 2021; Orsted 1.4% dividend yield (2020).
The return on investment is not based on dividend but increased price of share: in the case of Orsted, a four-fold increase.
- Commandment 5: Shareholders are waiting
The contradiction is shareholders wanting high dividends but also demanding green solutions.
Oil companies-BP, ExxonMobil, Shell have paid huge dividends +5% historically…but this cannot continue.
Yet green companies are paying comparable dividends:
Iberdrola return on investment 5%, 2021;
Enel return on investment 5.15%, 2020;
Engie return on investment 4.77%, 2019.
- Commandment 6: Can the Oil Majors compete with the Green Competition?
BP &Equinor partnering in the USA: Offshore Empire and Beacon Wind.
NortH2 Vision in which Shell and Gasunie have combined forces to create a mega-hydrogen facility, fed by offshore wind farms, which by 2030 could produce 3-4 GW energy and possibly 10GW by 2040, Netherlands.
BP & Orsted developing green hydrogen at BP’s Lingen refinery, Germany.
BP will spend US$ 5Billion per year to green itself; by 2030 will have 50GW of net regenerating capacity, and planned pipeline of 20GW of green generating capacity.
Equinor’s Dogger Bank, North Sea, will produce some 3.6 GW of energy, enough to light up 6Million households, is the company’s showcase project.
TOTAL will have 35 gigawatt (GW) capacity by 2025, and hopes to add 10GW per year after 2025. That could mean an additional 250GW by 2050.
Enel in next 10years will be spending euro 190 billion on renewables and by 2030 have 145 GW installed capacity.
Orsted has an installed capacity of 10GW and build out to 15 GW.
RWE by 2022 will have 28.7 GW of installed capacity.
Engie spent Euro 7.4Billion on renewables and 33GW of installed capacity.
Iberdrola u to 2030 will spend Euro 150Billion on renewables and target of 93GW installed capacity.
- Commandment 7: More Specialization
Upstream Shell has announced reducing exploration to 9 key hubs
BP reducing production to 40% of current total;
Downstream: BP sale of petrochemical division to Ineos;
Expect more sales to ensure scales of economy and shoring up balance sheets;
Crossovers between Oil majors and New Energy players.
- Commandment 8: Are major service providers capable of providing services to Green Sector?
Up to 2023 there is a major decrease forecast in the various components including seismic, subsea, well services, EPCI,drilling, and maintenance and operations.
Share prices of the major service providers- Baker Hughes, Halliburton and Schlumberger- have tanked:
in December 2016 Baker Hughes’s share price was $65, December 2020 $21;
Schlumberger in December 2016 $85, December 2020 $21;
Halliburton December 2016 $55, December 2020 $19.
Halliburton talks about further digalization of its services on its website. It also talks of lower capital intensity and being committed to technologies that reduce emissions/environmental footprint.
Olivier Le Peuch, CEO Schlumberger, recently announced a major strategic restructuring creating four new divisions- Digital & Integration, Production Systems, Well Construction, Reservoir Performance.
Within the confines of the E+P bubble, both major service companies continue on with what they anticipate what the IOCs are dictating: belt tightening, a reduced head count, with the hope for a better tomorrow. Simply re-shuffling the deck chairs on the Titanic.
The one exception is Baker Hughes, who have recently unveiled a forward looking strategy focused on CCS(Carbon Capture Storage), Hydrogen, and Energy Storage.
Key themes for the Energy Transition.
- Marine Contractors:
Heerema: becoming focused on offshore wind projects
Technip Energies- entailing LNG, sustainable chemistry and decarbonization- has been spun off creating new innovative options.
- New Energy Service Providers
Siemens Energy has operations in 90 countries offering a full project cycle of servicesL generation, transmission and storage from conventional to renewable energy.
Cummins operates in 51 countries in Africa and market leader in fuel cel land hydrogen production technologies. Cummins began developing its fuel cell capabilities more than 20 years ago.
- Commandment 9: National oil companies must justify their investments
If national oil companies follow their current course, they will invest more than $400Billion in costly oil and gas projects that will only break even if humanity exceeds its emissions targets and allows the global temperature to rise more than two degrees centigrade 2 oC.
Either the world does what’s necessary to limit global warming, or national oil companies can profit from these investments. Both are not possible.
State oil companies’ investments could pay off, or they could pave the way for economic crises across the emerging and developing world, and necessitate future bailouts that cost the public. Some oil-dependent governments in Africa, Latin America and Eurasia are making particularly risky bets with public money.
Many national oil companies have incentives to continue spending big on new oil and gas projects. As a result, company officials might not, on their own, change course to account for the energy transition away from fossil fuels toward green energy, nor make investment decisions that serve the interests of citizens.
See “Risky Bet National Oil Companies in the Energy Transition”, David Manley and Patrick R.P. Heller, Natural Resource Governance Institute
- Commandment 10: Putting together an Energy Roadmap
The challenge to meet!
The author, Gerard Kreeft, holds a BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada). He is an Energy Transition Adviser and was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. Kreeft has Dutch and Canadian citizenship and resides in the Netherlands. He writes on a regular basis for Africa Oil + Gas Report.