By Gerard Kreeft
The UAE will host the 28th Conference of the Parties to the UN Framework Convention on Climate Change (COP28) from November 30 to December 12, 2023 at Expo City Dubai.
The evet is meant to unite the world towards agreement on bold, practical and ambitious solutions to the most pressing global challenge of our time: combatting CO2 neutrality by 2050 and the growing danger of not reaching a decrease of 1.50C of the earth’s temperature.
The three Amigos will undoubtedly be there in full ornate, proclaiming their hydrocarbon gospel to a world struggling to re-define an energy road map for the coming decades. What message can they possibly bring?
Chevron
Chevron’s recent $ 60Billion acquisition of Hess Corporation has given th California headquartered major a 30% share of the Stabroek Block in Guyana, adding some 90,000 barrels oil per day (BOEPD) to Chevron’s production. 
Aside from its newly acquired asset in Guyana, two-thirds of Chevron’s total production of 3Million barrels of oil will in 2025 come from just two projects: Tengiz in Kazakhstan and the Permian Basin in the United States; each yielding 1Million barrels of oil equivalent per day.
Today the company has a net value of $291Billion, seen its stock price rise by 52% to $169 by September 2023, up from $111 in January 2019. Through 2027, Chevron anticipates to maintain a capital budget of between $14-16Billion per annum. The company’s new energy division is pledged to spend about $2Billion per year or 12.5-14% of Chevron’s projected capital budget.
The company has indicated that over the next 3 years it will spend some $10.5-$12.5Billion yearly in the USA, mostly in the Permian Basin and Gulf of Mexico. This means that at least 75% of Chevron’s total capital budget over that period is pledged for the U.S. market.
Outside the USA, Chevron will spend $3.5Billion, or 70% of its international budget, to develop its Tengiz asset in Kazakhstan, with the remaining $1.5Billion spent elsewhere. This is not promising for Africa, where Chevron has major operations stretched across the continent, including major projects in Nigeria, Angola, Equatorial Guinea, and Egypt that have received limited funding in order to bankroll Tengiz. Putting so many of its eggs in the Tengiz basket could be a strategic vulnerability: if Tengiz output falls short, Chevron’s market performance will suffer, potentially dramatically.
Tengiz
The Caspian Region, particularly Kazakhstan, has been a key frontier for Chevron since the break-up of the Soviet Union. Tengiz, Kashagan and Karachaganak were all major projects taken on at great risk, but they garnished great financial wealth which in turn generated cashflow for the majors to develop projects around the globe, including Africa.
This is about to change. WoodMackenzie is predicting that, by 2030, annual capital spending on upstream oil and gas projects in the Caspian Region will drop 50% from it’s 2018 peak of $20Billion.
Caspian Pipeline Consortium (CPC)
An equally troubling problem is the Caspian Pipeline Consortium(CPC) which transports Caspian oil from Tengiz field to Novorossiysk-2 Marine Terminal, an export terminal at the Russian Black Sea port of Novorossiysk. The CPC pipeline handles almost all of Kazakhstan’s oil exports. In 2021 the pipeline exported up to 1.3Million barrels of oil per day (BOPD). On July 6, 2022, a Russian court ordered a 30-day suspension of the pipeline because of an oil spill. The CPC appealed the ruling and the suspension was lifted on 11 July of the following week, and the CPC was instead fined 200,000 rubles ($3,300).
The incident demonstrates the vulnerability of Tengiz and future production. No doubt this is not the last such incident which involves Russian and Kazakhstan goodwill, to ensure that Chevron’s Tengiz Project does not falter. Having to depend on Russian-Kazakhstan goodwill to guarantee Tengiz production, has put Chevron’s lack of diversity of oil supply in a very bad light.
Permian Basin
A final sour note for Chevron could be its Permian Basin assets. What assurances do we have that Chevron’s Permian Basin adventure will fare better than that of past shale operators?
In a 2021 March report, the Institute for Energy Economics and Financial Analysis (IEEFA), found that 30 producers generated $1.8Billion in free cash flows in 2020, after slashing capital spending by $20Billion from the previous year.
“Last year’s positive free cash flows were only possible because shale companies cut their capital spending to the lowest level in more than a decade,” said Clark Williams-Derry, IEEFA energy finance analyst and co-author of the report. “Restraining capital spending could help the fracking sector generate cash, but low levels of investment also undermine the industry’s prospects for growth.”
Since 2010, the 30 companies examined by IEEFA had reported negative free cash flows totaling $158Billion.
“The positive free cash flows pale in comparison to the industry’s accumulated debt loads.”
The 30 shale producers owe almost $90Billion in long-term debt, and the reductions in capital expenditures are unlikely to ensure that the industry grows.
ExxonMobil
ExxonMobil’s $60Billion purchase of Pioneer Resources in October 2023 is vastly overpriced, according to IEEFA. Over the last decade, Pioneer’s stock has increased 17% vs 148% in the overall S&P 500 Index—a sign that even the best companies in the US shale industry have underperformed in the broader market.
ExxonMobil’s vital signs are the following:
Between January 2019 and September 2023, the stock price at the NYSE has risen 66%, from $71 to $118. Over 41 consecutive years, the company has increased its annual dividend payment. It produces 3.7Million barrels of oil equivalent per day (3.7MMBOEPD) and has a capex of between $23-$25Billion. Yet there are troubling storm clouds gathering.
LNG—A Mixed Blessing
Rovuma LNG was supposed to become ExxonMobil’s futuristic model LNG project. Instead, in a matter of months events have overtaken ExxonMobil’s best laid plans.
In June 2024 FID(Final Investment Decision) is expected to be made on ENI’s second Coral Sul Project in Mozambique. The first LNG shipment of ENI’s Coral Sul FLNG shipment took place in November 2022.
ENI’s Coral Sul FLNG project’s inauguration deserves special attention. While Africa’s two most highly touted LNG projects—Rovuma and Mozambique LNG– continue to be on security hold, ENI has achieved pole position with its Coral Sul FLNG project. With a long-term predicted weakened global demand for LNG, both ExxonMobil and TOTALEnergies will have to re-think their Mozambique strategy.
Rovuma is owned by a consortium consisting of ExxonMobil, ENI, China National Petroleum Company, Galp, Kogas and ENH; and Mozambique LNG owned by TOTALEnergies, Mitsui Group, ENH, ONGC, Bharat Petroleum, PTTEP, and Oil India.
Because of the security situation in the north of Cabo Delgado province, both projects have been at a standstill since 2021. In February 2023 TOTALEnergies sent an independent mission to Mozambique to evaluate the security status. The key question: will both TOTALEnergies and ExxonMobil resume their potential projects in the short-term? Security clearance aside a number of hurdles remain.
True, Final Investment Decisions (FID) for Mozambique LNG has been declared in 2019 and the company insists that the project will be delivered up in 2024. Will this really happen? Based on past planning scenarios the earliest delivery of LNG would be 2027-2028. Unfortunately, the LNG global marketplace is also shifting and could provide the Mozambique LNG project planners some additional headaches. Rovuma LNG to date continues to be silent on its project planning.
LNG’s Present Situation
IEEFA (Institute for Energy Economics and Financial Analysis) in its recent Global LNG Outlook 2023-2027 provides a somewhat sobering picture for new LNG projects: “IEEFA expects that sustained high global LNG prices; weak LNG demand growth and elevated price sensitivity in Asia; declines in gas consumption in Europe; and a multi-year string of global capital investments in cost-competitive energy alternatives will undermine global LNG demand growth over the next several years.”
According to IEEFA the global demand for LNG is slowing:
While Europe is maintaining a high degree of LNG import, it is also increasing energy efficiency measures and wind and solar projects have become commonplace;
Japan and Korea, historically dependable LNG importers, are increasingly turning to nuclear, and renewables. China decreased its LNG imports by 20% in 2022 and is turning to pipeline gas supplied by Russia as well as domestic gas supplies. South Asia, including India, Pakistan, and Bangladesh, slashed purchases by 16% in 2022 and suppliers often defaulted on contracts to obtain higher prices elsewhere.
“After several years of weak supply growth, IEEFA anticipates that the global LNG market will see a tidal wave of new projects come online starting in mid-2025. The wave will likely crest in 2026, with the addition of 64Million metric tons of annual liquefaction capacity—the most in the history of the global LNG industry. The supply additions will boost global liquefaction capacity by roughly 13% in a single year. Liquefaction projects targeting in-service after 2026 may be entering a much smaller demand pool than bullish market forecasts anticipate. As new supply floods the market, today’s tight markets may give way to a supply glut, with lower-than-anticipated prices, smaller netbacks, tighter margins, and lower profits for LNG exporters.”
According to this less-than-upbeat forecast, only 5.8Million Tonnes Per Annum (5MMTPA) of liquefaction production will be developed in 2023, to be followed by 9.1MMTPA in 2024. Currently, the entire global LNG production capacity is 456MMTPA.
The turning point will be 2025.
“IEEFA anticipates that roughly 17MMTPA of liquefaction projects are likely to come online around the world in 2025—more than in 2023 and 2024 combined. New capacity additions will crest in 2026, with an estimated 64MMTPA of capacity coming online in a single year, and continue into 2027, when 37MMTPA of new capacity is expected to begin operating”.…
Much of the new production will come from Qatar, USA and Australia. If 2026 and 2027 will see a sharp upturn in LNG liquefaction production how will this affect Mozambique’s two LNG projects which could potentially add 38.1MMTPA when fully functioning? Long term delays can only threaten project viability. And not proceeding sooner rather than later increases the chances of these projects being listed as stranded assets.
Shell
The chief obsession of Wael Sewan, Shell’s CEO since January 2023, is to drive up the company share price. Yet the share price has barely moved—it was $61 on January 2019 vs $64 on September 2023. In his view Shell must mimic Chevron and ExxonMobil. While the Shell share price has remained virtually unchanged over the last five years, Chevron has seen its share price increase 52% and ExxonMobil 66%.
Shell’s total capex for the period 2023-2025 is between $22Billion-$25Billion per year, of which some 80% is earmarked for hydrocarbons. Not unlike Chevron and ExxonMobil.
Sewan is attempting to change Shell’s narrative: that Shell is in the business of producing hydrocarbons, instead of also selling the illusion that its new energy policy matters. Europe’s oil majors, Including Shell, have seen their share prices flounder. Why? Because of their duality of messaging. The European oil majors in the period January 2019-September 2023(with the exception of TOTALEnergies and Equinor), have seen their share prices underperforming badly:
BP down from $40 to $39;
ENI down from $33 to $32;
TOTALEnergies was up from $54 to $66, 22%;
Equinor was up from $22 to $33, 50%.
The messaging of Chevron, ExxonMobil and now Shell is that they are oil companies, much in the tradition of John D. Rockefeller. This clarity of messaging is resonating with shareholders.
Shell’s Illusion
Prior to Sewan’s leadership, Shell had argued that its Upstream pillar ..”delivers the cash and returns needed to fund our shareholder distributions and the transformation of our company, by providing vital supplies of oil and natural gas.”
Yet Sewan is frank enough to demonstrate that this vision was an illusion. Leaning and depending on its upstream portfolio to lead the company to a bright new green future is perhaps central to Shell’s dilemma. Using funding from its upstream division to fund its green energy was in Sewan’s view a non-starter. Perhaps Sewan’s gamble of turning Shell back into an oil company will help its stock price increase in the short-term.
Yet Shell’s vision is also a testimony demonstrating how little the Green Alliance—Enel, Engie, Iberdrola, and Ørsted–is understood and viewed. What has set these companies apart is that they have created a huge competitive advantage which will be hard to challenge for newcomers. Moreover, they have moved well beyond simply dabbling in green energy. These companies have become specialists and now moving on to the next level: creating a digital platform on which value does not reside in owning resources but rather in managing data-driven ecosystems. This business model essentially borrows a chapter from Uber, which does not own taxis, or Booking, which does not own hotels. Some members of the Green Alliance have established new goals, such as CO2 neutrality by 2040 instead of 2050 to which Shell is pledged.
Shell’s Green Assets
What will Shell do with its green assets? Do not be surprised if Shell’s green assets are spun-off in a new venture. Shell’s REFHYNE Project, the Rhineland Refinery in Germany, could well become the precedent that the company needs to ensure it becomes the leading supplier of green hydrogen, where hydrogen production is powered by renewable energy for industrial and transport customers. Could the REFHYNE Project be duplicated many times over to ensure that green technology becomes a key ingredient in the energy transition?
Pay attention to Shell’s Pernis refinery in the Netherlands. One of the largest in Europe, Pernis refinery has a 400,000 b/d capacity and a complexity enabling the processing of many different crude types. The site is already deeply integrated with chemicals production and is being transformed into an integrated energy and chemicals park that will deliver low-carbon products.
Concluding Remarks
Shareholders of Chevron, ExxonMobil and Shell will in the short-term continue to see a steady flow of their annual dividends. Yet each company faces possible dangers. For example:
If the Ukraine conflict is prolonged, Chevron’s Tengiz Project in Kazakhstan could suffer, which represents one-third of the company’s production.
Will ExxonMobil’s Rovuma Project in Mozambique ever be started or will it become a stranded asset?
Will Shell’s new strategy—becoming an oil company once again— succeed?
Then there is the matter of US shale production, which both Chevron and ExxonMobil are counting on heavily and in the eyes of IEEFA has a checkered and spotty record.
Both Chevron’s purchase of Hess and ExxonMobil’s purchase of Pioneer are indications that the hunt for additional oil and gas assets will continue. A race to the bottom with reckless abandon?
Is there a Plan B?
Unfortunately no.
The combined profit of our Three Amigos in 2022 was $ 131Billion (Chevron $35Billion+ ExxonMobil $56Billion+ Shell $40Billion). No doubt if our Three Amigos attended COP 28, they would be kindly requested to donate a sizeable portion of their earnings as a CO2 surcharge.
Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, 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, and guest contributor to Institute for Energy Economics and Financial Analysis (IEEFA). His book ‘The 10 Commandments of the Energy Transition ‘is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition
