By Irina Slav
Exxon this week did something unprecedented: it wrote down its gas assets by a massive $17 to $20 billion. In evidence that the crisis has finally gotten to the world’s formerly biggest public oil company, Exxon said it will focus on a handful of key upstream regions, very much like its peers. It seems the pandemic has put an end to the global growth era in oil. It is now time to pick and choose the best projects to invest in while keeping an eye out for sustainability trends. Exxon said this week it would focus its upstream efforts on Guyana, Brazil, and the Permian. Guyana is certainly one of the hot spots in oil despite the crisis. After making more than a dozen discoveries in a single block there, Exxon plans to be pumping 750,000 bpd of oil by 2025.
Brazil is another hot spot because of its pre-salt zone, containing potentially billions of barrels of untapped oil. And with offshore production costs falling, deepwater has become one of the lowest-cost new production areas, according to Rystad Energy, making the country even more attractive for companies looking for long-life fields. Because low-cost, resilient production would be the focus of the industry from now on.
While oil demand took a severe beating from the pandemic, it will recover eventually. Over the next two decades, global demand for oil and gas could reach a cumulative 1.1 trillion barrels, according to Wood Mackenzie analysts. This is a lot of oil and gas, but the important part, according to them, is that it is a lot less than what’s still available out there. In other words, oil companies will need to become even pickier than they already are with new exploration.
It is perhaps not a surprise, then, that the majors are betting on production assets that have proved their potential for attractive returns on investments with low production costs and plentiful resources. And while Exxon’s focus on the Permian as one of its priority upstream areas may be to an extent questionable because of the capital intensity of shale oil drilling, others are betting on legacy producing regions.
BP, for instance, recently said that it planned further investments in the UAE, Iraq, and Oman. BP is the operator of the Rumaila field in Iraq, the world’s third-largest, as well as low-cost assets in Abu Dhabi and Oman.
“We will continue to invest in these,” BP’s senior vice president for the Middle East, Stephen Willis, told Bloomberg last month, because they have “world-leading operating cost, capital cost and production efficiency performance.”
Shell, similarly to Exxon, has outlined several priority upstream areas, including Brazil, the Gulf of Mexico, the UK North Sea, and Nigeria, among others. Again, the thing that stands out for all these priority areas is that they are legacy producers where Shell has had a long presence, and the opportunity to cut costs to the lowest possible level.
But according to Wood Mac, production cost is no longer the one top priority. Investors are eager to hop on the decarbonization train, and they are insisting on seeing some responsible oil production, meaning low emissions from production even if the product being extracted is itself a source of emissions. This makes oil companies’ task quite a bit harder, although not impossible.
Most supermajors have already declared ambitious decarbonization goals for the future as such goals appear to be the top investor bait these days. These should serve to counter the fact oil companies are still producing oil and not just electricity from solar and wind farms, simply because the world continues to need this oil. But the decarbonization agenda will also have a bearing on choosing which oil fields to develop and which to drop, and how to reorganize operations in response to projected supply and demand trends.
Exxon wrote down its U.S. gas assets. BP said it won’t explore for oil in countries where it doesn’t already have a presence. Shell is slashing its refining capacity by more than 50 percent. Everyone is betting big on LNG. The majors are preparing for a future in which oil and gas will still be consumed in large amounts but never as large as they were before the pandemic.
This future will be one where energy investors are much more concerned about the company’s carbon footprint than the investors of the olden days who only cared about dividends. But they will still care about dividends, so oil producers will need to juggle decarbonization efforts with financial performance to balance these priorities.
Smaller players, in the meantime, could absorb the assets Big Oil is shedding as part of its portfolio streamlining drive and make them generate cash, according to Wood Mac, as long as they also address the environmental, social responsibility, and governance concerns of their present and future shareholders.