By Alex Kimani
The oil markets are once again in an upbeat mood, with crude prices shooting up 5% on Wednesday after reports emerged that OPEC+ producers rolled over production cuts in April. The Wall Street consensus was that collective production pledges would rise by 1.5M bbl/day for the month of April, with Saudi Arabia reversing its unilateral 1M bbl/day cut.
The specter of another extension of OPEC+ production cuts has overshadowed news of a hefty 21.6M-barrel increase in U.S. crude inventories, with Julius Baer analyst Norbert Rucker saying $70/bbl oil is now in the crosshairs because “the fundamentals of the oil market suggest further strength”.
It has also overshadowed another important development: The greening of the American oil industry has gone into overdrive.
Speaking from the annual CERAWeek by IHS Markit energy conference, Big Oil chief executives from Exxon Mobil (NYSE:XOM), Chevron Corp.(NYSE:CVX), Occidental Petroleum (NYSE:OXY) and ConocoPhillips (NYSE:COP) have all spoken about the industry’s transition to a lower carbon world, with OXY even branding itself a ‘carbon management’ company that wants to set the industry standard for the production of net-zero carbon oil.
IHS Markit vice chairman Dan Yegin says the oil and gas sector has greatly speeded up efforts on carbon and is rapidly recalibrating itself to the new global benchmark–net zero carbon by 2050.
Hydrogen, carbon capture, and innovation are the big cross-cutting themes that have jumped out at this year’s summit.
Lowering emissions, not nixing fossil fuels
An overriding theme that has emerged at the conference is that Big Oil wants to focus not so much on curtailing oil and gas production but rather on mitigating the impact of its carbon and greenhouse gas emissions.
According to Exxon Mobil CEO Darren Woods and Occidental Petroleum CEO Vicky Hollub, reducing carbon emissions from fossil fuels and not the actual use of fossil fuels, offers the best way to combat climate change.
Interestingly, both CEOs stressed–on separate panels–that the world still needs oil and gas, and governments need to focus on mitigating global warming using technologies such as carbon capture and storage (CCS) instead of attacking fossil fuels.
Nevertheless, even the biggest hardliner of them all, Exxon Mobil, has markedly changed its tune from just a few years back.
During the company’s 2021 Investor Day held on Wednesday, CEO Darren Woods outlined the company’s energy transition strategy including plans to trim production growth and boost cash flows in a bid to support a growing dividend. Exxon revealed that it plans to hold production flat from 2020 levels through 2025 at 3.7M boe/day, good for a 26% cut from the 5M boe/day estimate for 2025 it released just a year ago.
Still, Exxon plans to continue ramping up production at the Permian Basin and Guyana, with Permian production averaging 400K boe/day this year before rising to 700K boe/day by 2025. Exxon also sees Guyana quickly becoming a key cash cow, but has indefinitely suspended other major projects such as the $30B Mozambique LNG export project.
Woods announced plans to increase investments on carbon capture and storage to ~3% of new spending, an improvement from the 1% it had previously earmarked for CCS but still a far cry from the double-digit levels from European majors Total SE (NYSE:TOT) and Royal Duch Shell (NYSE:RDS.A). Woods urged governments to stop picking winners and losers but instead to establish carbon markets so as to ‘‘make sure we’re using market forces to try to most cost effectively reduce CO2 emissions.’’
Deep-pocketed investors were not impressed.
The 145-member Coalition for a Responsible Exxon that oversees $2.5T in assets said that Exxon Mobil must change direction and not merely appoint new board candidates.
Nevertheless, XOM shares have gained 2% on Thursday to take them to a 39.6% gain in the year-to-date.
Occidental Petroleum’s Vicky Hollub pretty much echoed Darren Woods’ views:
“What I think that people don’t understand is we should not be talking about eliminating fossil fuels. What we really need to be talking about is eliminating emissions and if we can provide and we will. Net carbon zero oil, that is what the world needs and the world cannot achieve the goals … of the Paris accord without the oil industry helping with that. We can be leaders in that.”
Hollub said OXY’s goal was to not only become a net-zero oil producer but also help other companies lower their carbon footprint:
“We’re going to be building what will be the largest direct air capture facility in the Permian and partnering with us to do that is United Airlines because they also have a commitment and focus on getting to net zero by 2050.”
Hollub revealed that Occidental has signed up to take carbon from two ethanol plants and a steel plant in Colorado and sequester it in the Permian basin.
OXY has become the quintessential poster-child of an M&A deal gone bad after its $55B acquisition of Anadarko left it saddled with a massive $38.5 billion debt pile.
Nevertheless, it appears to be making an impressive turnaround after OXY stock climbed 67.6% YTD though the shares remain well below 2018 levels.
A fight for survival
Stewart Glickman, CFRA energy analyst, says Big Oil is spending much more time marketing its efforts on a low carbon future and technologies such as carbon capture because they are literally embroiled in a fight for survival.
In 2020 alone, ESG funds attracted $51.1 billion of new money, and not having a low-carbon strategy in these times is sounding your death knell.
Sure, fossil fuel investors still want to hear the usual things: How healthy is your balance sheet? Can you sustain your dividend? What’s your operating cash flow look like? Can you maintain production you want without spending too heavily on capex?
These considerations will always be paramount. But in the same breath they also want to hear about your investment in renewables and low carbon solutions businesses. And changing a few board seats no longer cuts it.
So far, oil and gas companies appear to be doing a good job placating jittery investors, with the Energy Select Sector SPDR Fund (XLE) up 33% vs. 1.7% YTD gain by the S&P 500. But they’d better start putting their money where their mouths are if they hope to continue winning in the long-term.