Editorial: Finally Moving Beyond Petroleum?

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The net-zero emissions ambitions of the European majors have captivated observers contemplating the final breakup of Big Oil. The starkest changes will take decades to unfold. But Europe's oil giants will have to decide today whether they want to play crude's potential last stand. Here, new strategic distinctions are emerging. No one has a clear picture of what the world's energy needs will be by midcentury. UK major BP has a 65 million barrel per day swing across its 2050 oil demand scenarios. Despite the uncertainty, the European majors generally anticipate oil consumption will move into systemic decline as the world tries to comply with the Paris climate agreement. Yet this outcome doesn't preclude demand rising this decade. Any significant increase could overwhelm a supply base ravaged by years of capital austerity and a Black Swan pandemic -- and send crude prices screaming higher. Here is where new fault lines could emerge. BP has been the most vocal in putting forward the notion that demand could have peaked, or be close to it in the wake of Covid-19. But its willingness to let its oil and gas output decline 40% by 2030, the bulk of which will take place post-2025, is not just philosophical. Its debt-laden balance sheet cannot afford to both play catch-up on portfolio diversification and grow oil and gas. Total firmly believes global upstream underinvestment will result in ”insufficient worldwide production capacities and a rebound in prices” by 2025 and has given itself some wiggle room. The portfolio shift outlined to date sees liquids’ contribution to sales falling from 55% in 2019 to 45% by 2030 but does not speak to absolute volumes; more rapid growth in electricity could still cause liquids’ share to fall even if oil doesn't significantly shrink. Total may be able to afford both given its lower debt and potential flexibility around its dividend. Whether BP has reset the bar on what is considered a credible energy transition story regardless of financial firepower will become clearer as Total faces investors on Sep. 30. Royal Dutch Shell will likely face similar questions over the coming weeks, even if it insists on waiting until February to update its still-vague transition strategy. The pressure to let go of oil and gas growth is expected to be more pronounced for the Anglo-Dutch supermajor. Its debt is rising and it has struggled to define its path given the big financial bet it already made merging with LNG-focused BG (EIF Aug.26'20). That said, the calculus comes down to more than just profits. The “Big Energy” transition strategies of the majors are a response to wider stakeholder pressures, not just the rise of environmental, social and governance investing. Today’s investors are but one of those stakeholders, with society at large, politicians and future generations also factoring heavily for the first time. The European majors are equally fighting to preserve their license to operate. They need to hold onto whatever voice they still have as politicians draft energy policies that are sure to have a profound impact on the industry. Showing growth in oil and gas could risk undermining longer-term objectives as transition talk is painted as greenwashing. But it may be hard to resist the profitable production required to generate cash flow in the medium term as the transition becomes more capital intensive post-2030.

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