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Editorial: The Euro Major Dividing Line

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The European majors aim to provide energy, in various forms, to customers over the coming decades. But how they plan to meet the world's oil and gas needs will differ. As Energy Intelligence has flagged and Total's investor day has since confirmed, new strategic distinctions have emerged when it comes to the European majors' future in oil and gas (EIF Sep.23'20). BP and Total straddle the dividing line, with BP seeking a sharp pullback and Total growing -- albeit with a much different hydrocarbon mix in tow. Total is more convinced than it was in late May that it should aggressively pull back its oil production. The company’s plans now see oil comprising just 30% of its energy sales by 2030 -- down from the 45% it envisioned in May -- implying a decline of roughly 450,000 barrels of oil equivalent per day from 2019 levels. Yet gas will step up in a bigger way via LNG, with 800,000 boe/d of growth bringing gas' share to 50%, up from the 40% initially targeted for 2030. The net result? An additional 350,000 boe/d of combined oil and gas output. BP, on the other hand, will let its current queue of upstream projects carry on, keeping underlying production flat through 2025, excluding asset sales. But constrained investment will take its toll in the second half of the decade. By 2030 production, not counting equity Rosneft barrels, should be down around 40%, or more than 1 million boe/d. The dividing line in part draws from differences in LNG. BP does see a bright future for LNG and plans to double its portfolio to 30 million tons per year by 2030. But the relatively asset-light major will do so through a mix of offtake agreements and equity capacity, meaning many of those Btus won't come from BP's own upstream. Total, on the other hand, already boasts the majors' second-largest equity LNG position and has an existing queue of future projects it says can profitably get it to 70 million tons/yr by next decade. The dividing line also comes down to views on oil. BP believes oil demand growth is essentially over; Total believes the peak won't come until around 2030, with higher prices likely to emerge once more later this decade due to a dearth of upstream investment. Total is still comfortable letting oil output materially decline despite that, but oil-linked LNG would help expose it to any upside. Yet the final distinction -- one Energy Intelligence believes cannot be overlooked -- is sheer financial capacity. BP cannot afford a true "all of the above" growth path. It is roughly keeping capex flat in the coming years, yet it is playing catch-up with Total and Royal Dutch Shell on establishing and growing low-carbon businesses. Total already has the LNG projects it needs, is close to spending 15% of its capex on low-carbon and is actively fine-tuning an established strategy. BP will face outsized execution risk to succeed in businesses it is only just breaking into. The question now is where Shell will sit along the dividing line. Its portfolio suggests alignment with Total: it holds an even larger LNG portfolio, has stressed the importance of gas-power integration and has ambitions of growth and scale (related). But it is not clear that it can afford it. Deciding to cut its dividend for the first time since World War II suggests it will consider trying.

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