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Majors Still Have Pivotal Role to Play

Copyright © 2021 Energy Intelligence Group
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The Western majors are under intense pressure from investors to refine how they approach reinvestment in oil and gas. This pressure will redefine their role in the global upstream sector. But speakers at this year’s Energy Intelligence Forum argued that the majors will remain pivotal players — and ones climate advocates may not want to see hit the exits on new upstream outlays just yet. The five leading majors account for 10% of the world’s daily oil and gas supply, according to Energy Intelligence’s Top 100 ranking. That market share is expected to fall this decade. BP, for example, will shrink output by 40% by 2030 via asset sales and natural declines. Royal Dutch Shell isn’t investing enough to offset declines, while Exxon Mobil adopted a no-growth capex program to save its dividend. But bankers, advisers and industry executives at the conference argued that other producers aren’t always equipped to fully replace the majors’ capabilities and capex, nor are they necessarily held as accountable for their carbon footprint.

Bank of America’s Julian Mylchreest sees global upstream investment increasingly shifting from publicly traded to private producers, from international oil companies (IOCs) to national oil companies (NOCs), and from oil to gas over time. But speakers warned that making this shift too soon could impede the world’s ability to meet demand, even if many state-backed producers are highly competent and motivated. The risk is particularly acute in LNG. “The IOCs drive 50% of the world’s gas ... LNG is an IOC machine. If you kill the majors, you kill LNG,” Philip Lambert, CEO of Lambert Energy Advisory, told the Forum. According to Energy Intelligence’s Global LNG database, the majors are participants in over 80 million tons per year of LNG capacity currently under construction and stakeholders in another 80 million-plus tons/yr of proposed capacity, notwithstanding Qatar's massive proposed expansion.

Questions abound over how significant a role gas will play in decarbonizing power given rapidly falling costs for solar and wind. But Mylchreest argues that the majors are “brilliantly positioned" to pair investments in gas and renewables, which will be needed until battery storage technologies advance and in jurisdictions with environmental limitations for renewables. De la Ray Venter, Shell’s head of LNG West, also reminded that power is not expected to be the main driver for gas as a transition fuel. Instead, LNG can support heavy transport, shipping and industry until hydrogen markets are developed.

The majors’ own decarbonization plans also mean that future investments in oil and gas must meet stricter emissions criteria than much of the industry. Next-generation LNG will deploy significant investments in emissions reduction, for instance, while new project sanctions are being restricted to some of the industry’s least carbon-intensive barrels and Btus. Although still “early days,” Shell’s Venter says “second-wave” decarbonization plans are in play for new LNG plants, with carbon capture and plant electrification using renewables able to move the needle far beyond what facility efficiency improvements and methane leak prevention can provide. “We must when we build new plants think to that,” TotalEnergies CEO Patrick Pouyanne said regarding the minimization of carbon and methane emissions from future LNG facilities. Exxon Senior Vice President Neil Chapman said his firm is restricting wider upstream investments to resources with first-quartile emissions performance, at minimum. “The reason for that is quite simple — we can’t reach our corporate objectives unless we do that.”

The crucial unknown is whether investors will accept this role for the majors, or insist they speed up their transition away from oil and gas faster than demand erodes. Jason Bennett, partner and energy sector co-leader at law firm Baker Botts, believes a smaller, but still significant group of equity investors could yet be willing to hold shares in oil and gas companies that ease the transition given the potentially disorderly offramp ahead. Mychreest suggested such investment appetite could emerge if the environmental, social and governance movement becomes more sophisticated, moving beyond a “green” versus “black” view of investments to instead support a spectrum of strategies given the world's still-significant appetite for hydrocarbons in the medium term.

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