Our Take: IOCs Far From Done in the Upstream

Copyright © 2021 Energy Intelligence Group

International oil companies (IOCs) face intense pressure to shift capital to low-carbon investments but will likely remain significant players in oil and gas development into the 2030s. Many bankers, analysts and industry executives at last week’s Energy Intelligence Forum shared the view that winding down oil and gas investment from IOCs too quickly risked adding more price and supply volatility to a global economy still dependent on hydrocarbons. But we believe IOCs must build — and execute — credible medium-term transition strategies alongside conventional investments if they’re to get the green light from investors.

  • Trading firms, independents, private producers and especially national oil companies will gain market share over IOCs later this decade, particularly if oil and gas demand remains robust. 

  • But speakers at this year’s Forum rejected calls for IOCs to dial down upstream investment as if the world were strictly following the International Energy Agency’s net zero by 2050 road map, which sees no need for investment in new fields after this year due to demand destruction. TotalEnergies CEO Patrick Pouyanne warned that prices would “rocket to the roof” by 2030 if the industry heeded such calls. 

  • Royal Dutch Shell CEO Ben van Beurden took issue with the “silly notion” that companies should simply sell assets to reduce enterprise-level emissions — arguing this does nothing to reduce global emissions. And he also took issue with the equally “silly” notion that IOCs should not be allowed to divest anything and should instead just wind down production.

  • Numerous executives — along with several bankers and financiers — argued that the intense scrutiny of IOCs’ emissions profiles means they will produce some of the lowest-carbon oil and gas to meet existing future demand. Exxon Mobil’s Neil Chapman noted that the US major is restricting its new upstream investments to resources with first-quartile emissions profiles. Occidental Petroleum CEO Vicki Hollub suggested crude produced from enhanced oil recovery that uses CO2 captured from the atmosphere could even be carbon negative. Repsol CEO Josu Jon Imaz pointed out that the Spanish major’s activities in environmentally sensitive Alaska have a lower carbon footprint since they rely on existing infrastructure and produce light oil. 

  • A few speakers called for a potential middle ground from investors that realize squeezing supply too far ahead of demand can cause issues, while there was a consensus that extremely high energy prices do not help anyone’s agenda. So, as environmental, social and governance investing becomes more sophisticated, this could mean that the "olive" model — the greening of a carbon-intensive industry rather than its shuttering — gets accepted as the way to get to net zero.

  • Crucially, the industry will need to get buy-in that its low-carbon activities aren’t greenwashing to excuse upstream development and that IOCs are credible facilitators of the transition. This means they must be on their best behavior and not falter in low-carbon strategy and execution.

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