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Peer Strategy

2022 to Test Appetite for Spectrum of Transition Strategies

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If 2021 marked a year of strategic redefinition across the global oil sector, 2022 will be the year that puts those strategies to the test. Many stakeholders now acknowledge that there is not a singular one-size-fits-all strategy for how integrated majors, independent E&Ps and national oil companies should adapt to the low-carbon energy future. But producers need to convince that their path can deliver staying power in a Paris-aligned world — and will work to support, rather than thwart, those objectives. Otherwise, calls for accelerated change or alternative strategies will escalate. Here is what Energy Intelligence will have on its radar over the coming months for our core peer groups.

  • US majors need to deliver tangible low-carbon projects to build credibility – but may still face calls for faster change.  

Executives at Exxon Mobil and Chevron have told Energy Intelligence that investors have warmed over the past year to energy transition strategies that embrace low-carbon initiatives outside of renewable electricity. But they will now have to convince that their push into carbon capture, biofuels and hydrogen is credible in scope and urgency.  

Both have significantly upsized their low-carbon investment plans, but spending here only tallies around 8%-11% of total capital expenditure, about half the rate of their European peers. Executives argue that the lower spend reflects the more nascent nature of carbon capture, renewable natural gas and hydrogen compared with solar and wind, and they have promised to accelerate investment if markets develop more rapidly than anticipated. Key to watch is whether investors accept this pace, or clamor for higher spending to support more aggressive net-zero ambitions. Investors are demanding details around specific investments and project timelines to make that assessment.  

Another potential pressure point lies with emissions targets. Chevron and Exxon upsized their emissions reduction goals in 2021 — but with significant caveats. Activist investor Follow This has already filed a resolution at Chevron and Exxon calling for medium- and long-term targets to reduce emissions from both its operations (Scope 1 + 2) and products (Scope 3). A successful resolution at Chevron would clearly signal that the company’s medium-term emissions intensity target that includes Scope 3 emissions — its response to the same resolution passing last year — is insufficient. Success at Exxon would push it to adopt net-zero targets for its operations and address Scope 3 emissions in some form. More aggressive targets would necessitate more aggressive low-carbon strategies.  

  • European majors face heightened skepticism as to whether integration offers a convincing strategic advantage.  

Existential questions surround Europe’s leading majors, as investors struggle to see how continued scale and integration offer a clear and compelling value proposition. Management teams will have to bridge this gap in understanding if they’re to convince that their path can deliver greater value than spinouts and demergers.  
Activist hedge fund Third Point has raised the stakes with its call for Shell to split its legacy petroleum operations and low-carbon renewables/LNG business into separate entities. Shell is already working to simplify its corporate structure but has yet to tangibly demonstrate how its "one-stop shop" energy provider strategy — which depends on integration, trading prowess and its formidable global retail footprint — remains the best course for investors.  

Like Shell, BP’s shares remain well below pre-pandemic levels. The UK major received a much-needed boost during the second half of 2021, as booming oil and gas prices eased some concerns around how the company might manage a peer-leading debt load and more aggressive upstream pullback while still delivering low-carbon growth and returns to shareholders. But investors remain wary. The company’s plans to shrink its oil and gas production by 1 million barrels of oil equivalent per day by 2030 while building a 50-gigawatt renewable electricity portfolio means its cash flow weighting will shift materially faster than those of Shell and TotalEnergies, even if it remains whole. But BP’s upstream pullback also leans heavily on divestments — a method for reducing company emissions that is drawing increasing scrutiny and some calls to halt.

TotalEnergies may help buoy the case for the large-scale, integrated Big Energy model with its slate of megaprojects advancing this year. Further details should follow around its unique hydrogen + renewables co-developments planned in Iraq and Libya, and could provide a model for other large resource holders needing to monetize remaining oil and gas resources while also embracing decarbonization. Total will also be a litmus test for whether conventional oil and gas megaprojects remain acceptable for this peer group, with all eyes on Uganda and Mozambique.

  • Regional integrateds will provide crucial case studies in more aggressive restructuring, led by Eni’s planned Plenitude IPO.  

Europe’s second tier of integrated oil and gas companies is more open to spinoffs and demergers, with the group less holistically integrated and lacking the retail fuel footprint of the larger majors.

Eni’s planned initial public offering of its Plenitude retail and renewables business — expected in mid-2022 — will be a critical test of whether such strategies can unlock greater value for shareholders than remaining a single company. Analysts project Plenitude can capture greater cash-flow multiples than Eni, but the Italian company is trying to balance this move by retaining a majority holding in the spinoff.

Spain’s Repsol will be among those most closely watching Plenitude’s success as it considers an IPO of its own low-carbon business unit among a host of restructuring moves on the table. Austria’s OMV is one to watch for its different course. The company is mulling splitting its upstream and renewables businesses off from its core petrochemicals unit and delisting the hydrocarbon + renewables offshoot.

  • NOCs will start enacting decarbonization goals to fight for “last man standing” status among producers and support domestic emissions targets. 

NOCs have accepted that they face a race against time to develop their hydrocarbons before demand permanently fades, and that meeting remaining demand requires producing lower-carbon barrels and Btus.

Leading Mideast NOCs — Saudi Aramco, Abu Dhabi National Oil Co. and QatarEnergy — will marry tangible emissions reduction efforts with production capacity buildouts this year. Adnoc, for example, will start using nuclear power to reduce its operational emissions onshore, while Aramco is expected to detail how it plans to achieve net-zero Scope 1+2 emissions by 2050, in support of the kingdom’s wider net-zero ambitions. At the same time, Aramco and Adnoc are each advancing plans to add another 1 million b/d of oil output capacity, while Aramco has green lighted its massive Jafurah unconventional gas development. QatarEnergy is expected to finally select partners for its giant LNG expansion scheme, which aims to maintain the country’s low-cost, low-carbon LNG status by deploying carbon capture and storage.

The story is similar in parts of Latin America and Asia. Petrobras will lead Brazil's push to be the leading source of oil production growth outside the US through 2026, but is working to design fully electric floating production, storage and offloading vessels for its next development cycle, among other decarbonization initiatives. Colombia’s Ecopetrol — a standout NOC for its Scope 3 emissions reduction targets — is still working to advance long-delayed fracking developments onshore, but is also pursuing a pilot green hydrogen project and electrifying its wider operations. In Southeast Asia, PTT Exploration & Production and Pertamina are expected to follow Petronas in embracing net-zero operational emissions targets this year, with the trio seeing growth in natural gas as fundamental to still meeting medium-term domestic energy demand.

  • US independents will pivot to growth, but not at the expense of shareholder returns — or emissions targets.  

Recovering global oil demand is expected to support higher US output this year, making 2022 the first true test for public E&Ps and their adherence to strict capital discipline. As explained before, capital discipline does not mean zero growth; it means only growing when the market needs more supply and not growing at the expense of shareholder returns. It is growth within these parameters that is expected from US independents this year.  

Some, like Diamondback Energy, are promising no growth again this year, as cost inflation is expected to absorb their additional capital dollars. But others, including Pioneer Natural Resources, ConocoPhillips and Devon Energy, see scope for at least some modest growth (less than 5%, pro-forma various acquisitions). In all cases, shareholder returns via dividends and share buybacks will also rise, with variable dividends an added sweetener should oil prices — and cash flows — remain robust. In all, Energy Intelligence expects US crude production to rise around 500,000 barrels per day from end-2021 to end-2022.  

As with other producers globally, US E&Ps will be expected to deliver falling emissions intensity and a path to net-zero operational emissions alongside any growth and returns.

2022: What We're Watching
AdnocProgress on (1) reducing operational emissions via nuclear power, (2) its initial foray into renewables, (3) unconventional and sour gas development, (4) oil capacity expansion
APA(1) Successful ramp-up in Egypt following favorable PSC revisions, (2) Next steps at Block 58 (Suriname), (3) Competitiveness of Austin Chalk (US)
BPWhether shareholders will come around to its strategy and accept the role asset sales will play to help achieve its 40% reduction in output expected this decade
Chevron(1) Concrete projects to begin implementing its medium-term growth targets in biofuels, renewable natural gas, CCS (2) Shareholder resistance/acceptance of the pace of its transition strategy
CNOOC(1) Ability to translate its offshore expertise to its new energy business, which will focus primarily on offshore wind (2) Success listing on the Shanghai Stock Exchange after recently delisting in New York and Toronto
CNPCGreater clarity around PetroChina's green energy investment priorities, given its broad interest in geothermal, wind, solar, gas-to-power, CCS and hydrogen
ConocoPhillips(1) Integration of Shell's Permian (US) assets + progress divesting other assets in the basin (2) Details on how it will spend its $200 million earmarked for low-carbon investments
Ecopetrol(1) Colombia's presidential election, which could shift the company's priorities, (2) Progress advancing pilot fracking projects, (3) Details around its net-zero push and green hydrogen pilot project, (3) Results from the key Gorgon-2 offshore gas appraisal well
EniResults of its Plenitude renewables + retail IPO, which could serve as a model for other spinoffs and increase calls for similar restructurings, if successful
EOG(1) Updates on its Dorado gas play (US) and strategy behind its recent international exploration push, (2) Progress on its CCS pilot, expected to start up in late 2022
Equinor(1) Several key FIDs: Rosebank in UK (license expires end-May), Wisting and NOAKA off Norway, (2) Successful start-up of John Sverdrup Phase 2 (Norway) in Q4
Exxon Mobil(1) Potential further activist moves via shareholder resolutions at its AGM in May, (2) Initial CCS and biofuels FIDs and further progress advancing its low-carbon project queue
GazpromWhether Nord Stream 2 can finally flow gas and the impact this will have on the company's export tactics
Hess(1) Successful start-up of Liza Phase II (Guyana) and ongoing exploration/appraisal work on Stabroek, (2) US Gulf of Mexico drilling program, including targeting a greenfield "hub-class" exploration prospect
Inpex(1) Detailed plans to implement its new 30% carbon intensity reduction by 2030 + net- zero by 2050 targets, (2) Efforts to become a leading supplier of carbon-neutral gas/LNG, (3) Ability to secure additional upstream acreage to backstop Ichthys LNG
KosmosResults from its Winterfell appraisal well in the US Gulf of Mexico, which could open up additional infrastructure-led drilling opportunities in the region
Lukoil(1) Details around its 10-year strategy and decarbonization efforts, (2) outcome of term negotiations for West Qurna 2 (Iraq), (3) restructuring of its European downstream business
OMVMajor corporate strategy update in early 2022, which could include plans for spinning its upstream + renewables business into a separate company and delisting it
Oxy(1) Successful breaking ground at its initial direct-air capture facility in the Permian (US), (2) Details on promised medium-term Scope 3 emissions reduction targets, (3) Continued ability to pay down debt
PDVSA(1) Ability to sustain recent production increases, (2) Any easing of US sanctions on Venezuela's oil sector, or more limited enforcement, (3) Whether the US continues to shield Citgo from creditors/bondholders looking to liquidate the US refining subsidiary
Pemex(1) Ability to minimize production declines and begin increasing refining throughput en route to 2023 self-sufficiency goals, (2) Plans to develop the shallow-water Zama field now that it has operatorship
Pertamina(1) Successful listing of its geothermal unit as part of five listings planned by 2024, (2) Ability to maintain output at Rokan (Indonesia) after taking ownership from Chevron
Petrobras(1) Brazil's presidential election, which could shift the company's priorities, (2) Progress on remaining divestments, especially its refining assets
PetronasSuccessful FID of its first CCS project (Kasawari) and its third floating LNG project (offshore Sabah, Malaysia)
PTTUpsized emissions reduction ambitions for PTTEP, including adopting a net-zero operational emissions target
QatarEnergy(1) Long-awaited partnership selection for its giant LNG expansion, (2) Plans to further reduce operational emissions to support 'low- cost, low-carbon' LNG credentials
Repsol Decision to IPO its low-carbon business or pursue an alternate restructuring
Rosneft(1) Progress on Vostok Oil and its ability to bring in additional foreign partners, (2) Additional divestments
Royal Dutch Shell(1) Ability to articulate the value proposition of its integrated energy transition strategy, (2) Potential concessions made to satiate activist investor demands, even if a full corporate split is unlikely
Saudi Aramco(1) Progress on its Jafurah unconventional gas scheme and oil capacity expansion, (2) Specifics on how it plans to achieve net- zero operational emissions by 2050
SinopecAccelerated investment in hydrogen, with its near-term focus on building out refueling stations
SonangolProgress on the sale of eight blocks Sonangol P&P, the group's upstream arm, put on the market last year to help it raise cash and limit its capex obligations.
TotalEnergies(1) Lake Albert in Uganda: can it secure financing and insurance backing + convince investors the project aligns with its transition strategy?, (2) Whether its oil + solar development deal in Iraq can be replicated elsewhere
Wintershall Dea(1) Whether current owners BASF + LetterOne will opt to sell a stake to a private equity buyer, or restart stalled IPO plans, (2) Outcome of German lawsuit looking to halt the company's exploration activities from 2026
Woodside(1) Successful completion of its acquisition of BHP's petroleum portfolio, (2) Early execution of its recently sanctioned Scarborough-to-Pluto scheme

Topics:
Corporate Strategy , ESG, Equity and Debt Markets, NOCs, Majors, Independent E&Ps, Regional Integrateds
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