Transition Time for Western Majors

This is the perfect moment for Western oil companies to make their big move beyond oil. They have the money, after recording record-high 2022 profits, and they may not be earning this much again soon — if ever. The price trajectory for oil is totally unpredictable amid war, energy transition and global economic repositioning. Natural gas prices provide a stunning reminder of that. Behind the smoke and mirrors, there’s plenty of oil available, and the transition is now clearly unstoppable. Occasional stumbles for renewables are due mainly to challenges to Chinese ascendancy in new energy manufacturing that will eventually be beneficial, not a lack of demand. After the market mayhem of the last year, gas no longer provides a fallback position outside North America. Maybe a couple of Western majors can imagine themselves in a last-man-standing role, but for most, it’s time to jump forward — not to lose their nerve and jump back into comfortable old upstream roles. 

No matter how mixed the signals on future production coming from the US government and equity markets, big new upstream developments won’t reliably pay off. Dollar-denominated oil prices have been and, for the moment, remain high. But this reflects disruptions from the gradual cutoff in European purchases of Russian oil — completed only this month, after all — and price supportive Opec-plus policies. The near 50% discount on Russian oil may be a better indicator of the underlying supply-demand balance. There is no shortage of physical oil. Recent high prices don’t mean the world will need more oil production by Western majors 10 years into the future.

The US Energy Information Administration (EIA) says as much in its latest short-term forecast: It shows rising global oil inventories and falling prices through 2024, even assuming US output gains slow over that time frame. BP implies much the same in its 2023 Energy Outlook, containing three scenarios for global energy supply and demand through 2050. It shows no growth in oil demand under any of these scenarios, as the role of oil in transport declines. Even in its “New Momentum,” a renamed equivalent to the old Business-as-Usual scenario, BP has cut the 2035 global demand outlook for oil by 5% and for gas by 6% just since its 2022 version of this report.

So why is BP backtracking on what had been — and is still, in some ways — the most aggressive corporate plan out there for chopping oil production in favor of new energy investments? I don’t know. But one place to look for an explanation might be the company’s loss of 1.1 million barrels per day in low-cost equity production it had been getting from the 19.75% stake in Russia’s Rosneft it abandoned after the invasion of Ukraine. BP always excluded Rosneft production from its strictly in-house target for output cuts of 40% by 2030 — now a more modest 25%. As a result, Rosneft’s prewar growth plans would have allowed BP to make that 40% in-house cut and still be down only 3% in its overall equity production. Without Rosneft, production cuts BP makes to lower its carbon count hit its oil earnings much harder. War has brought many disruptions.

EV, Renewables Acceleration

The other side of that moving transition picture — acceleration in the shift off oil and onto electric vehicles (EVs), and off gas and onto renewable power — argues just as strongly for a shift in strategy for the majors. For oil, the critical element at this point in the transition is transport. The data site EV-Volumes just came out with a report showing 55% growth in EV sales worldwide last year to 10.5 million, including both battery and plug-in hybrid. This in the face of a slight contraction in auto sales overall. EV-Volumes projects a 36% jump this year, to 14.3 million.

European growth slowed last year to “just” 15%, while the US and Canada were up 48% and China an astounding 82% — due partly to the pending withdrawal of subsidies early this year, which looks to be pulling Chinese EV growth back down for a short period, at least. US and Canadian growth is projected to top 70% this year, pushing EVs to over 10% of total car sales worldwide. At that base level, rapid percentage gains start to make a huge difference.

Renewables, and particularly solar, are on a roll worldwide, as well, aided by the high gas and coal prices of 2022. The International Energy Agency (IEA) forecasts that wind and solar will provide 35% of global power generation by 2025, up over the three-year period from 29% now. Emissions from fossil fuel generation are “close to a tipping point,” the IEA adds, after rising 1.3% in 2022, as both coal and gas use combined flatten out to 2025 and then decline. The balance between coal and gas is seen as heavily price dependent.

The US’ own EIA provides more detail on expected capacity additions, where the solar surge is more stark. After falling back from 2021 levels because of recurring uncertainty over the feasibility of panel and component imports from Southeast Asia and China, solar capacity is projected to grow by 29 gigawatts and constitute 53% of all generating capacity additions. Wind and solar together should provide 18% of US generated power by 2024, up from 14% last year. Texas passes California as the state with the most additions, an example of a wider catch-up trend in both renewable generation and EVs for Midwest and Southern US, often Republican-voting states.

Opportunities Abound

Enough numbers. The point is clear. Fossil fuels are a soon-to-be shrinking business, while electricity — including for transportation, the mainstay of oil demand for the last century — is a growth business. Enormous investment opportunities exist, and the field is wide open to make them, with few signs as yet of corporate dominance in most fields. Many of these investments in renewable power and other new energy forms come with government support attached, especially in the US, linked to the Infrastructure and Jobs Act of 2021 and the more recent Inflation Reduction Act (IRA). Profit margins are low relative to those for oil and gas during peaks in the commodity cycle, and it’s hard to tell whether that will change as more domestic US and EU manufacturing comes into play. But renewables are unlikely to experience as intense and lengthy down cycles as fossil fuels either.

Those laws provide government support for “reshoring” of manufacturing and mining to the US after 30-40 years of deindustrialization. It’s a once-in-a-lifetime shift, and it’s coming just as Big Oil needs a wide new path forward. Oil demand isn’t disappearing overnight, and very few claim it should. Equally, the process of building up solar, battery and other transition-related manufacturing will take time, as will the installation of solar and wind facilities and, potentially, the build-out of rapid EV charging capacity and clean hydrogen infrastructure. The first-mover advantages could be considerable, and at the moment, the oil industry has the money to spend to do both the new and old.

It's easy to misinterpret what has often been a garbled political message in the US. But the bigger US oil operators, especially, with their greater ability and incentive to pivot, should not be lured by siren songs down a “more oil and gas” path. It’s a corporate dead end. Many of the oil majors came to understand that clearly two or more years ago. They should not forget it now when the evidence is all the clearer — even if the oil profits are momentarily much larger.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass. The views expressed in this article are those of the author.