The Ongoing Transformation Of ‘Big Oil’

By Irina Slav - Jul 12, 2021, 

When last year BP (-0.50%) vowed to reduce its oil and gas output by 40 percent by 2030 as it shifts to renewable energy, it came as a shock to many, pushing the company's share prices down sharply. Yet since then, pressure on Big Oil to stop doing what it does has only been growing. And Big Oil is responding.

The Houston Chronicle's Paul Takahashi in a recent article detailed supermajors positioning to effectively move away from their core business and into low-carbon energy. Takahashi noted several examples of Big Oil partnering with majors from other industries to effectively reduce these other industries' consumption of Big Oil's principal products: fuels.

One such example was Total—recently renamed TotalEnergies (0.25%)—partnering with BP (-0.50%) and Uber (-1.35%) to speed up the adoption of electric vehicles. TotalEnergies (0.25%) already has a growing footprint in EV charging infrastructure, as does BP. And they have a solid reason for doing so: European governments are dead set on achieving their net-zero goals.

Just last week, the European Commission said that it planned to propose that internal combustion engine cars be phased out beginning 2035 EU-wide. Before that, the EC plan envisages a reduction in vehicle emissions by 65 percent by 2030.

"There's no way around it, reaching net-zero by 2050 means phasing out combustion vehicle sales by 2035 at the latest," Bloomberg quoted Colin McKerracher, BloombergNEF's head of advance transport research, as saying.

This would mean Big Oil would lose a solid chunk of its biggest market—that for fuels, meaning, in turn, they would need to find a replacement. EVs are one logical replacement for fuel sales, so no wonder Europe's Big Oil majors have been quite active in building a presence in charging infrastructure.

Pressure is not coming only from governments. Asset managers are getting increasingly restless about emissions and ESG investments.

Earlier this month, asset management firms worth a combined $6 trillion in client assets called for a global carbon price as a way of accelerating the energy transition. They did not stop there, either. The group, which calls itself The Net Zero Asset Owner Alliance, also said the cost of carbon emissions needed to treble by 2030 if we are to reach global climate change targets.

What this effectively means for Big Oil is that their client pool will shrink considerably over the next couple of decades, assuming the transition drive continues. If carbon costs rise, more and more companies will opt for low-carbon energy alternatives to fossil fuels, especially with governments subsidizing these. With the timeframes cited by various energy transition proponents, Big Oil doesn't really have much time. So it is moving away from being Big Oil and into Big Energy territory.

Some are venturing into alternative fuels. The Chron's Takahashi noted Chevron's (0.20%) partnership with Toyota (0.62%) in developing transport and storage systems for hydrogen-powered cars. The partnership, according to the two companies' press release, aimed to "catalyze and lead the development of commercially viable, large-scale businesses in hydrogen, with the goal to advance a functional, thriving global hydrogen economy."

These partnerships and shifts come not a moment too soon. Reuters reported last week that even central banks are joining the ESG investment chorus. Citing a survey by Invesco, the report said a third of central banks and sovereign wealth funds have started paying more attention to environmental, social, and governance investment priorities during the past year. More than half had specific ESG policies, up from 44 percent a year earlier.

Related: Natural Gas Prices Still Have Room To Run

Then, of course, there was the unprecedented ruling of a Dutch court against Shell (-0.95%), which obliged the company to reduce its carbon emissions by 45 percent within ten years. This will effectively force the supermajor to move from Big Oil to Big Energy. More court cases like that are not out of the question, either.

Some see this shift as an opportunity for the industry, however. An Oilman magazine article penned by Benjamin Beberness listed the opportunities that the energy transition is opening up to oil and gas companies, and they are taking advantage of this. These include entering solar and wind power through state acquisitions in already existing businesses and hydrogen production and distribution. Power utilities are also fair game for oil and gas companies that want to survive in a shifting energy world.

Be that as it may, Big Oil will hardly give up on the business that gave it its name entirely, even in 2050.

"As people understand we're going to be in the hydrocarbons business for decades to come, that concern has gone away a little bit," BP's Bernard Looney said in response to investor criticism the company might miss on the oil price rally because of its production cut plans.

"We want to run the best hydrocarbons business possible. We don't want to run the biggest hydrocarbons business possible," Looney clarified, as quoted by Reuters last month. Chances are that if the green transition drive continues at current rates, this business will by 2050 be only a small portion of BP's overall business. The same might be true for its peers.

By Irina Slav for Oilprice.com