By Leonard Hyman & William Tilles - Dec 10, 2023
While you have been eagerly following the sterile debate in Doha about whether to phase out or phase down fossil fuels, you probably missed an announcement on December 6, one that you probably would not have noticed anyway because it is not in your line of business. But it could presage similar events in the oil business.
Here is what happened. British American Tobacco (BAT) announced that it would write off £25 billion of the £62 billion value of the US brands it acquired in 2017 (Reynolds American). Why? Because of a combination of slowing growth, consumer reluctance to spend, and losses in the vape market that was supposed to replace revenues from old lines of cigarettes. When BAT made the Reynolds acquisition management presumably knew cigarette sales were under pressure, that government health experts didn’t show sympathy for the vapes, and that many new firms were pushing into the vape market, thereby creating more competition that cigarette companies had become accustomed to over the years. Note that BAT did not write down the assets because those properties lost money, but rather because they were forced to recognize a severe loss of value. The reason we keep an eye on the tobacco industry is that tobacco and oil (or fossil fuels in general) have shared an almost identical regulatory and legal strategy for several decades—whether the issue was denying their products links to cancer or climate change. Related: COP28: Arab Coordination Group Promises $10B To Assist Developing Nations
The Reynolds American acquisition was similar in size to the recent ExxonMobil and Chevron acquisition announcements of this fall. As an aside, we should point out something about corporate mergers and ways to distinguish them. Simply consider the underlying business. Is it growing or in decline? Interestingly, it can be sensible for both high growth and declining businesses to find merger partners although the capital allocation challenges are reversed. The two oil giants, knowing that sales are slowing and facing uncertain litigation risk from a public that holds them responsible for global warming, decided to combine and manage their decline across a much larger revenue and asset base. The strategy here is to ultimately reduce costs faster than revenues decline. This may prove somewhat easier in a cartelized industry like oil which enjoys a modicum of price fixing via OPEC.
BAT, on the other hand, purchased Reynolds American for growth not simply scale. They wanted entry into the high-growth US vape market, which it saw as its future. With the benefit of hindsight we see they paid way too much for entry into a new market and a business with considerable regulatory overhang. ExxonMobil and Chevron aren’t taking on any new business risk by partnering, they each do the same thing just in different places. It’s just about eking out economies of even greater scale as revenues flatten and decline. The companies make clear that, despite all the warnings about climate and threats of new technologies and of the entry of firms vigorously trying to reduce their markets (Tesla and the entire Chinese automobile industry as examples) they feel good about their prospects and will robustly continue old policies. Frankly, we would not be surprised to hear they actually have a growth strategy that involves Africa, S. Asia and possibly other frontier markets.
What about climate change? Well, a proposal from Sheik Al Jaber, President of the COP28 climate conference in Doha, did not include calls for closure or phase outs of oil and gas infrastructure as, for example, former Vice President Gore has been advocating. Instead, proposed reductions in CO2 emissions are all about the offsets. Offsets are like behavioral swaps. In other words we get to keep doing the formerly environmentally harmful things (like driving, cooking, or heating our home) but by switching to new, cleaner technologies our emissions will be reduced. These emission reductions come mainly from two areas, increasing electrification (like electric vehicles and heat pumps) and a tripling in planned deployment of solar photovoltaics. The other two smaller “buckets” for CO2 removal were for reduction of methane emissions and “other” which included new nuclear power generation. New nuclear is not getting much love here despite a commitment from twenty or so nations to triple nuclear capacity.
So back to our original question: will oil mergers in a declining industry like Exxon/Chevron provide financially attractive results to investors or will they disappoint like BAT/Reynolds? There are several parallels: slowing growth, possible decline in demand, uncertain timing regarding litigation and its outcomes, and a public policy designed to reduce or eliminate sale of the product. But there is one key policy difference here, the concept of “offsets”. There were no offsets for the tobacco industry or for smokers for that matter. Just punitive financial penalties and harsh warnings on cigarette packages regarding smoking and lung cancer. Offsets are a pain free way to achieve policy outcomes. No plants or facilities have to be prematurely shuttered triggering financial write offs. No unemployment or even political unrest. As long as the favored policy vehicle includes economically pain free CO2 “offsets” via new technologies, as opposed to actual plant closures, then we feel pretty good about the prospects for oil and gas mergers.
Bottom line: obviously we don’t know for sure whether recent big mergers at solid valuations will end with large write-offs for oil and gas companies as they did for “big” tobacco. And we just can’t help but notice the similarities. But there is one difference between the two industries that seems to favor the energy industry. The Republican party in the US has adopted a policy strongly advocating for increased fossil fuel usage as well as claiming that climate change is a hoax. The tobacco industry for all their chutzpah never claimed lung cancer was a hoax.
By Leonard Hyman and William Tilles for Oilprice.com
While you have been eagerly following the sterile debate in Doha about whether to phase out or phase down fossil fuels, you probably missed an announcement on December 6, one that you probably would not have noticed anyway because it is not in your line of business. But it could presage similar events in the oil business.
Here is what happened. British American Tobacco (BAT) announced that it would write off £25 billion of the £62 billion value of the US brands it acquired in 2017 (Reynolds American). Why? Because of a combination of slowing growth, consumer reluctance to spend, and losses in the vape market that was supposed to replace revenues from old lines of cigarettes. When BAT made the Reynolds acquisition management presumably knew cigarette sales were under pressure, that government health experts didn’t show sympathy for the vapes, and that many new firms were pushing into the vape market, thereby creating more competition that cigarette companies had become accustomed to over the years. Note that BAT did not write down the assets because those properties lost money, but rather because they were forced to recognize a severe loss of value. The reason we keep an eye on the tobacco industry is that tobacco and oil (or fossil fuels in general) have shared an almost identical regulatory and legal strategy for several decades—whether the issue was denying their products links to cancer or climate change. Related: COP28: Arab Coordination Group Promises $10B To Assist Developing Nations
The Reynolds American acquisition was similar in size to the recent ExxonMobil and Chevron acquisition announcements of this fall. As an aside, we should point out something about corporate mergers and ways to distinguish them. Simply consider the underlying business. Is it growing or in decline? Interestingly, it can be sensible for both high growth and declining businesses to find merger partners although the capital allocation challenges are reversed. The two oil giants, knowing that sales are slowing and facing uncertain litigation risk from a public that holds them responsible for global warming, decided to combine and manage their decline across a much larger revenue and asset base. The strategy here is to ultimately reduce costs faster than revenues decline. This may prove somewhat easier in a cartelized industry like oil which enjoys a modicum of price fixing via OPEC.
BAT, on the other hand, purchased Reynolds American for growth not simply scale. They wanted entry into the high-growth US vape market, which it saw as its future. With the benefit of hindsight we see they paid way too much for entry into a new market and a business with considerable regulatory overhang. ExxonMobil and Chevron aren’t taking on any new business risk by partnering, they each do the same thing just in different places. It’s just about eking out economies of even greater scale as revenues flatten and decline. The companies make clear that, despite all the warnings about climate and threats of new technologies and of the entry of firms vigorously trying to reduce their markets (Tesla and the entire Chinese automobile industry as examples) they feel good about their prospects and will robustly continue old policies. Frankly, we would not be surprised to hear they actually have a growth strategy that involves Africa, S. Asia and possibly other frontier markets.
What about climate change? Well, a proposal from Sheik Al Jaber, President of the COP28 climate conference in Doha, did not include calls for closure or phase outs of oil and gas infrastructure as, for example, former Vice President Gore has been advocating. Instead, proposed reductions in CO2 emissions are all about the offsets. Offsets are like behavioral swaps. In other words we get to keep doing the formerly environmentally harmful things (like driving, cooking, or heating our home) but by switching to new, cleaner technologies our emissions will be reduced. These emission reductions come mainly from two areas, increasing electrification (like electric vehicles and heat pumps) and a tripling in planned deployment of solar photovoltaics. The other two smaller “buckets” for CO2 removal were for reduction of methane emissions and “other” which included new nuclear power generation. New nuclear is not getting much love here despite a commitment from twenty or so nations to triple nuclear capacity.
So back to our original question: will oil mergers in a declining industry like Exxon/Chevron provide financially attractive results to investors or will they disappoint like BAT/Reynolds? There are several parallels: slowing growth, possible decline in demand, uncertain timing regarding litigation and its outcomes, and a public policy designed to reduce or eliminate sale of the product. But there is one key policy difference here, the concept of “offsets”. There were no offsets for the tobacco industry or for smokers for that matter. Just punitive financial penalties and harsh warnings on cigarette packages regarding smoking and lung cancer. Offsets are a pain free way to achieve policy outcomes. No plants or facilities have to be prematurely shuttered triggering financial write offs. No unemployment or even political unrest. As long as the favored policy vehicle includes economically pain free CO2 “offsets” via new technologies, as opposed to actual plant closures, then we feel pretty good about the prospects for oil and gas mergers.
Bottom line: obviously we don’t know for sure whether recent big mergers at solid valuations will end with large write-offs for oil and gas companies as they did for “big” tobacco. And we just can’t help but notice the similarities. But there is one difference between the two industries that seems to favor the energy industry. The Republican party in the US has adopted a policy strongly advocating for increased fossil fuel usage as well as claiming that climate change is a hoax. The tobacco industry for all their chutzpah never claimed lung cancer was a hoax.
By Leonard Hyman and William Tilles for Oilprice.com
Have Reports of Oil’s Death Been Greatly Exaggerated?
By Haley Zaremba - Dec 10, 2023
Despite the predictions, oil profits are soaring, and supermajors like Chevron and Exxon Mobil are increasing investments in fossil fuel extraction.
Contradictions have arisen at COP28, where oil-funded climate talks discuss phasing down fossil fuels, while the industry walks back emission reduction pledges, fueling the debate over the future of oil, gas, and coal.
There is a great mismatch between dominant climate narratives and the reality of the global energy sector. While energy industry insiders and environmentalists alike claim that the energy industry is heavily investing in cleaner alternatives and that the death of fossil fuels is just around the corner, Big Oil’s ledgers tell a different story. “The death of the oil industry has been greatly overstated,” said Kevin Book, managing director at the consulting firm ClearView Energy. “The realities of demand and the limitations of alternatives haven't changed.”
In October, The International Energy Agency (IEA) predicted that coal, oil, and gas are all due to begin their terminal decline earlier than previously predicted in the World Energy Outlook 2023, its flagship annual report. The report found that with just the climate and energy policies that are already in place today, demand for coal, oil, and gas are each expected to peak by 2030. This projection comes as a shock – the report marks the first time that demand for each fuel has been predicted within this decade.
But reality might be a bit messier than those figures suggest. Oil profits are soaring, and many supermajors are planning to ramp up investments in future extraction of fossil fuels. The United States had a record year, and Chevron and Exxon Mobil are busily acquiring rivals with untapped reserves, indicating that they think they are none too concerned about the alleged looming threat of peak oil.
It goes without saying that the world can’t ditch fossil fuels overnight, and access to affordable and reliable baseload energies will be necessary to ease the energy transition and avoid painful energy shocks. “It is highly unlikely that society would accept the degradation in global standard of living required to permanently achieve a scenario like the IEA [scenario]”, Exxon said in its reply to the IEA’s 2050 net-zero emissions (NZE) scenario, which lays out a pathway for limiting the global temperature rise to 1.5 degrees Celsius. But many critics feel that Big Oil is using this line of argument as an excuse and even a scare tactic to continue investing in extraction rather than in finding better energy alternatives.
544.5K
110
U.S. Gasoline Prices Fall to 11-Month Low
Indeed, instead of continuing to intensify their efforts toward meeting global climate goals, many supermajors have been walking back their previous pledges or merely failing to achieve them. Earlier this year, BP announced that it would be slashing its promise to reduce carbon emissions from its energy production by 35 to 50 percent by 2030 to just 20 to 30 percent. But while their actions speak volumes, spokespeople for the oil and gas industry continue to avow their commitment to reducing emissions and collaborating with the decarbonization movement.
This contradiction is highly visible at this year’s COP28 United Nations Climate Change Conference currently taking place in Dubai’s Expo City in the United Arab Emirates in a conference venue paid for with oil wealth in the middle of one of the world’s most prominent petro-states. The UAE negotiating team has said with “cautious optimism” that it believes COP28 could result in a commitment to phasing down fossil fuels over the coming decades, an accomplishment that has proved to be impossible in previous COPs. However, no one is even suggesting that a hard date be set or that “abated” fossil fuels be challenged.
“Abated” fossil fuels are a contentious topic as technologies like carbon capture are a central platform of the decarbonization plans of oil and gas companies, but are largely dismissed by environmentalists. Sen. Jeff Merkley (D-Ore.) has dismissed such tactics as “99 percent greenwashing,” saying: “What they're trying to do is protect their established ownership of fossil assets."
So is peak oil right around the corner? Or not? It seems that larger market forces are pushing oil, gas, and coal in the direction of the dodo, but it’s just as clear that there is still money to be made in their extraction. And until that changes, there will always be someone willing to drill.
By Haley Zaremba for Oilprice.com
The International Energy Agency predicts a terminal decline for coal, oil, and gas by 2030, challenging dominant climate narratives.
Despite the predictions, oil profits are soaring, and supermajors like Chevron and Exxon Mobil are increasing investments in fossil fuel extraction.
Contradictions have arisen at COP28, where oil-funded climate talks discuss phasing down fossil fuels, while the industry walks back emission reduction pledges, fueling the debate over the future of oil, gas, and coal.
There is a great mismatch between dominant climate narratives and the reality of the global energy sector. While energy industry insiders and environmentalists alike claim that the energy industry is heavily investing in cleaner alternatives and that the death of fossil fuels is just around the corner, Big Oil’s ledgers tell a different story. “The death of the oil industry has been greatly overstated,” said Kevin Book, managing director at the consulting firm ClearView Energy. “The realities of demand and the limitations of alternatives haven't changed.”
In October, The International Energy Agency (IEA) predicted that coal, oil, and gas are all due to begin their terminal decline earlier than previously predicted in the World Energy Outlook 2023, its flagship annual report. The report found that with just the climate and energy policies that are already in place today, demand for coal, oil, and gas are each expected to peak by 2030. This projection comes as a shock – the report marks the first time that demand for each fuel has been predicted within this decade.
But reality might be a bit messier than those figures suggest. Oil profits are soaring, and many supermajors are planning to ramp up investments in future extraction of fossil fuels. The United States had a record year, and Chevron and Exxon Mobil are busily acquiring rivals with untapped reserves, indicating that they think they are none too concerned about the alleged looming threat of peak oil.
It goes without saying that the world can’t ditch fossil fuels overnight, and access to affordable and reliable baseload energies will be necessary to ease the energy transition and avoid painful energy shocks. “It is highly unlikely that society would accept the degradation in global standard of living required to permanently achieve a scenario like the IEA [scenario]”, Exxon said in its reply to the IEA’s 2050 net-zero emissions (NZE) scenario, which lays out a pathway for limiting the global temperature rise to 1.5 degrees Celsius. But many critics feel that Big Oil is using this line of argument as an excuse and even a scare tactic to continue investing in extraction rather than in finding better energy alternatives.
544.5K
110
U.S. Gasoline Prices Fall to 11-Month Low
Indeed, instead of continuing to intensify their efforts toward meeting global climate goals, many supermajors have been walking back their previous pledges or merely failing to achieve them. Earlier this year, BP announced that it would be slashing its promise to reduce carbon emissions from its energy production by 35 to 50 percent by 2030 to just 20 to 30 percent. But while their actions speak volumes, spokespeople for the oil and gas industry continue to avow their commitment to reducing emissions and collaborating with the decarbonization movement.
This contradiction is highly visible at this year’s COP28 United Nations Climate Change Conference currently taking place in Dubai’s Expo City in the United Arab Emirates in a conference venue paid for with oil wealth in the middle of one of the world’s most prominent petro-states. The UAE negotiating team has said with “cautious optimism” that it believes COP28 could result in a commitment to phasing down fossil fuels over the coming decades, an accomplishment that has proved to be impossible in previous COPs. However, no one is even suggesting that a hard date be set or that “abated” fossil fuels be challenged.
“Abated” fossil fuels are a contentious topic as technologies like carbon capture are a central platform of the decarbonization plans of oil and gas companies, but are largely dismissed by environmentalists. Sen. Jeff Merkley (D-Ore.) has dismissed such tactics as “99 percent greenwashing,” saying: “What they're trying to do is protect their established ownership of fossil assets."
So is peak oil right around the corner? Or not? It seems that larger market forces are pushing oil, gas, and coal in the direction of the dodo, but it’s just as clear that there is still money to be made in their extraction. And until that changes, there will always be someone willing to drill.
By Haley Zaremba for Oilprice.com
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