The deal was meant to taper, allowing countries to produce more as demand recovers. But a drawn-out crisis has left them stuck with more than 7 million b/d of crude still offline. They are expected to meet again on January 4 to discuss adding back 500,000 b/d.
Tensions have risen within the group as they weigh renewed lockdowns against a desire to rebuild revenues.
The question of long-term demand is a cloud that hangs over the entire expanded OPEC+ alliance, which has included Russia and other producers since 2016.
Fears of a renewed price war within the group are weighing on sentiment, analysts at RBC Capital Markets argue.
“Market rebalancing remains heavily dependent upon the output management of OPEC+,” RBC said.
Geopolitics
The biggest geopolitical shift in 2021 will probably come early for the oil market, as Donald Trump departs the White House. Trump became heavily involved with OPEC decisions, pressuring Saudi Arabia to raise or lower production in return for his support.
U.S. President-elect Joe Biden.Photo by Mark Makela/Getty Images
President-elect Joe Biden is expected to be less hands-on with the cartel, but he may end up being no less influential. The potential revival of the Iran nuclear deal could result in Tehran adding close to 2 million b/d of crude back to the market if U.S. sanctions ease.
Tensions in some of the weaker oil producers, in Africa, Latin America and other regions, will also be closely watched. All have been hard hit by the drop in oil prices, threatening political stability.
Refining
One of the worst sectors of the oil industry in 2020 was refining. Crude was helped by OPEC+ group’s supply management, but refiners have fewer levers to pull when demand crashes. That has meant low margins for much of the year.
Permanent plant shutdowns are widely expected to accelerate in 2021, especially in Europe, with consumption patterns shifting east.
If enough plants close, however, that should ultimately boost margins for those left standing.
EXXONMOBIL, ONCE the world’s most valuable publicly traded oil company, is not easily swayed. As green investors urged it to develop cleaner energy, it planned instead to pump 25% more oil and gas by 2025. As rivals wrote down billions of dollars in assets, it said its own reserves were unaffected. But in the maelstrom of 2020 even mighty Exxon had to budge. On November 30th it announced a write-down of between $17bn and $20bn, and cuts to capital spending of up to a third in 2022-25, implicitly scrapping its production goal. On December 14th it pledged to cut carbon emissions from operations, if only per unit of energy produced, by as much as 20% within five years.
These declarations are a sign that pressure on ExxonMobil is mounting. It lost half its market value between January and November. Investors have gripes beyond covid-19. In May BlackRock, the world’s biggest asset manager, supported a motion to relieve Darren Woods, ExxonMobil’s chief executive, of his duties as chairman. In December D.E. Shaw, a hedge fund, sent the firm a letter demanding capital discipline to protect its dividend. New York’s state pension fund, America’s third-largest, is considering divesting from the riskiest fossil-fuel firms. California State Teachers Retirement System (CalSTRS), the second-largest public pension fund, backs a campaign to replace nearly half of ExxonMobil’s board. “It’s critical to their survival that they change,” says Christopher Ailman, CalSTRS’ chief investment officer.
Still, Mr Woods hangs on to both jobs. And, for all its latest pronouncements, his firm is betting on its old business, even as European rivals seek to reinvent themselves for a climate-friendlier era. This points to a widening transatlantic rift, as the world’s oil giants try to win back investors after a year when demand for crude collapsed and its future became murkier. Each approach is riddled with risk.
Supermajors’ returns have mostly been middling for years. In the decade to 2014 they overspent, furiously chasing production growth. As shale transformed the oil market from one of assumed scarcity to one of obvious abundance, many struggled to adapt. The return on capital employed for the top five Western firms—ExxonMobil, Royal Dutch Shell, Chevron, BP and Total—sank by an average of three-quarters between 2008 and 2019. In 2019 energy was the worst-performing sector in the S&P 500 index of big American firms, as it had been in 2014, 2015 and 2018.
The past 12 months brought new indignities. All told, the big five have lost $350bn in stockmarket value. They talk of slashing jobs, by up to 15%, and capital spending. Shell cut its dividend for the first time since the second world war. BP said it would sell its posh headquarters in London’s Mayfair. In August ExxonMobil was knocked out of the Dow Jones Industrial Average, after nearly a century in the index. Energy firms’ share of the S&P 500 fell below 3%, from a high-water mark of 13% in 2011.
In 2021 a covid-19 vaccine will eventually support demand for petrol and jet fuel—but no one knows how quickly. Leaders of the world’s two biggest oil markets, China and America, have made it clear they want to curb emissions, but not when or by how much. Petrostates such as Russia and the United Arab Emirates are keen to defend their market share and wary of sustained production cuts that may boost American shale by inflating prices. The Organisation of the Petroleum Exporting Countries agreed in December to raise output modestly in January, but declined to promise further price support.
Further out, expectations vary hugely. Legal & General Investment Management, an asset manager, reckons that keeping global warming within 2°C of preindustrial temperatures may halve oil demand in ten years. That is unlikely, but highlights risks to oil firms. While BP thinks demand may already have peaked, ExxonMobil has expected it to climb until at least 2040, supported by rising incomes and population.
Given all the uncertainty and underperformance, the question is not why investors would flee big oil. It is why they wouldn’t. The answer, for now, is dividends. Morgan Stanley, a bank, reckons the ability to cover payouts explains some 80% of the variation in firms’ valuations. That is a reason why those in America, which have resisted dividend cuts, are valued more highly relative to cashflow than European ones, which succumbed (see chart).
Well-laid plans
Shareholder returns in the next 5-10 years will be determined by two factors, reckons Michele Della Vigna of Goldman Sachs, another bank: cost-cutting and the management of the old business. Take Chevron, ExxonMobil’s American rival. It has some low-carbon investments but no pretence of becoming a green giant. “We have been pretty clear that we are not going to diversify away or divest from our core business,” Pierre Breber, its finance chief, affirmed in October. Its low-cost oilfields pump out cash. A $5bn takeover of Noble Energy, a shale firm, will help it consolidate holdings in the Permian basin, which sprawls from west Texas to New Mexico. Morgan Stanley expects Chevron to generate $4.7bn of free cashflow in 2020.
This path is not risk-free. If oil demand declines more rapidly than the companies anticipate, they might struggle with a rising cost of capital and stiff competition from the likes of Saudi Aramco, Saudi Arabia’s oil colossus, or its Emirati counterparts. ExxonMobil shows the danger of spending too much on fossil fuels and losing sight of returns. Its free cashflow in 2020 is already negative. The alternative, embraced by European firms, is to increase the efficiency of the legacy business while venturing into new areas.
The challenge for that model, says Muqsit Ashraf of Accenture, a consultancy, is proving they can generate strong returns from their green businesses—and outdo incumbents. Europe’s utilities are already renewables giants. Investors have doubts. When BP vowed in September to ramp up investment in clean energy tenfold and reduce production of oil and gas by at least 40% by 2030, the market saw not a bold leap but a belly-flop. BP’s market capitalisation kept sliding, to a 26-year low in October, until successful vaccine trials pepped up the oil price—and with it energy stocks.
Even in Europe incentives remain muddled. According to CarbonTracker, a watchdog, as of 2019 Shell and BP continued to reward executives for increasing oil and gas output. Shell and Total have set emissions targets that let them increase total production of oil provided their output from renewables and cleaner (though still polluting) natural gas rises faster. Shell sees gas as crucial to efforts to reduce its products’ carbon intensity, and a complement to intermittent power from the wind and sun. In the third quarter its integrated gas business accounted for 22% of cashflow from operations. Total also views the fuel as strategic, with plans to nearly double its sales of liquefied natural gas by 2030. Goldman Sachs calculates that in 2019 low-carbon power accounted for just 3% of BP’s capital spending, 4% of Shell’s and 8% of Total’s.
These figures are rising—even in America, though at a slower clip. Mr Della Vigna predicts that renewable power might account for 43% of capital spending by 2030 for BP and generate 17% of revenues. By 2025 Total plans to increase its installed solar and wind capacity from 5 to 35 gigawatts. On December 15th Norway’s government approved funding for a big project to capture and store carbon that Shell will develop with Total and Equinor, Norway’s state oil company. The prize for gaining scale in green energy is bigger than merely maintaining it in the dirty sort, says one seasoned investor. “But”, he adds, “the risk is also bigger.” ■
This article appeared in the Business section of the print edition under the headline “Brown v broad”
When Sydney rock band Midnight Oil returns to the stage for a series of outdoor concerts next year, the quartet will do so alongside several fresh faces, including a new bass player, following Bones Hillman’s shock death last month.
Midnight Oil bassist Bones Hillman has died of cancer, aged 62.
Key points:
Midnight Oil paid tribute to Bones Hillman’s “beautiful voice” and “wicked sense of humour”
Hillman played with The Swingers, of Counting the Beat fame, before joining Midnight Oil
He played on six studio albums with Midnight Oil, including the 2020 release The Makarrata Project
Hillman, born Wayne Stevens, played for Midnight Oil from 1987 right up until the band’s reunion and tour in 2017. He died in his home in Milwaukee.
A statement from the band paid tribute to their “dear friend”.
“We’re grieving the loss of our brother Bones Hillman, who has passed away at his home in Milwaukee today after a cancer battle,” the statement read.
“He was the bassist with the beautiful voice, the band member with the wicked sense of humour, and our brilliant musical comrade.”
“Bones joined Midnight Oil way back in 1987 after stints in various Kiwi bands, most notably The Swingers. He played and sang on every Midnight Oil recording since Blue Sky Mining and we did thousands of gigs together.
“We will deeply miss our dear friend and companion and we send our sincerest sympathies to [wife] Denise, who has been a tower of strength for him.
“Haere rā Bonesy from Jim, Martin, Peter & Rob.”
A statement from the band paid tribute to Bones Hillman (right).(Supplied: 1 News Express)
After playing in a number of punk bands in New Zealand through the 1970s, he joined the Swingers in 1977, and in 1981 had a trans-Tasman number one hit with Counting the Beat.
Hillman replaced Peter Gifford in Midnight Oil shortly before the band released its sixth studio album Diesel and Dust, which featured tracks like Beds Are Burning and Dreamworld.
He played on each of the band’s subsequent six studio albums, including the 2020 release The Makarrata Project.
The new line of lubricants will comprise greases, brake fluid, transmission oil, tractor oil, diesel exhaust fluid, gear oil and hydraulic oils, developed for multiple vehicles.
The new line of engine oils will go on sale in India in November 2020
Goodyear and Assurance International Limited have collaborated on a new line of engine oils that will be manufactured, sourced and distributed in India. Expected to launch in November, under a licensing collaboration, the product line consists of a full range of lubricants for multiple vehicles including greases, brake fluid, transmission oil, tractor oil, diesel exhaust fluid, gear oil and hydraulic oils.
The new range of engine oils are designed to perform as per specifications under American Petroleum Institute
The Goodyear vehicle lubricants collection will be blended with advanced additive technologies in India. Each product is designed to enhance performance, reliability and longevity for customer use in passenger and commercial vehicles. Besides marketing and distribution, Assurance Intl Limited will also provide after-sales assistance to consumers.
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All international standards are being followed during the manufacturing process. The laboratory ensures that all products are examined before leaving the blending plant. All products are guaranteed to perform as per the specifications of American Petroleum Institute (API) including the new Goodyear high quality vehicle lubricants, produced by Assurance Intl Limited.
(Bloomberg Opinion) — Covid-19 may do for Big Oil what the Chicxulub asteroid did for the dinosaurs when it struck Earth 66 million years ago.
Much like the “terrible lizards,” Big Oil was already in decline before the novel coronavirus hit. The world in which they thrived is changing around them and they face multiple threats to their future health. But the outbreak’s impact has accelerated the process.
The pandemic has slashed oil demand, taking prices down with it. Producers everywhere were slow to react. Now the recovery is taking longer than initially expected, as infection rates remain stubbornly high in the U.S. and they spike again in Europe.
For this horrible year, the International Energy Agency sees global oil demand 8.4 million barrels a day lower than it was in 2019. In 2021 it will still be 2.5 million barrels a day down on last year. The other major oil forecasting agencies see a similar future. That makes the next couple of years an uncomfortable time for all oil producers.
In the second quarter, when the pandemic had its most dramatic impact on oil demand and prices, European oil majors were able to offset some of their losses with huge profits from in-house trading teams. It was a period of extreme price volatility. They won’t have that buffer in their third-quarter results.
The struggles faced by Big Oil are clearly reflected in their share prices. Exxon Mobil Corp.’s value is now just half what it was at the start of the year, and Chevron Corp. is down by a little less than 40%. Royal Dutch Shell Plc has fallen even further.
It’s been a particularly bad few weeks for Exxon. First it lost its place in the Dow Jones Industrial Average, leaving rival Chevron as the index’s only oil company. Last week it briefly ceased to be the largest U.S. oil company by market value for the first time since it began as Standard Oil more than a century ago. That crown, too, passed to Chevron.
Exxon is facing a backlash for its unwillingness to adapt to changes in the planet’s physical environment. The Church of England Pensions Board sold all its holdings in the company after it failed to set goals to reduce emissions produced by its customers. Oil rivals, particularly those based in Europe, have moved more quickly to set themselves ambitious carbon-reduction targets, although it’s important to maintain a healthy skepticism over their ability to reach them.
Big Oil is also getting smaller. BP Plc plans to cut 10,000 jobs, equivalent to 14% of its workforce; Shell will shed 9,000 workers, or 11%; and Chevron will reduce its payroll by 6,000, a 13% reduction. Exxon will also cut headcount, although it hasn’t given a figure.
While the pandemic will hopefully subside, the pre-existing threat from the shift away from carbon-based fuels won’t. Both BP and French oil major Total SE now see global oil demand plateauing at close to 100 million barrels a day by 2030, before starting to fall. Shell also expects demand for oil products to peak, “whether it is this decade or next is anybody’s guess,” De La Rey Venter, a Shell executive, told the FT Commodities Global Summit last month.
Even the Organization of Petroleum Exporting Countries can now see a peak coming, a notion it had previously called misguided. OPEC’s latest World Oil Outlook, published last week, says the world’s consumption of liquid fuels will reach a plateau around 2040.
OPEC’s outlook points to one more challenge for Big Oil. It forecasts that oil production from non-OPEC countries will stagnate and fall after a rebound from pandemic-hit production levels by 2025. When it does, the world will need OPEC members to pump more oil, even as demand stagnates. While the oil majors can theoretically explore for and pump crude anywhere, they’re excluded from the one country that offers the most attractive combination of ample reserves and low costs — Saudi Arabia.
Some dinosaurs lingered for another million years after the Chicxulub asteroid struck. Others evolved into more than 10,000 species of birds. The Covid-19 pandemic won’t bring about the imminent demise of Big Oil companies. But it will almost certainly hasten their metamorphosis, and those that can’t change will go the way of Tyrannosaurus Rex and Brontosaurus.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.
