There are two very different narratives about the impact of climate change on the international oil industry. One dominates the pages of the financial media, charts the progress of an alliance of institutional investors and environmental lobbyists in reining in Big Oil, and sets out a disturbing picture for the majors. This is a depressing scenario for non-diversified oil producers in emerging markets (EM) such as Nigeria, Russia and Saudi Arabia.
Listed oil companies within G7 are under growing pressure to up their game. BP was the first last year to set itself climate-friendly targets. It pledged net-zero emissions by 2050, a 40 per cent reduction in oil and gas production by 2030 and a 20-fold increase in renewables power generation. These were bold commitments at the time yet a sizeable minority is looking for more rapid change. At the company’s AGM in mid-May a Dutch activist group called Follow This secured a 21 percent vote for an intensification of the company’s efforts. Two years previously, its share of the vote for a similar motion was 8 percent.
Activists have since hailed 26 May as a day of irreversible change in their campaign. First, a district court in the Netherlands ruled in favour of the Dutch wing of Friends of the Earth that Royal Dutch Shell should lower its emissions by 45 per cent from 2019 levels before 2030. The company is to challenge this ruling from a lower court.
On the same day across the Atlantic a small investor in ExxonMobil, a hedge fund called Engine No 1, got two of its nominations onto the board against the wishes of the company at the AGM. A large majority also voted for the company to substantially reduce its emissions from its own production. Of the two developments on the day, we see the ExxonMobil AGM as more significant because Darren Woods, the chief executive, and senior management have tended to be unreconstructed on the impact of climate change.
The second narrative covers EM producers, which might be listed such as Saudi Aramco but which are not subject to institutional pressure from shareholders. In many cases their taxes and royalties dominate government revenue. The year plus of Covid-19 requires them to pump more, not less oil out of the ground. We can select a good number from the OPEC+ alliance (KMG in Kazakhstan, Pemex, Rosneft, SNPG in Gabon, Sonangol, Sonatrach and more).
Vostok Oil, associated with Rosneft, is developing a huge project in the Arctic. It has started to secure investors and credit facilities for the project, which is designed to add production of 1.0mbpd by 2028 and 2.0mbpd by 2035. Estimated development costs of USD150bn included the building of 15 new towns to house workers and ancillary services. The Russian state is to offer tax breaks for investors in Vostok. Industry analysts are drawing comparisons in terms of scale with the Permian Basin in the US and the Ghawar field in Saudi.
OPEC+ continues to unwind its production cuts, which peaked at 9.9mbpd in April 2020 and will have eased to 5.8mbpd by July. Its share of global output will rise as the listed majors trim their production to meet their targets for net zero emissions.
The alliance’s challenge will be to hold up prices to cover government spending and fund non-oil productive investment. Western consumers will have their say with their spending choices for new vehicles and for foreign holidays. The main driver for the next decade, we suspect, will be the resilience of demand from China, India and elsewhere in Asia. These markets are providing the bulk of growth this year as total demand inches back toward the peak of 100.0mbpd seen pre-Covid in 2019. It may be significant that Aramco is deepening its trade and investment ties with Asia.
Oil producers across the world are enjoying the rebound in demand and prices since the start of the year. UK Brent has crossed the USD70/barrel threshold in recent days. Whether they have bought into the talk of a commodities supercycle or not, their fortunes have picked up. Total and Shell reported net earnings for Q1 ’21 up by 69 percent and 13 percent year-on-year respectively.
The second narrative does not make diversification any less urgent in our view. It is merely that producers will have a little more time to deliver than the first would suggest. The NNPC and other EM oil producers will be envious of Norway, which has a population of less than six million and the largest sovereign wealth fund in the world (currently valued at USD1.3trn).
