(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)
By George Hay and Yawen Chen
(Reuters Breakingviews) – U.S. and European oil giants sell the same product in the same global market. But they are on diverging paths. While American groups like Exxon Mobil and Chevron are buying up smaller drillers, their European rivals such as Shell, BP and TotalEnergies are largely sitting on their hands. Part of the explanation is a transatlantic disagreement about the long-term outlook for oil.
If the world is to limit increases in temperatures to 1.5 degrees Celsius above pre-industrial levels, demand for oil needs to shrink from 100 million barrels a day to 24 million barrels by 2050, according to the International Energy Agency. Faced with this scenario, fossil fuel producers have a limited range of options. They can keep pumping and hope they outlast smaller rivals; pivot to other forms of energy that emit little or no carbon dioxide; or gradually wind themselves down while returning cash to shareholders. There is one other alternative, though: simply assume that demand for oil will not decline.
Forecasts circulated by U.S. oil giants suggest they have chosen the fourth option. In January Exxon Mobil, headed by Darren Woods, said daily demand under its central scenario for 2050 would be roughly the same as the current 100 million barrels, while natural gas consumption would rise by 25%. Chevron boss Mike Wirth is more circumspect, but cites third-party forecasts that assume daily oil consumption will lie in a range between 70 million and 112 million barrels in the decade from 2040 to 2050.
The Europeans are fuzzier and a lot less bullish. Under its “Archipelagos” scenario Shell sees daily oil demand of 90 million barrels in 2050, but only around 40 million barrels using estimates in one called “Sky 2050”. BP’s “New Momentum” model assumes 73 million barrels of daily 2050 consumption, but a separate net zero scenario cites only 21 million barrels. TotalEnergies, meanwhile, reckons demand for oil and biofuels could range between 51 and 71 million barrels a day.
Any of these 2050 visions could be correct. But if higher oil demand scenarios transpire, U.S. oil group investors will be big winners. Production by U.S. oil majors will grow 6% a year between 2022 and 2030, according to Bernstein analysts, while big European groups will only pump 0.6% more. If oil prices remain at their current $84 a barrel level, the Americans will make substantially more money. This calculation helps explain why Exxon recently forked out $64.5 billion in a share-based deal for Pioneer Natural Resources, while Chevron paid $53 billion for its U.S. rival Hess.
Woods and Wirth’s dealmaking also comes with a built-in hedge in case optimism about oil demand proves misplaced. Exxon’s Pioneer deal will help the group to reduce production costs and emissions emanating from the drilling process, Wood Mackenzie analysts say, allowing it to be more profitable than the competition even if oil prices fall. Gulf giants like Saudi Aramco make a similar case, arguing that market-beating low costs will allow them to be the industry’s “last man standing” as demand for the black stuff dries up.
This logic might spur new BP boss Murray Auchincloss, TotalEnergies CEO Patrick Pouyanné and Shell’s Wael Sawan to bulk up in oil as well. But their lack of a clear long-term forecast complicates matters. If the oil market is going to shrink substantially, it will be impossible for all the industry’s major players to keep pumping at their current level. At the same time, though, the European groups’ view of oil’s future is not sufficiently bleak to justify a head-long rush away from fossil fuels and into buying green energy groups like $25 billion RWE, $24 billion Orsted, or $22 billion SSE.
The transatlantic divergence owes much to investors’ preferences. European shareholders have tended to be more antsy about climate change, while U.S. institutions have been less bothered about pivoting away from investing according to environmental, social and governance criteria. Global sustainable funds saw outflows in the fourth quarter for the first time since Morningstar Manager Research started keeping tabs in 2018. Even Exxon’s climate-minded activist investor Engine No. 1 voted down shareholder proposals for the group to reduce emissions, and supported the Pioneer transaction. The disconnect shows up in valuations: including debt, Exxon and Chevron are valued at nearly 6 times the EBITDA analysts forecast them to make in 2024, according to LSEG data. Shell, BP and TotalEnergies languish on less than 4 times.
For all their apparent strategic clarity, it’s possible that Exxon and other oil bulls are wrong about future oil demand. If world leaders finally take climate change seriously, they might implement stringent carbon taxes, which could prompt a slump in demand for oil. Crude prices could then fall to $24 a barrel, according to an Exxon analysis incorporating the IEA’s net zero scenario. U.S. groups would then have to rapidly redirect capital spending into lower-carbon fuels like hydrogen, where future demand is still uncertain.
U.S. oil majors also face the obvious problem of elevated emissions from all the extra oil they plan to pump. One option is to suck the carbon they belch out of the air. But to cancel out the vast increase in emissions, each of the industry giants would have to invest $25 billion in developing carbon capture, storage and removal capacity every year until 2050 while spending another $10 billion a year on average to maintain their current oil production, the IEA reckons. That’s substantially more than their current average annual capex budgets.
Still, investors value clarity, which European groups lack. BP’s Auchincloss wants to devote 25% of the group’s capital spending to low-carbon investments by 2025, but attempts so far to gain scale quickly in renewable energy have stuttered. The British company recently wrote down the value of key U.S. wind power projects. More importantly, BP last year said it plans to cut oil and gas production by 25% between 2019 and 2030, watering down a previous target of 40%. Formerly supportive investors like the Church of England’s Pensions Board and Dutch pensions scheme PFZW have sold shares in large European oil groups because they are insufficiently green.
BP, Shell and TotalEnergies are tackling this uncertainty by returning lots of cash to shareholders. The notable feature of recent full-year results from the three companies was a series of multibillion-dollar share buybacks. If European groups don’t want to bulk up in oil like their U.S. rivals, but remain reluctant to shift quickly enough into other forms of energy, the main other option available will be to slowly wind themselves down.
Follow @gfhay and @ywchen1 on X
(Editing by Peter Thal Larsen and Oliver Taslic)
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