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http://gorozen.com/research/commentaries/3Q2021_Commentary
The super-majors’ problems continue to mount. Last quarter in “The Incredible Shrinking Oil Majors,” we discussed their inability to replace production with new reserves and how production of both oil and gas would significantly disappoint as we progressed through this decade -- especially considering the collapse of upstream capital spending budgets last year. We also discussed the forces now being applied to the companies by various ESG groups, both shareholders with de minimis ownership and various court systems, and how these forces would only exacerbate the reserve replacement and production problems being faced by these companies today.
A number of recent developments merit discussion. Both capital spending and production of oil and natural gas continue to fall for the four super-majors (Exxon, Chevron, Royal Dutch Shell and Total Energies). In 2019, upstream capital expenditures averaged $15 bn per quarter for these four companies. Upstream spending collapsed in tandem with oil prices in 2020; by 1Q21 it had fallen by over 50%. Even though oil prices have rebounded, capital spending has lagged far behind, trending upward in 2021 off last year’s low, but still well below 2019 levels.
The large drop in capital spending has already put notable pressure on oil and gas production across the four super-majors. The surge in finding and development costs over the previous decade, combined with any extended drop in upstream capital spending, will produce large drops in reserve replacement and production going forward.
Our models originally suggested hydrocarbon reserve replacement will fall to only 40% while production itself will fall over 30% by 2030 unless capital spending trends move much higher. It now looks like the severe drop (and weak subsequent rebound) in capital spending over the past 20 months is already pressuring oil and natural gas production. Super-major production has now fallen over 10% since the beginning of 2019.
Three out of the four super-majors face intense ESG-related scrutiny. (2 very interesting graphs follow)
After successfully replacing 25% of Exxon’s board of directors despite owning just 0.02% of the outstanding equity, Engine No. 1, the climate-focused activist hedge fund, met with Chevron’s management late last summer. In discussions that were later described as “cordial,” Chevron executives shared their plan to reduce carbon emissions. Subsequently, Chevron announced new plans to further reduce carbon output, along with their intention to appoint a new director with “environmental expertise.” Although it remains unclear exactly what Engine No. 1 is planning, rumors suggest the fund has contacted other investors, strongly suggesting they intend to launch a second campaign in the not-too-distant future.