We need oil part 222 Jan 2021 20:30
Oil companies are at a fork in the road.
They need to find a way of either diversifying or cleaning up their business.
Occidental has opted for the latter, as have ExxonMobil and Chevron. Using carbon capture and storage, the company wants to ensure that the pollution created from mining, extracting and burning oil won’t make its way into the atmosphere.
But most have instead have opted to pivot towards renewables.
Industry leaders like BP have decided that now’s the time to wean themselves off fossil fuels and pivot towards renewables – BP promising, for example, to up its wind and solar production to 50 gigawatts by 2030 and reduce oil production by 40% by 2050.
There’s one big problem for those companies pursuing the renewables approach: profitability. Or lack of it.
An oil major would expect pretty solid returns from an upstream project – in the range of 15-20%. In comparison, oil’s cleaner cousins currently offer much more modest returns, in the area of 5-10%.
The cost of producing renewable power is falling. Whether that will be enough to catch up with oil – and whether investors will be happy to wait for that to happen – is another question.
But make no mistake – names like BP, Shell, and Equinor are, at their core, still oil companies. Yes, they’ll be ramping up their renewables output, but their profits will continue to be fossil fuelled.
And investors may forgive them for their sins yet – particularly given that we’re going to continue relying on oil for a good while yet. But as I’ve argued before, oil has some life in it yet. If its price does make a strong recovery, then Big Oil will benefit.
Maybe investors will forgive them for their sins yet.
All the best,
Nathan Tipping
Research Analyst, Southbank Investment Research
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