We have 20 years left: what will happen “after oil”

US, WASHINGTON (ORDO NEWS) — The unwinding of the climate agenda that we have been observing for the last year has predictably made the discussion about decarbonization of energy and the so-called energy transition popular.

In turn, along the chain, these aspects have actualized another topic for discussion: how will the transformation of “oil” companies into the sphere of lower-carbon energy sources take place. Indeed, even optimistic forecasts suggest that the “peak of oil” will come in ten to fifteen years, after which demand will begin to decline gradually.

For many oil companies, this transformation has its own reason: nevertheless, their oil reserves, at least acceptable cheap in production, will in any case run out in a comparable time period. But such a large-scale change is a very inertial and slow-moving thing, so now you need to think what to do next.

It should be understood: despite certain steps of a part of the oil industry in this direction, the share of oil and gas investments in green energy is currently (in the broadest sense: first of all, it’s “windmills” and solar panels, but also energy storage and other technologies) accounts for a few percent of the total investment, the bulk of which is still oil and gas.

At the same time, abandoning investment in fossil fuels, as suggested by Greta Tunberg, is now absolutely impossible. If such a failure were to occur, then very quickly, almost instantly, we would face a new oil shortage: production from existing wells is falling quite quickly even in traditional fields, not to mention shale.

Therefore, the only question is how quickly companies will switch to green energy in the long term, whether the share of annual investments in green will remain at three percent of the total capex (these are the estimates given in the recent Energy Transition: Evolution or Revolution review for 15 large oil and gas companies) or every year we will see a consistent increase here.

It is important to note that three percent is the average temperature in the hospital, which shows a very averaged picture: different companies have radically different strategies. American oil transnational corporations, such as ExxonMobil and Chevron, so far remain mainly in oil and gas with a bias in oil (investments in renewable energy sources – at the level of one or two percent), while European companies (Shell, BP, Total) go more and more into renewable energy (with investments already at the level of five to fifteen percent of the total), and, in addition, are also actively expanding their share in the gas market.

Nevertheless, ExxonMobil and Chevron have their own strategy for preparing for market changes. We already wrote about this earlier: both of these companies, especially ExxonMobil, arranged a massive sale of oil assets around the world. But against this background, they focus on the national market, the proceeds are invested in the production of shale oil in the United States.

And not because shale oil looks more competitive than traditional production. Now “traditional” oil is, as a rule, already quite expensive offshore, so the question is open, who will have lower cost here. And in general, it is much more important for companies that the “shale” is several times shorter than the investment cycle (two to three years), so the creation of such a “flexible” sector in its production portfolio will help them in the future to respond more easily to possible changes in prices and demand for oil market.

But in general, we repeat, American companies are still largely focused on oil and gas, as this corresponds to the trends in the USA for active use of fossil fuels. Europe, by contrast, has already plunged strongly into renewable energy, and in accordance with these trends, European companies are actively investing in green energy.

At the same time, European companies have been especially interested in the gas sector (mainly liquefied natural gas) for several years. Shell has already become the world’s largest LNG trader, Total is also selected according to its volume.

It is clear that natural gas is seen by these market participants as a “transitional” fuel on the long road to low-carbon energy. However, Total already has 50 percent of gas in the energy structure. In addition, the company aggressively invests and buys LNG projects around the world. And, of course, green energy interests companies in all cases, not only as “wind” and “sun”.

For example, recently the same Total announced plans to create a joint venture with Peugeot for the production of batteries for cars, investments will amount to more than five billion dollars. However, even despite the ambitious transition program, Total, one of the most active oil and gas companies in the new energy sector, will be able to produce only 15–20 percent of revenue by 2040.

Finally, we ask the main question: what investments are more profitable? It is traditionally believed that investments in the oil industry are very profitable, which forces companies to remain in this sector. But it would be more correct to say that a high rate of return reflects possible risks. Therefore, investment decisions are made with a high (double-digit) rate of return at an oil price of, say, $ 60. This is insurance against falling prices: even if quotes are moderately reduced, companies will remain in profit, investment returns will only decrease.

But since prices are on average high (including thanks to the OPEC + agreements) are high, the oil sector allows us to generate good profits, which also includes investments in new energy. On the contrary: investments in renewable energy sources often turn out to be low-profitable, because they are considered low-risk – in the sense that in the future the industry will only develop and the risk of asset depreciation will be minimized in case of a decrease in demand.

But the future is unknown. The consensus is that from another five (the most pessimistic forecast) to 20 years (the most optimistic) demand for oil will grow. However, the price of oil itself will be determined by the balance of supply and demand, where uncertainties remain: both demand, and shale production, and the OPEC + agreement. At what point is the equilibrium in the medium term? What if those who still invest in oil are right?

To summarize. Firstly, this is a very slow process, and even oil companies actively investing in new energy are ready to allocate less than ten percent of the total capital costs for this transition. A hypothetical instantaneous rejection of new investments in oil will lead to an instant deficit.

Secondly, different companies are preparing very differently for the decline of the oil age. And there are many factors: the company’s leaders have different visions of the future, the pressure of public opinion in different countries, and, of course, the structure of stocks.

What does all this mean for Russia? Our oil and gas companies are still minimally involved in investing part of the revenues in the new energy sector or sectors outside the energy sector (this option is also possible), although there are small movements in these areas.

The continuing bias in reinvesting profits exclusively in the oil industry is associated in our country with a relatively good resource base and tax system, which is gradually adapting to the growing cost of production. But we still have reserves of oil at an acceptable cost price for twenty years.

Moreover, the conclusions for the state and companies are different. From the point of view of the state and the budget, this means that in ten to fifteen years (or better early) we must manage to minimize our dependence on oil revenues. Companies have a completely different task: they need to have time to diversify their oil business in other directions. In any case, there is absolutely no need to rush and make hasty decisions, but it is necessary to start this discussion now in our country.

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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.