The race to be last man standing in Big Oil

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Who is right about the future of oil? The International Energy Agency has predicted that global demand for oil, along with natural gas and coal, will peak this decade, in a historic turning point. US supermajors beg to differ. ExxonMobil’s purchase of shale producer Pioneer Natural Resources this month and Chevron’s deal this week to acquire Hess amount to the biggest consolidation in Big Oil for two decades. The tie-ups are a bet that the IEA’s vision of shrinking demand is wrong, or at least a bid to position these enlarged US giants among the last producers standing to meet the demand they believe will still exist by mid-century. In doubling down on oil, US groups are also widening the gap with European peers that have begun, tentatively, to embrace clean energy.

The IEA first published a pathway in 2021 to reach net zero emissions by 2050, and limit the global temperature rise to 1.5C above pre-industrial levels. This envisaged oil consumption falling 75 per cent from now to below 25mn barrels a day. Its latest central scenario, which assumes governments meet existing pledges on climate action but do no more, sees demand topping out before 2030, then dropping to about 55mn b/d in 2050. The agency’s most pessimistic scenario, under which countries plough on with today’s “stated policies”, would leave oil demand still at 97mn b/d by mid-century — but lead to a disastrous 2.4C of warming by 2100.

Assuming low-cost Opec producers and Russia keep output at similar levels to today, they would meet much of the 2050 demand in a net zero scenario. Producers elsewhere would be fighting for scraps. But if consumption is closer to the IEA’s central scenario — which, sadly for the planet, for now seems more likely — that would leave a fair bit even for higher-cost US producers to go at.

In hard-headed business terms, then, it may be a credible strategy for them to lower costs by increasing scale, and ensuring they have suitable reserves with the flexibility to dial output up or down depending on demand. Smaller, less efficient groups would be most at risk of being left with stranded assets. The focus on energy security prompted by the wars in Ukraine and Israel means western governments might also quietly prefer domestic groups to be around to supply remaining oil needs over time, rather than having to rely on, say, Saudi Aramco or Russia’s Rosneft.

Since traditional oil investors prefer the high-risk, high-reward model of oil ventures to the lower if steadier returns from renewable energy, a chasm in valuations has opened between US groups and European rivals that have begun, to varying degrees, to shift to clean power. Climate activists, of course, will look askance at Exxon and Chevron’s bulking up — and no doubt step up efforts to persuade them to change tack.

There is certainly a case for highly cash-generative oil and gas giants, with all their engineering knowhow, to play a role in the energy transition — even if critics question their ability and readiness to do so. But the US consolidation will increase market pressure on the likes of BP — which recently lost Bernard Looney, the CEO who drew up its transition targets — Shell and TotalEnergies to demonstrate that their more hybrid strategies are sound; Shell has already been backtracking somewhat.

An alternative model is for oil companies to shovel cash to investors who then channel it to clean energy specialists; Chevron says it will raise dividends and buybacks once the Hess deal closes. Vast capital is needed: the IEA forecasts total annual clean energy investment will reach $2tn by 2030 even under its pessimistic scenario — but must double to $4tn to meet the net zero goal. If oil companies are not ready to plough their returns into green energy themselves then, for the sake of the planet, it will be up to markets to do it instead.