A Balancing Act
If you happen to be in north-western France and you pick the right day you can see some superb displays of horsemanship at the Haras National du Pin, the French national stud. Among the highlights is the rider who enters the arena astride two horses; one person using all his or her skill to keep the two beasts together. A similar skill, you could argue, is being shown by the oil and gas supermajors as they seek to negotiate this protracted period of energy transition.
One horse is a company’s traditional oil business, mature, sometimes prone to fatigue but a consistent generator of high profits and dividends over the years. Add in the gas element and you have a core business that will continue to deliver returns well beyond the 2040 date used, for example, in the latest BP Energy Outlook scenarios. The other horse, less predictable and still somewhat unreliable in a business sense, is the diversified energy company; also investing in renewables, power generation and a more consumer-focused downstream operation.
The BP Energy Outlook takes comfort in the ‘trot-trot’ staying power of the core business. Oil demand looks set to plateau or even start to fall in various scenarios with the growth of gas and renewables after 2020 but is carried along by rising energy demand in the developing world. Alongside this is the challenge, as BP’s Bob Dudley notes in his introduction to the Outlook, of meeting this extra energy demand while also reducing carbon emissions. Small wonder then that in BP’s ‘evolving transition’ scenario renewables are the fastest growing energy source (7.6% per annum between now and 2040), accounting for around two thirds of the increase in global power generation.
There lies the rub. Oil and gas majors must hedge their bets if they are to ride the transition conundrum. The obvious solution, notes Paul Bogenrieder, a Senior Energy Analyst with EY, is “ – use your capital, expertise and brand to transform into the energy company of the future.” Thus, ExxonMobil is targeting 10,000 barrels of biofuel a day, while Shell has taken itself into the energy retail business. Providing oil majors retain capital for exploration and continue to deliver the dividends demanded by shareholders, the diversification show must go on. In a world where it is predicted that over 60% of the global energy market will be in renewables by 2040, big oil (not to mention expanding gas) is working overtime to keep those two horses together.