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Is climate change off oil industry’s agenda?

Only a few, short months ago, one topic dominated the agenda in the oil industry: climate change.

Oil majors had battled through the price collapse of 2014-16 and, with Brent crude averaging a comfortable $US64 a barrel in 2019, all eyes were on how the huge companies would tackle the existential challenge of global warming.

Under pressure from investors, Bernard Looney, BP’s new chief executive, unveiled bold ambitions to cut its emissions to “net zero” by 2050 and rivals scrambled to compete on their green credentials.

Then the bottom fell out of the oil market.

As the coronavirus pandemic started to hit demand, producers in the OPEC cartel and allies led by Russia failed to agree a deal to pump less. Saudi Arabia, OPEC’s biggest member, responded by increasing output and prices plunged. By the end of last month, as efforts to contain the virus led to sweeping economic shutdowns around the world, oil demand was down by a quarter and Brent crude had fallen to a mere $US22 a barrel.

“Our sector has had a double hit – not only coronavirus and its effect on the economy, but also the oil price war between the Saudis and the Russians have created the perfect storm,” Mathios Rigas, chief executive of Energean Oil and Gas, a FTSE 250 group, said. “Some companies will make it to the other side. Some will not.”

Although a deal has been thrashed out by OPEC, Russia and others to curb output, experts warned that it was too little, too late to counter the unprecedented demand destruction caused by the pandemic.

The oil industry is back in survival mode and the agenda appears to have been rewritten. The most pressing questions for the majors now are about their immediate financial health – their dividends and spending plans.

Last year, Royal Dutch Shell, Europe’s biggest oil company, was on track to complete a $US25 billion share buyback this year and unveiled plans to return a further $US125 billion to shareholders through dividends and buybacks between 2021 and 2025. Those plans were contingent on an oil price of at least $US65 this year, rising with inflation to $US70 or more by 2025.

As prices hit 18-year lows of less than half those levels last month, Shell halted its $US25 billion buyback. Oswald Clint, an analyst at Bernstein Research, said the long-term $US125 billion ambitions were “more of a pipe dream at the moment”, given the “unprecedented supply and demand shock”. Shell would have to reassess “whether their oil macro views are sufficiently robust in order to deliver the plan out to 2025. They could persevere, but it’ll be a hard old struggle.”

Shell has not cut its dividend since World War II and Ben van Beurden, 61, its chief executive of six years, will not want to be the man to break that record – although with its shares yielding more than 10 per cent, investors clearly are worried that he may have to.

For now, most industry analysts believe that Shell and its peers can afford to keep paying their dividends, aided by plans to cut back sharply on capital expenditure and costs by billions of dollars. However, those analysts say that hoped-for dividend growth in the years to come look increasingly unlikely – and if low prices persist beyond this year, dividend cuts could be on the cards.

One senior industry executive noted the fear that the destruction to demand caused by coronavirus could lead to “low oil prices through until the end of 2021. You have to be truly optimistic to believe the oil price is going to come up in a very big way, so we are going to see some strategic changes. There’ll be a whole load of higher-cost oil, gas and LNG (liquefied natural gas) projects that people will need to walk away from.”

Shell has said already that it will cut capital spending this year by $US5 billion, from $US25 billion. It has quit a proposed multibillion-dollar LNG project in Louisiana in the United States and industry rivals question the wisdom of proceeding with the $US14 billion-plus LNG Canada project, where work has been paused because of coronavirus.

Costly projects across the industry now look vulnerable, from deepwater fields off Nigeria to recent discoveries in Britain to – indeed, especially – American shale. BP has set out plans to cut its capital expenditure by $US3 billion, with about $US1 billion of cuts focused on its North American shale business.

It’s not only on production where companies are cutting back: refining and petrochemicals operations are under pressure, too. “Oil majors are hit hard because historically downstream businesses still dampened oil price crashes,” Roland Rechsteiner, a partner at Oliver Wyman, a consultancy, said.

As companies scramble to save cash, some fear that the green agenda will be sidelined, just as big oil companies had looked ready to raise spending from present low levels. Yet Mr Looney, 49, has insisted that this won’t be the case at BP and that the crisis “only reaffirms the need to reinvent our company”.

In fact, many believe that the case for investing in green energy has been enhanced. “At sub-$US35 oil, average returns from oil and gas projects are in the realm of typical renewables projects,” Mr Rechsteiner said. “However, the latter have a much more attractive risk profile; it is more utility-like than commodity-like.”

Lydia Rainforth, an analyst at Barclays, said the realisation “that you can wake up one morning and the oil price is down 30 per cent due to the OPEC action” may help to win over sceptical oil investors to the more stable, if theoretically lower, returns on offer from renewables. “What it may end up doing is bringing forward the point at which the companies are prepared to let oil and gas production start to decline. If anything, what I think it does is accelerate that transition.”

She believes BP can afford to keep paying its dividend at present levels, but questions “whether it is the right decision for them to keep it”. If demand and prices remain subdued a year from now, “at that point, the better decision may be to cut back on the dividends and accelerate the energy transition capital expenditure and reduce debt a little bit”.

Mr Looney has said that he remains “committed to growing sustainable free cashflow and distributions to our shareholders over the long term”.

However, if he was considering cutting the company’s dividend in the short term to prioritise funding the green agenda, one industry executive suggested that now presented an ideal opportunity: “I could imagine Bernard saying, ‘I’m gonna cut the dividend right back – it’s the right thing for society, it’s the right thing to fund the energy transition instead.’

“It’s easier to do that now, in the depths of this financial crisis, than it is to hold off for three or six months when the world’s recovering.

“The banks are cutting their dividends, everyone’s cutting their dividend. Will people really notice if BP’s share price goes down 5 per cent to 10 per cent on the day, when it’s already come down so much anyway?”

The Times

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