Two things to bear in mind when someone tells you they suffer from a problem of perception. First, perception shapes and sometimes outright supplants reality. Second, the complaint comes with a subtext of “it’s not me, it’s you.”
Which brings us to Big Oil.
Speaking at an industry conference in London last week, Amin Nasser, chief executive of Saudi Arabian Oil Co. – AKA Saudi Aramco – said the industry suffers from “a crisis” of perception. People mistakenly think the oil business is finished, he argued, so they won’t invest in it, and that’s going to lead to a crisis of supply, which hurts everyone. He said a “senior financial figure” he ran into at Davos predicted the end of the oil industry in about five years, while another claimed most vehicles on the road would be electric within a decade.
In other words, important stakeholders believe that the entire world will soon run on anything … but oil!
Here’s the thing: Hardly anyone serious thinks the oil business is “finished” within five years or even ten. My colleagues at Bloomberg NEF produce long-term projections for electric vehicles typically at the bullish end of the spectrum. Yet even they expect only 9 percent of the global passenger-vehicle fleet will be electrified by 2030, leaving 1.3 billion internal-combustion vehicles still around. That doesn’t sound like zero oil demand. Similarly, Nasser warned of a drop of one-fifth in global oil supply “if investment stopped today.” I just sat through umpteen oil-sector earnings calls, and I am here to tell you investment is not stopping today.
The hyperbole matters because, if the oil industry is to deal with what ails it, then it had better clearly define what that is.
Nasser’s explanation as to why stakeholders apparently ignore the industry’s success in providing reliable energy supply essentially boils down to them ignoring “logic and facts” and mostly responding to “pressure and hype” in forming views that are, nonetheless, “sincerely held.” Few things win hearts and minds quite like a dollop of condescension, but the real problem is that this is all too simplistic.
As Nasser said several times, fossil fuels have helped lift billions of people out of poverty. What he didn’t say several times was that those fuels also inflict a cost in terms of carbon emissions. This is the conundrum: We rely on fuels to support our way of life that we now know also threaten it. Lifting one generation out of poverty is a stunning achievement, but it won’t seem that way as and when their children’s or grandchildren’s homes get inundated. It is telling that the phrase “climate change” didn’t appear once in the speech, yet Nasser boasted of Aramco’s oil having relatively low carbon intensity – which is nice but ignores the fact that the vast majority of emissions relate to combustion of the fuel, not producing it.
At one point, Nasser said the industry should remind investors that “despite being a much smaller proportion of the S&P 500, energy pays twice the dividends of tech.” He really nailed something there, though I suspect not in the way he intended.
The majors must pay higher dividends than technology companies, partly because poor returns on a decade of high-octane investment leading up to 2014 sullied the energy sector’s reputation as a steward of capital. Moreover, even though the industry isn’t “finished” by any stretch, investors question whether new projects with a lifespan measured in decades will fully pay for themselves if oil demand plateaus. Notice I didn’t write “collapses”; it’s a subtle but important distinction.
For financial markets, it matters less that things like renewable energy and electric vehicles represent a small part of overall demand today and more that they capture much of the marginal growth. On Wall Street, that sort of perception, grounded in reality, creates reality. Energy’s weighting in the S&P 500 hasn’t collapsed over the past decade just because fund managers suddenly found some Greenpeace flyers.
Even OPEC’s own projections show oil demand essentially flattening out in the late 2030s, and I’m pretty sure they aren’t in the business of hyping alternatives. Yet Nasser calls for pushing back on “exaggerated theories like peak oil demand.” Less than three years ago, he was telling an audience in Istanbul that Aramco’s technology would help raise its oil resources to 900 billion barrels and the recovery factor on its major fields to 70 percent. As it stands, Aramco’s existing proved reserves are around 270 billion barrels – equivalent to almost a third of OPEC’s projection for global oil demand through 2040 and representing almost 70 years’ worth of Saudi Arabian production.
Somehow, this doesn’t sound like a strategy for dealing with potential disruption or an energy transition. It sounds more like the traditional mindset of “drill it and they will come.” That has damaged the industry’s credibility with investors and likely explains the flawed thinking behind that $2 trillion figure thrown around for Aramco’s elusive IPO.
The oil industry’s products remain in high demand, natural gas is taking market share, and it can use the cash flow generated by this to pay out high dividends and invest judiciously.
Yet for this to resonate with investors and society in general, it must be set in a more realistic context. Nasser calls oil and gas “ample, reliable, and affordable”, but the “affordable” bit ignores the costs of climate change and the possibility of more widespread carbon pricing. Equally, calling a plan to re-convince everyone about the benefits of fossil fuels a “radical new mission” is a striking way to describe what amounts to the preservation of the status quo.
Instead, as Nasser also said, the industry should be transparent:
Releasing fulsome stress test results so investors can make up their own minds should be a priority for IR departments at this point, not a concession granted under duress. Rather than dismissing competing technologies as too small to matter, recognize this is something said by every company that got upended by a newcomer. Instead, emphasize your market remains large for now and the foreseeable future and talk about how and why you can last longer in relative terms as and when it peaks and shrinks (or will eventually bow out gracefully in a fountain of dividends). By all means, continue striving for lower carbon intensity in your own operations while being honest about the trade-offs from using oil and gas and how society may shift priorities against those trade-offs. Above all, focusing on costs rather than growth, and being careful to maintain a flexible portfolio of projects that aren’t all weighted to returns beyond 2030, are sound strategies being deployed by some already.Whatever you do, don’t think that talking more forcefully will suddenly make everyone understand. The conversation, the very language, has changed.