A global push to cut carbon emissions has delivered a major challenge to the oil industry for the next decade: it must produce more energy, at a lower cost and with less pollution.
It’s a tall order.
Global energy demand will continue to grow in the post-pandemic world. A UN report from 2019 projects the world population to reach 10.9 billion in 2100. This robust increase will be matched by greater demand for energy.
Oil producers will have to match that, yet do so under increasing pressure to cut emissions. The pressure comes from governments supporting clean fuels, renewable energy generation, and electric transport from gasoline. ESG funds among investors, in turn, have backed the trend towards sustainability having attracted $51.1 billion of new money in 2020.
But the oil and gas industry is still the world’s major source of energy. Reducing carbon emissions from fossil fuels and not the actual use of fossil fuels offers the best way to combat climate change, according to Exxon Mobil CEO Darren Woods.
In addition to investments in cleaning emission, oil companies will have to contend with rising costs, especially in the upstream portion of the business.
The industry has under-invested in exploration. Since 2015 – and again during the pandemic glut last year – the industry drastically cut budgets. For an industry with billion-dollar projects and extremely long lead times, getting this right will be important for supplying the future consumer with affordable energy.
As global oil reserves gradually run out, the industry will have to invest in both maintenance and production to make use of the resources available. This could be particularly difficult given possible fluctuations in supply and demand and the volatility of oil prices. Furthermore, some analysts believe that the peak oil era is already upon us.
Finally, the overall object of the exercise will be to demonstrate to shareholders durable cash flows.
Oil has rallied more than 30 percent so far this year, shepherded carefully by OPEC and Russia. But gluts in the market remain, along with new pressures from the rise of electricity-powered vehicles.
In the past year, there has been a significant outflow of investors from the industry, driven by the rise of renewables and concerns about carbon taxation.
For the short term, though, things look to be improving.
Big Oil is looking at 2021 with increased optimism. Brokerages see a tightening oil market, easing monetary policies, and oil as a hedge against inflation, leading to oil prices averaging around $60 a barrel this year. This will supply oil companies with a cushion to get rid of debts and start to transform their businesses.
The next decade for oil producers looks to be a big fight. The industry must take on complex geology, increasing demand for energy, and threats to its market dominance from renewables or cleaner fuels. It must battle host governments for tax rents in several exporting nations, and in other countries it must contend with host nations supporting a green agenda. And it has to do all this while providing returns to shareholders. Whether Big Oil can rise to the education is one of the big questions of the next decade.