Big oil is doomed. We have the verdict of Fatih Birol, head of the International Energy Agency, delivered this week to the FT. Larger scale hydrocarbon investments involve not only “risk for our climate but also have some business risks as the world may not need an increase of oil production”.
Well, they don’t come much larger scale than the pair of hydrocarbon investments from ExxonMobil and Chevron, to buy Pioneer Resources and Hess Corporation respectively. Between them the pair have just risked over $100 billion. True, both deals are paper swaps rather than cash transactions, but clearly none of the four companies involved agrees with Birol. Indeed, Mike Wirth, Chevron’s chief, said he did not consider the forecast of declining oil consumption after 2030 to be “remotely right.”
Wirth might have drawn attention to previous forecasts from the IEA which back up his claim, most of which just show that forecasting is hard, especially for the future. The IEA forecasts themselves rely on government projections, some of which are little more than wishful thinking. Still, nowhere can news of the two big deals have been more welcome than in the London boardrooms of BP and Shell. The complications from merging such behemoths mean that the two UK majors are safe from takeover, at least for the present.
Otherwise, it must have been tempting for Exxon to have a crack at BP. The divergence in the market valuations of the pair over the last few years is little short of embarrassing, as Exxon has stuck to its knitting as an oil and gas business, while BP has gone green(ish). Signs that the new management there has grasped that BP is an oil company after all have encouraged something of a re-rating of the shares, but the gap remains large. At ÂŁ91 billion market value, it is well within range for Exxon, especially with a mixture of cash and shares.
As for Shell, its shares have recently reached a new peak, and at twice BP’s value, is probably too big even for Exxon to contemplate. Its decision to cut 200 green jobs, announced this week, is an indication that its new CEO understands that it too is, first and foremost, an oil and gas company. The other factor at play here is the constant pressure on British executives from activists trying to stop them doing what they do. This is hardly helpful to a management which is there to create value for the shareholders and take difficult long-term decisions.
It’s an open secret that the Shell board contemplated a move across the Atlantic. That would be a mighty blow to London as a financial centre. It might have concentrated minds in Westminster and Whitehall to consider oil companies as national assets rather than cows to be milked.
Finding alternative energy sources is hard, and oil companies have little more idea of how to do it than lots of other enterprises. They should be encouraged to provide the oil and gas which power our lives, and distribute their profits so the market can find solutions. These will not be cheap or simple. Shares in Siemens, one of the major manufacturers of wind turbines, fell 39 per cent in a single day this week after the company released another profit warning. As Kermit once said; it’s not easy being green.
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