The Future of Oil as a Commodity in 2021 – Disrupting a longer-term pattern, or another bastion against Big Tech?
The oil industry started the year by prompting a global recession in March 2020 following a failed OPEC+ Conference in Vienna. Having failed to agree a set price for the year, the price per barrel of oil collapsed as low as $31.26 on Monday 9th March 2020. The disagreement between Russia and Saudi Arabia prompted a depressed market in 2020, further hampered by the sharp decline in demand from sectors such as aviation.
Earnings reports have revealed multi-billion-dollar losses, Total reported a $7.2bn net loss for 2020 due to the pandemic.
ExxonMobil faced direct challenges when Engine No1, an activist investment fund, independently nominated four new director candidates to Exxon’s board. The fund underlined that ‘long-term decline’ does not represent a strategy, and was supported by BlackRock, the asset manager.
Royal Dutch Shell meanwhile failed in their defence of a Nigerian subsidiary before The Hague. Shell’s Nigerian subsidiary was found liable for oil spills in the country ten years ago, which marks an advance in the Netherlands’ ability to hold multinationals to account for the actions of their overseas subsidiaries. This establishment of a ‘duty of care’ on the parent company could set a precedent where cases are brought where companies are headquartered, rather than where the pollution takes place. This would have major implications for major US and EU corporations, with more demanding climate regulation and legislation in the pipeline.
Looking ahead to 2021, Royal Dutch Shell raised its dividend to investors despite the company’s preferred profit measure falling by 71%. This could cause market shake-ups, with notable US oil majors seeking to consolidate their positions through Mergers and Acquisitions (M&A). A tie-up between the US supermajors would create more profitable oil portfolios that would challenge the low cost Middle Eastern and Russian suppliers. This ‘last-man standing’ strategy is designed to mitigate the declining demand for oil.
Indeed, consolidations would make the fuel competitive in a market where demand will continue to exist in the short- to medium-terms. The price of crude oil rose on Monday 8th February 2021 to over $60 per barrel in anticipation of increased energy demand following lockdowns. Coupled with comfortable trading in China’s futures market, though the industry will need to change, it seems progress will be slower than the demands of activists.
BP’s highly publicised shift to renewable energy is being targeted by activists as a publicity stunt. This follows Rosneft’s commitment to creating infrastructure for a large gas operation in Russia. BP, a significant 20 % shareholder of Rosneft, will have to either challenge the development or divest its interest in that portfolio. Transformation then, does not represent a straightforward challenge.
The oil industry faces existential threats in the form of supply, demand, but also alternative energy forms. The push for net neutrality is pursued not only by governments, but also corporates. Significantly, Apple, Amazon, Facebook and Google have each made commitments to net neutrality within the next two decades. Their capacity to invest in green energy, and also potentially withhold data to increase the efficiency of oil and gas extraction from the oil giants should be cause for concern.
Progress is slower than would be hoped for the environment, but it seems that 2020-21 could represent the point of no return for the industry. The oil giants face increasing costs of potential climate litigation, lower demand for crude oil as a fuel and greater investor scrutiny. Royal Dutch Shell announced a production peak in 2019, a bold statement supporting the end of the oil age. However, McKinsey forecast a peak demand peak for oil to come in 2029. As ever, radical statements are followed by more measured actions.
Sources:
https://www.vedomosti.ru/economics/articles/2021/02/09/857328-morgan-stanley
https://www.vedomosti.ru/economics/articles/2021/02/07/856990-pandemiya-sblizila
https://www.faz.net/aktuell/finanzen/oel-wird-wieder-teurer-17153663.html
https://www.ft.com/content/3c93f7ed-cd30-4507-aa2b-856ed779863b
https://www.ft.com/content/3032d80d-89b0-4020-922e-f4fa15435b5d
https://www.ft.com/content/877b3676-5236-4d90-bfbc-b0683faa5af8
https://www.ft.com/content/3a863835-9e27-414c-a715-17eec4a99da7
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https://www.ft.com/content/179e64c9-a264-4a06-811f-b1d07d90fbd0
