In today’s Exponential Investor:
- Big Oil doesn’t want to be Big Oil any more
- Financial activism causes CEOs to jump the gun
- The billion-pound “black gold rush” is on
Mere months before natural gas prices started to double, and then triple, and then quadruple, “Big Oil” decided it didn’t want to Big Oil anymore.
Big Oil – much like Big Tobacco two decades ago – realised financial activism was increasingly infiltrating pension funds and private equity groups, and decided to win over shareholders by selling off oil and gas assets and begrudgingly accept the green revolution.
Green power was the favoured power for the UK, so it made no sense to buck the trend.
Companies such as ExxonMobil, BP, Chevron, Equinor and Shell all sold off old wells for a billion pounds here and a billion pounds there.
They amassed huge piles of cash along the way to invest in something cleaner and greener. But, most importantly, assets that would please shareholders and keep them sticky.
By July 2021, some US$140 billion in oil and gas assets were up for sale across the industry.
One fast-thinking analyst at a private equity firm noted, “The quickest way to shrink emissions as a major company is to shed assets so you can hit climate related targets… But asset sales do nothing for climate change, you’re just moving emissions from one hand to the other.”
While Big Oil made have made their environmental balance sheets look carbon friendly, there’s no real environmental benefit being passed on to you or me.
In fact, I’d argue that shifting old fossil-fuel assets from a major multi-billion-pound corporation to a smaller, scrutinised oil firm is worse for the environment…
Passing the carbon buck
By May 2022, some US$192 billion in oil wells had shifted from publicly traded companies to mostly private owned ones, meaning scrutiny and accountability to shareholders is no longer required. The data is now obscured from view in the hands of just a few.
Former oil giants divesting their assets to fulfil all of their environmental, social and governance (ESG) responsibilities gets a quick tick of approval from their crony mates in parliament, but this doesn’t actually have a meaningful environmental impact.
Worse still, older oil wells now rest with companies devoid of the intellectual capital that is organically built up in oil giants. Leaving the small oilers to muddle through with best guesses, assumptions and hopes that no one will find out if something were to go wrong.
That said, there’s power in these spills.
Horrific as they may be, these major oil spills are burned into our memory and force us to confront the ugly realities of mineral and resource extraction.
Public pressure from shareholders and society drive change at government level to increase oversight and scrutiny for these oilers.
While, thankfully, culture-shifting oil spills are rare – at worst once a decade – minor spills occur frequently. Most of which we don’t hear anything about.
The majority of oil spills occur at transfer points such as oil refineries, pipeline failures, oil tankers and ship terminals. These small spills are generally less than 4.5 barrels of oil, but they account for over 80% of all oil spills since 1970.
It’s estimated that, each year, some 1.6 million barrels of oil are lost due to ship operating procedures. A further 771,000 barrels of oil is spilt at refineries, terminals and onshore refineries.
The real number is suspected to be much higher, because this information is largely accumulated from self-reporting companies and published media sources.
There’s already very little legislation to force oil and gas firms to self-report small spills, with even fewer rules in place to hold them accountable.
At the very least, when it comes to a publicly traded company, there’s shareholder pressure to not lose the very product that makes these entities money.
But at no point does Shell selling its oil assets benefit us from an environmental perspective.
Even putting oil spills aside, carbon emissions remain in the atmosphere. They just come from a company with another name.
Also, another much-forgotten factor is the end-of-life process when it comes to depleted wells. Big Oil companies must report the hows and whens of plugging up an old oil well. It’s expensive and time consuming, and it needs to be carried out correctly to avoid further local environmental damage.
Small oil companies – particularly in the US – tend to just walk away from old wells, claiming they’ve run out of money to plug the well correctly, dusting their hands off and entering into bankruptcy…
Big Oil jumped the gun
This is part of the problem with all things oil and gas. It’s a dirty business rife with environmental problems throughout the entire extraction-to-production chain.
And, yes, the industry overall needs to work to a much higher standard. But a public company selling an oil well to privately held firms only benefits us on paper.
Big spills, an even bigger clean-up bill and bad press would be enough to encourage any CEO to jump out of supposedly old “assets” such as oil and gas. Hell hath no fury like a shareholder losing money…
Firms like Shell and Chevron may have looked like they were getting ahead of the ESG curve, selling old wells and raking in a billion or so pounds for their troubles.
And, sure, that may have even matched up with some shareholders’ views that oil and gas is old news. Part of a world some of us left far behind when we installed solar panels on the roof and bought a Tesla.
But we need a reality check.
Fossil fuels might be perceived as dirty and environmentally dangerous, yet our society is based on hydrocarbons, and will continue to rely on them for decades to come.
Our entire built environment rests on the four pillars of steel, ammonia, cement and plastics. All of which required fossil fuels. Without any of these pillars we have no shelter and no food.
The UK is fast-tracking an approvals process for offshore oil and gas exploration, as well as increasing the number of permits available.
Big Oil firms may have jumped the gun.
There’s about to be billion-pound “black gold” rush in the North Sea, with everyone wanting to capitalise on the UK government’s sudden hunger for energy independence.
Not only have Big Oil companies possibly robbed themselves of a financial windfall… but how much faster would the UK achieve energy security if giant oil companies applied their multi-decade experience of exploration out here?
Or, as an incredibly clever co-worker uttered in an email thread just recently, “go woke, go broke”.
Until next time,
Co-editor, Exponential Investor
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