Will Q1 Financials Change IOCs' Energy Transition?

Summary

• US and European international oil companies (IOCs) have registered positive financial income in the first quarter of 2021 following huge losses registered throughout most of 2020.
• The revenues came as a result of higher oil prices, improving refining margins and higher demand prospects.
• While the IOCs have started talking about their plans to switch to renewable energy, they lack tangible projects on the ground, and the huge investments are not yet a reality, meaning they are still vulnerable to the pandemic oil demand shock and the huge losses as a result.

Photo by Igor Borisenko/iStock via Getty Images

US and European international oil companies (IOCs) have registered positive financial income in the first quarter of 2021 following huge losses registered throughout most of 2020. The revenues came as a result of higher oil prices, improving refining margins and higher demand prospects.

The pandemic drove IOCs to heavy and unprecedented losses last year, a result of the largest oil demand shock in history. One of the adverse effects of this was a significant decline in upstream investments, which will result in a negative reflection on the market value of these companies and, in the long term, cause a catastrophic shortage in oil supplies.

IOCs have seen their market values sink in recent months, battered by concerns over oil demand due to the pandemic as well as investors' doubts over their ability to successfully carry out an ambitious plan to pivot away from fossil fuels to renewable energy.

Some IOCs mistakenly believed that oil demand may have already peaked in 2019, and intend to reduce oil and gas production by 40 percent by 2030. Others began charting a new path at the beginning of this year, with pledges to reduce emissions from their operations to net zero by 2050. The goals behind this sudden shift to what they claim is more sustainable and environmentally friendly energy means they have set themselves a new set of financing challenges as they seek to transition their investments into renewable energy.

While the IOCs have started talking suddenly and boldly about their plans to switch to renewable energy, they lack tangible projects on the ground, and the huge investments are not yet a reality, meaning they are still vulnerable to the pandemic oil demand shock and the huge losses as a result.

As the world moves to become greener and embrace more eco-friendly energy sources in the long term, it is scaling down oil investments and ramping up funding for renewables. So, the question remains: What will be the repercussions on oil?

Several IOC refineries have announced plans to convert some production operations to renewable fuels. However, how can IOCs deal with the financial challenges posed by this energy transition? It is not clear, and it will be extremely challenging for refineries to invest and earn returns that are above their weighted average cost of capital and shift toward a cleaner, more sustainable and eco-friendly form of energy.

With the returns seen from oil revenues, the rebound in oil demand and global inventories returning to their five-year average, will IOCs still abandon oil investments?

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[genomegk]

Companies know high CAPEX exploration to maintain steady state levels of production is risky in the face of lower than forecast demand. 2019 was just a warning shot. I don't think anyone believes 2019 was the year of peak oil production, but it does not have to be to justify cuts. How much less does demand need to be compared to production to create a glut and decimate profits? Hint 1%=100 million barrels of oil a year surplus. Look at the economic performance of oil companies over the last decade. This is not a new problem.

[ziegle9876]

Some IOCs mistakenly believed that oil demand may have already peaked in 2019, and intend to reduce oil and gas production by 40 percent by 2030...... They don't "intend", they did not find anything in spite of not negligible exploration spending so they sell this narrative (Shell......). Why? Because they have significantly downgraded the historically high quality of their upstream teams, to save a bit of opex..... Not only should capex-related personnel cost be capitalized, but to try to save money on people in an industry that is 100% capital intensive and 0% labor intensive is so myopic that it can be considered as total blindness. No more Expats where they are needed and doing studies in Bangalore costs billions.....