Further out in time lie existential challenges thrown down by decarbonisation and technology. We think oil consumption growth slows but peak oil demand doesn’t happen for at least a couple of decades.
However, oil companies have yet to present a coherent long term strategy that assuages concerns of an industry that will, eventually, face long term decline.
New energy will form part of that strategy. Most Majors, led by the Europeans, are already investing to varying degrees in renewables, a putative ‘third leg’ to the integrated model. Renewables fits the bill - it’s energy, it’s low carbon, and it’s got growth – a lot of growth. Statoil and Total could be allocating a fifth of their investment to renewables by the 2030s.
The commercial proposition can be attractive – perhaps well short of the best new projects in Upstream, but better than many high cost developments currently in the Majors’ hoppers. The long life of wind and renewables projects and stable cash flow visibility could provide much needed support for a dividend policy.
The opportunity posed by renewables
Renewables on their own are not going to transform growth prospects for the peer group as a whole.
Our latest analysis by Tom Ellacott and team suggests that the scale of opportunity is simply not there on our forecasts for solar and wind, at least not in the next twenty years.
Say the Majors captured the same market share of the global renewables market by 2035 as they have currently in oil and gas, a bold assumption in itself. Wind and solar output would reach 1.3 million boe/d, or just 6% of the Majors’ combined production.
Renewables needs to be part of the long term growth story, but for the foreseeable future will be just that – and a relatively modest part.
Even if market share parity in renewables is achieved, the task of replacing natural decline in oil and gas production will be formidable. We reckon the Majors will need up to 10 million boe/d of new oil and gas production by the mid-2030s to maintain total output at the peak levels we forecast next decade.
New oil and gas volumes will swamp the likely potential in renewables by a ratio of almost 10:1.