Page 8 - FSUOGMWeek142020

FSUOGM COMMENTARY FSUOGM
European majors to shelve green
plans until markets stabilise
In the longer term, however, oil firms may see investment in renewables more favourably
EUROPE
WHAT:
European majors are likely to put carbon- zero initiatives on the backburner until they stabilise their finances.
WHY:
Oil and gas producers have taken the knife to discretionary spending to protect their balance sheets.
WHAT NEXT:
If low oil prices persist and oil project returns decrease, companies may be more motivated to invest in renewables.
A number of leading oil companies announced ambitious plans prior to the oil price crash to make their operations carbon neutral within the next few decades. They were responding to mounting pressure from governments, envi- ronmentalists and even their own investors. But with the industry now in survival mode, many of these plans are likely to be shelved until market conditions stabilise.
Leading the carbon-cutting trend were European majors. The first was Spain’s Repsol, which in early December pledged to reduce net carbon emissions from its operations and most of its products to zero by 2050. It even booked a €4.8bn ($5.3bn) charge on its assets to reflect its shift in priorities.
Others soon followed suit and made simi- lar promises, including Norway’s Equinor, Ita- ly’s Eni and even BP. The latter went so far as to announce a restructuring plan to prepare itself for becoming net zero. Their US peers Exxon- Mobil, Chevron and ConocoPhillips notably did not take similar steps.
Many of the promises were made when the oil was selling for $60 per barrel. The market outlook was not bullish, but at least it was sta- ble. The black swan event that is the coronavirus (COVID-19) pandemic has changed all this, creating unprecedented market uncertainty.
As lockdowns intensify, cutting deeply into fuel demand, Russia and Saudi Arabia are once again locked in a supply war which promises to flood the market.
Brent is now trading at just $25 per barrel, with forecasters warning it may slide to as low as $10 once global storage space runs out.
“In a $60 per barrel oil price environment, most companies were generating strong cash flow and could afford to think about carbon mitigation strategies,” Valentina Kretzschmar of Edinburgh-based Wood Mackenzie explains. “But now, the sector will struggle to generate enough cash to maintain operations and honour shareholder commitments.”
International oil producers have announced steep cuts to capital expenditure this year, typ- ically between 20-30%. Many have taken the knife to all discretionary spending, including budgets allocated for carbon mitigation.
“Companies that have yet to engage in carbon reduction strategies are almost certain to put the issue on the back burner until they stabilise their finances,” Kretzschmar says.
On the green side
In the longer term, however, oil and gas compa- nies may have greater incentive to expand into renewables.
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w w w . N E W S B A S E . c o m Week 14 08•April•2020