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September 22, 2023

Small oil moves in where big oil moves out

Small oil moves in where big oil moves out

Oil Price

A Dutch court ruled against Shell two years ago in a case targeting the supermajor’s emission footprint. It obliged the company to slash its emissions by almost half from 2019 by 2030.

Small oil moves in where big oil moves out

Source: Reuters

In response, then-CEO Ben van Beurden wrote a post on LinkedIn, noting an obvious fact that seems to have remained a mystery for the environmentalists that sued Shell and many more like them.

“Imagine Shell decided to stop selling petrol and diesel today. This would certainly cut Shell’s carbon emissions. But it would not help the world one bit. Demand for fuel would not change. People would fill up their cars and delivery trucks at other service stations.”

In confirmation of the above simple truth that while there is demand for a product, supply will find its way, the Wall Street Journal this week reported that as oil majors pulled out of higher-emission projects across the world, smaller companies came and took their place.

We are now witnessing the same thing that happened in 2016 and 2017 in the North Sea but at a larger scale. Back in 2016/17, majors were leaving the North Sea to focus on lower-cost assets. At the time, emission reduction was not such an emergency. Supermajors just wanted to save on platform decommissioning and high UK taxes.

Yet it turned out that there were companies willing to take on those platform decommissioning costs and high taxes—plus the fact of natural depletion—that turned the North Sea into the hottest spot for oil and gas mergers and acquisitions in the world, second only to U.S. shale.

Shell sold some North Sea assets in 2017. Chevron remained there. BP put up some of its North Sea assets for sale but kept its presence in the region. Meanwhile, a lesser-known firm by the name of Chrysaor bought $3.8 billion worth of oil and gas assets in the North Sea that same year and three years later merged with Premier Oil to become the largest oil and gas operator in the area.

The story is repeating now on a global scale. The supermajors have been quite explicit in their intentions to focus on low-cost, high-return assets with the added consideration of emission footprints. So, many of them are leaving emission-intensive projects in Africa, Latin America, and Asia.

Yet, just like nature, the oil industry cannot stand a vacuum, and smaller companies are taking the freed-up space. “What we are seeing is that the larger companies are reducing their share in aging assets with little upside production that have relatively large emissions,” Audun Martinsen, head of energy service research at Rystad Energy, told the WSJ. “Their space has been filled by smaller exploration and production companies.”

According to Rystad, the trend will continue, with offshore investments coming from large public oil companies declining from 45% of the total in 2019 to 37% of the total in 2025. At the same time, smaller, often private companies will increase their share of total investments in oil and gas.

Also, the Norwegian-based energy research firm said, investments in new oil and gas production this year, thanks to these smaller companies, are set to hit $100 billion for the second year in a row. All this is happening while Chevron, TotalEnergies, Shell, BP, and Exxon focus on reducing their emissions without going bust.

According to the WSJ report, the smaller, often privately owned companies are more nimble than Big Oil supermajors and, as such, are better positioned to take risks with projects that are either new, with a high emission footprint or both.

They have lower costs than mammoth organizations like the supermajors and can, according to the WSJ, more quickly recoup their investments in case a downturn looms on the horizon.

In Africa, according to Rystad data cited in the report, Big Oil is reducing its presence, but smaller players are happy to fill the void. As a result, the value of new oil and gas deals on the continent hit $21 billion last year, up from $5.5 billion in 2020. The share of oil production held by smaller, independent players is also on the rise.

The same trend is noticeable in Latin America. Following the partial exit of the supermajors as they focused on their lower-cost and lower-risk assets, small independents moved in and continued exploring for more oil and gas and extracting what was already discovered.

It seems this shift in oil and gas investments will continue, with more and more investment in new production coming from small companies. This is not a welcome development for environmentalists. Because smaller companies cannot be held up to the scrutiny of shareholders that increasingly include representatives of those same environmentalists.

Many of the smaller energy firms taking on emission-intensive projects are privately owned. They are only accountable to their owners and relevant regulators. They cannot be pressured into dropping this or that project. All that because of the simple truth expressed in Ben van Beurden’s LinkedIn post from 2021: while there is demand for a product, supply will find a way.

By Irina Slav for Oilprice.com

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