Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 6, 2019
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Business Trends

Lower crude prices across the board across July-August saw financial performance from oil supermajors fall in response. This was despite a temporary spike in prices from an attack on the world’s largest crude processing plant in Saudi Arabia; initially fearing the worst, the recovery in Saudi production capacity was largely re-instated within 2-3 weeks, returning oil prices to a downward trend. Worries about the overall health of the world economy is depressing demand for oil, with particular worrying economic data from India and China.

The decline were across the board, with ExxonMobil taking the biggest hit. Quarterly profits were down by almost 50%. Despite oil and oil-equivalent production rising by 3% (driven by shale liquids production in the Permian), the fall was largely due to lower crude prices. It was actually anticipated, and results actually topped analyst expectations. ExxonMobil has stated that it is making ‘excellent progress’ on its long-term growth strategy, citing potential production coming from its blockbuster discoveries in Guyana. ExxonMobil’s results were also clouded by its current trial in New York, over misleading investors over its financial reporting.

BP and Chevron also reported large drops in their quarterly results. BP’s net profit fell 39.7% - beating expectations on lower upstream earnings and weaker oil prices. BP’s CEO Bob Dudley will be stepping down from his role as CEO, completing a tenure that has seen him rebuild the company in the aftermath of the Deep Horizon disaster back to regular profitability. Chevron mirrored the decline with net profits falling by 36%, again within expectations.

The champion among the supermajors was, once again, Shell. Quarterly profits were down by 15%, with Shell citing prices and lower chemicals margins. Upstream profits were down 51.9% y-o-y, but Shell’s broader focus on downstream and natural gas over the past few years has paid off, with the downstream and integrated gas units reporting adjusted income that were 7.1% and 16.7% higher than Q318. Buoyed by this, Shell announced that it was launching the next tranche of its share buyback programme, repurchasing US$2.75 billion worth of shares up to January 2020 as part of its major, 3-ear US$25 billion buyback programme.

Total also performed relatively well. That doesn’t mean it was immune from the overall market trends, it was shielded by the start-up of the Culzean gas field in the UK North Sea bolstering its bottom line. Output contribution from Culzean, which started up in June, helped overall production rise to 3 mmboe/d. Better performance is expected in Q419, as the startup of Equinor’s massive Johan Sverdrup field, in which Total owns a 8.44% stake which should allow y-o-y production growth to reach 9%, up from the current 8%.

This does reflect the general pull back from offshore among the supermajors, as the focus  has defaulted to onshore opportunities of shale. In that sense, they are a victim of their own success, surging US shale production has blunted the ability of the OPEC+ club to keep prices in the higher US$60-70/b range, burdening their bottom line. The two best performers – Shell and Total – stand out as being the two with the strongest downstream and, in particular, natural gas businesses: a diversification that spreads the risk. And with prices in no position to climb back it, it is this distinction that will continue to colour performance among the world’s largest oil companies.

Supermajor Financials Q3 2019:

  • ExxonMobil – Revenue (US$65 billion, down 15.1% y-o-y), Net profit (US$3.17 billion, down 49.1% y-o-y)
  • Shell - Revenue (US$89.5 billion, down 11.9% y-o-y), Net profit (US$4.7 billion, down 15% y-o-y)
  • Chevron – Revenue (US$36.1 billion, down 17.8% y-o-y), Net profit (US$2.58 billion, down 36% y-o-y)
  • BP - Revenue (US$69.3 billion, down 14.2% y-o-y), Net profit (US$2.3 billion, down 40% y-o-y)
  • Total - Revenue (US$48.5 billion, down 11% y-o-y), Net profit (US$2.8 billion, down 29% y-o-y)

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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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