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12 November 2021

Oil: Love it or Hate it

There is a tendency for controversy regarding all things black, viscous, and not suitable for spreading on toast.

Oil, love it or hate it, has been the lifeblood of the global economy for a century, emitting greenhouse gases and contributing to climate change. The COP26 summit forefronts the urgency of the climate problem, and many investors are washing their hands clean of the oil majors as they burnish their portfolios’ green credentials. But is this the right move? Could investing in big oil be part of the solution, or is it taking another step toward the climate crunch?

As governments discuss an energy transition, and companies seek sustainable, recyclable non-oil alternatives, it is clear to most that oil’s days are numbered. Big oil companies are aware of this new reality, and reminding investors of their categorisation as energy stocks, investing heavily into renewables to provide electricity. Currently, BP is investing US$4-5bn a year in renewable projects; hardly crumbs and a rate that would place it to become one of the world’s largest renewable electricity companies. Nearly every major oil company is investing in renewable projects such as offshore wind, though admittedly financing them with oil-derived cash flows.

Big figures sound impressive but looking at how far investor cash spreads reveals a different story. BP paid more than 15 times (US$2.5bn) the typical price for an offshore wind project at auction this year, and oil majors are bidding up prices dramatically. As many an investor has experienced, overpaying can nullify an opportunity by driving down returns, and picking a management team that understands that is important. Total is focused on paying reasonable prices and steering clear of bidding wars.

Renewable investment or not, it is important to invest with your eyes open. These companies are still producing oil, make no mistake, and though their investment has slowed, they are still investing more resources into oil and gas than renewables. This presents a greater risk to investors worried about stranded assets that only cause ill – who could make use of thousands of kilometres of pipelines? A study by Siemens energy suggests natural gas infrastructure could be tweaked to deliver hydrogen in a new hydrogen age, giving the world economy a much-needed blood transfusion. Pipelines are the most economical transportation method for the fuel and could carry three times as much hydrogen as natural gas at the same pressure, which could bring down the cost of its introduction significantly.

Shareholders in big oil are at odds, between those that want to focus on reaping cash from the oil business and those that want to transition into cleaner, greener companies. A factor that many fail to consider is that it takes two to make a market. Excluding oil from portfolios involves selling its shares to someone who wants to buy them, someone who might care more about cash and returns than the environment. Companies are beholden to their shareholders and, despite their best intention, green-minded investors selling their shares in the companies likely, on aggregate, increases the voting power of those who would let oil companies’ returns rise, entrenching the problem. Climate change is a collective phenomenon, and to merely wash your portfolio clean of it will not influence the ones jamming progress, quite the opposite.

Are oil companies part of the solution, then? The answer is not so clear because they are in a state of flux. They could yet become renewable powerhouses; conversely, they could be creating headlines, destroying value, and slicing enthusiasm for renewables. Their pipelines could be converted to enable the hydrogen future evangelised by enthusiasts for decades, or they could continue to pipe black gold for as long as possible, pumping them for shareholder cash. It is up to investors to decide the future of big oil, to hold their management to account, exercise their votes, and not politely hold their noses.
Oil: Love it or Hate it
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