Massive losses should be a warning to big oil that its bonanza is over

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The final months of 2020 were a tough end to a tough year, according to BP’s chief executive. But Bernard Looney’s verdict on the worst financial year in the industry’s history is a devastating understatement. It was a period marked by thousands of job cuts, battered dividend policies and record multibillion-dollar losses.

BP revealed a full-year loss of $18bn, its first since the Deepwater Horizon disaster more than a decade ago, while US oil giant ExxonMobil reported an annual loss of $22.4bn – its first ever. Shell capped a year in which it slashed its dividend for the first time since the second world war with a debit of almost $20bn.

The crushing decline of the oil industry during the Covid-19 pandemic may be unprecedented, but it is also a foreseeable outcome for fossil fuel producers in the years ahead. The race to create clean-burning biofuels and hydrogen to propel aircraft and seaborne tankers is gaining pace. At the same time, electric vehicles are accelerating into the mainstream.

A green transport future is arriving faster than even the most optimistic environmentalists had hoped, and fossil fuel executives had feared.

Managers have a choice: they can view the 2020 collapse as an unprecedented event in the history of the industry, or a grim foreshadowing of its value in a world that no longer needs fossil fuels. Both are valid viewpoints, of course. But unless oil companies prepare today for a greener future, they face an indefinite number of dire financial years.

There are some signs that the warning of 2020 has been heeded by the world’s biggest producers: companies including BP, Shell and Norway’s oil giant Equinor are taking an aggressive position within the offshore wind market, Shell is accelerating its move into electric vehicle charging, and all seem enamoured by the potential for a hydrogen economy.

But the real trick to guarding against the risky future for fossil fuel production is to stop producing fossil fuels. None of the major oil companies seem ready to make that leap. They may want to hurry.

For further proof, if it were needed, that the low-carbon race is advancing apace, turn your attention to the US comedy star Will Ferrell. The actor has – temporarily – traded in his big-screen gags for a General Motors television advert in which he vows to help the US beat Norway’s dominance in electric vehicles. The ad, which is due to run in the US during the Super Bowl, is perhaps the clearest sign that forgoing fossil fuels is no longer the niche pursuit of the eco-conscious. If the star of Anchorman is using the phrase “Norway is out EV-ing us” in one of the most-watched US television slots of the year, we can safely assume that electric vehicles have arrived in the hearts and minds of middle America.

There will be Big Oil naysayers who insist that the road towards green transport will be more of a long and winding path than a motorway. That is to be expected: it comes from the same playbook used by the fossil-fuel industry when renewable energy began to emerge. Energy from the sun and the wind was once dismissed as being too expensive, too difficult to store, and technically incapable of playing a major role in the energy system. In a matter of years, renewable energy developers have quietly proved these theories wrong.

Oil company bosses who believe there is one last hurrah for fossil fuels before the green renaissance takes hold may be proved wrong yet again, and this time there will be no excuses. Many warning shots have been fired in the green revolution, but none so loudly as in 2020. It’s time to bite the bullet.

The economy is being boosted by the vaccine, but held back by Brexit

lSince the UK mass vaccination programme began, the value of sterling has crept steadily higher against the euro. From a low of EUR1.09 on 11 December, the pound has risen to edge above EUR1.14. If the relative value of currencies are any guide to the future, it seems clear investors are betting on the UK having a brighter 2021 than the eurozone.

The European Central Bank is likely to confirm this outlook when it meets next month, by downgrading the outlook for growth this year for the 19-member currency bloc from around 4% to nearer 3%. It will blame the delays in vaccination procurement for holding back what was at one stage predicted to be a robust recovery.

Meanwhile, the Bank of England says a strong bounceback beckons in the second half of the year, resulting in 5% growth overall in 2021.

But while a faster vaccination programme is significant, it is not the only issue affecting growth. When the figures are tallied, the UK will almost certainly have suffered a 10% contraction in 2020, much worse than the eurozone average of 6.8%. This means Britain starts 2021 from a weaker position than its neighbours.

Government spending, and not just on health, also matters. At the moment, the Conservative party is heading towards setting a budget in March that will be dominated by talk of bringing down the public spending deficit as much as ways to boost the economy.

The EU has no such concerns when much of its EUR750bn (GBP670bn) stimulus package has yet to be spent and its manufacturing base is motoring along, while the UK’s suffers an overload of Brexit trade bureaucracy.

That means there are plenty of trip hazards ahead for both British and EU forecasters. Their predictions may be modified many times before the year is out.

We need seek a seabed dividend

As oil revenues plunge, the drilling giants are getting set for a switch to renewables. An auction of seabed plots for windfarms off the coasts of England and Wales has attracted record bids as new companies pile into the sector, with predictions that it will raise more than GBP4bn in licensing fees over the next decade.

With Boris Johnson calling for every home in the UK to be powered by renewables by 2030, the seabed looks set to remain a major source of revenue for the British state. So the time has come for a debate on what the nation should do with this green windfall.

As things stand, a quarter of the cash will go to the Queen. The other three-quarters will flow to the Treasury.

A first step would be to reduce the monarch’s share of revenues from the Crown Estate, which manages all her property, including her rights to the seabed. At present she is entitled to 25% of Crown Estate income. The sum was increased from 15% in 2017 in order to help pay for repairs to Buckingham Palace. That decision should now be reversed – even a smaller share will be more than enough to pay for the rewiring.

The bigger question is how the Treasury should manage its portion. Some, including the Green party, want the money invested for future generations.

Norway’s sovereign wealth fund is a source of envy around the world, perhaps nowhere more so than in Britain. One of the largest state-owned nest eggs in the world, the oil fund – or Oljefondets – was created in 1990 from North Sea oil revenues and is now worth more than GBP700bn. The investment income is helping to pay for the pandemic.

Margaret Thatcher’s government spent the takings from Britain’s 1980s oil boom by recycling them into cuts in taxes and welfare benefits. Had the money been put into a fund, the IPPR calculated a couple of years ago, it would be worth some GBP500bn today. The UK must make the most of this new opportunity.

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