As renewable energy gains momentum, oil companies are shedding costly assets and focusing on low-cost projects that can survive price swings.
The oil industry is facing a year of big decisions in 2024. With oil prices hovering around $30 per barrel, companies are rethinking their portfolios and strategies to adapt to the changing energy landscape. The rise of electric vehicles, climate policies, and social pressures are challenging the long-term viability of oil and gas as the dominant sources of energy.
Some of the world’s largest oil companies are targeting new projects that can break even at $30 per barrel or lower, while also increasing their investments in low-carbon technologies and emissions reduction. These moves are aimed at improving their financial performance, satisfying their shareholders, and enhancing their sustainability.
Low-cost oil and high returns
The oil majors – BP, Chevron, Eni, ExxonMobil, Shell and TotalEnergies – have been selling off some of their high-cost, legacy assets in regions such as Africa, Canada, and the North Sea. They are also scaling back or exiting from countries with high political and security risks, such as Nigeria and Indonesia.
Instead, they are focusing on low-cost oil and gas production in areas such as the Middle East, Brazil, and the US shale. These projects have lower breakeven prices, ranging from $25 to $30 per barrel, and can generate higher returns and cash flows.
For example, ExxonMobil and Chevron recently struck deals worth a combined $125 billion to acquire companies that will help them pump oil for between $25 and $30 per barrel. Shell and Equinor are pursuing projects with $25-30 per barrel breakevens, while France’s TotalEnergies aims to get its production costs under $25.
These low-cost projects also offer more flexibility to adjust output in response to market fluctuations. The oil industry has experienced three major price crashes in the past 15 years, and many analysts expect another one to happen in the near future.
Balancing oil and renewables
While the oil majors are still in the business of growing their hydrocarbon production, they are also aware of the need to diversify their energy mix and reduce their carbon footprint. The global demand for oil is expected to peak in the next decade, as renewable energy sources such as solar, wind, and hydrogen become more competitive and accessible.
The oil companies are therefore increasing their investments in low-carbon energies, such as biofuels, hydrogen, carbon capture and storage, and renewable power generation. They are also setting ambitious targets to achieve net-zero emissions by 2050 or sooner, in line with the Paris Agreement goals.
However, the pace and scale of this energy transition vary among the oil majors. Some, such as BP and TotalEnergies, have been more aggressive and proactive in shifting their portfolios and strategies towards renewables. Others, such as ExxonMobil and Chevron, have been more cautious and conservative, focusing on their core strengths and competencies in oil and gas.
A year of opportunities and challenges
The oil industry is expected to have a solid start in 2024, thanks to the high oil prices and strong financial position of the companies. This will enable them to finance both their investments and dividends, and maintain their disciplined capital program and shareholder-focused strategy.
However, the industry will also face several challenges and uncertainties in 2024, such as the COVID-19 pandemic recovery, the geopolitical tensions in the Middle East and elsewhere, the regulatory and fiscal changes in key markets, and the social and environmental pressures from various stakeholders.
The oil companies will have to balance these competing demands and expectations, and demonstrate their ability to deliver value and sustainability in a changing world.
Source: Reuters
