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opinion

Big Oil wasn’t supposed to be Big Oil by now.

The world’s largest stock market-listed oil companies were supposed to be different beasts at this point, in recognition that climate change was a clear and present danger, that crazy-expensive development costs were killing them and that they ultimately could not compete with the state-owned production machines in the desert, such as Saudi Aramco, with ultracheap pumping costs.

Yet today, nothing much has changed. They are still Big Oil – just with a smattering of clean-energy businesses on the side, as if for climate change PR purposes.

Propelled by the recent price surge – oil is up by more than half in 12 months – they are market darlings once again. Today, Shell is the top name on the FTSE 100, having overtaken vaccine powerhouse AstraZeneca. In one month, ExxonMobil has gone from US$60 a share to more than US$70, giving it a market value of US$300-billion. Canada’s Suncor energy is up almost 50 per cent since this time last year.

For Big Oil, the good times have returned in a cloud of soot and planet-warming greenhouse gases, and investors couldn’t be happier. It’s as if November’s Glasgow climate summit, COP26, never happened.

While many oil companies have vowed to reach net zero by 2050 or so, investors are not exactly bemoaning rising oil production and prices and are approving plans to boost oil and natural gas investments. According to research firm Rystad Energy, overall investment will increase US$26-billion this year, to US$628-billion. Drilling rig counts in North America are up by half over a year, says oil field services company Baker Hughes.

Six or seven years ago, when oil was going down the toilet, the ugly reality of climate change was penetrating the brains of oil company investors and bosses and renewable energy was coming on strong, there was the sense that Big Oil faced a momentous shakeup.

At the time, there was plenty of speculation that corporate raiders were poised to buy oil and gas companies, cut their capital expenditures on exploration and development to zero and liquidate their reserves over time. In essence (though not in the legal sense), they would turn them into Canadian-style income trusts. The lack of spending meant they would be able to pay out gorgeously plump dividends to shareholders.

The lack of capital spending, of course, would be slow-motion suicide, because reserves would not be replaced. But corporate death would never be so profitable, and a few of the enlightened oil and gas companies would divert some of the profits to renewables, reinventing themselves as climate-friendly energy companies.

The concept never took off, even though it made a lot of sense on many levels. Shortly after the idea was studied, prices climbed, with oil reaching more than US$80 a barrel (today it’s US$85). Share prices and profits recovered, and corporate raiders lost interest in owning companies that could pump themselves into oblivion. A few of them realized that running down reserves and paying big dividends would ensure a company would be valued largely on a discounted cash flow basis, potentially reducing its overall worth.

Today, a variation on the theme has been raised by John Browne, the British lord who was CEO of BP (the former British Petroleum) between 1995 and 2007. More than 20 years ago, he tried to rebrand BP as “Beyond Petroleum,” a remarkably progressive idea at the time. It would see one of the world’s biggest oil companies gradually embrace sustainable energy. But BP’s black-to-green reinvention never took off, and the rebranding was quietly shelved a few years later.

Mr. Browne’s new idea is to split Big Oil companies into fossil-fuel and low-carbon businesses.

Writing in a recent issue of Time magazine, he said, “[Renewable energy] is rapidly growing, less capital intensive and valued at a premium by investors, whereas the business of hydrocarbons is capital intensive, unloved by the market and in decline. If companies take steps to separate these very different types of activity into two corporate entities, investors can allocate their capital more efficiently and the true value of low-carbon businesses within large hydrocarbon producers will become clearer.”

The concept is sensible – and doomed.

Big Oil bosses don’t want to split their companies into green and black parts. Their argument is that the profits from the black bits are needed to build the green bits, such as wind and solar generation, and profits from hydrocarbons are surging again – Mr. Browne is wrong in his assessment that the market no longer loves hydrocarbons.

The other argument – one no oil CEO would admit to – is that Big Oil really knows nothing about renewable energy. It is the new breed of renewable energy companies, such as Denmark’s Orsted, the biggest developer of offshore wind farms, that are soaking up the most investor attention in the green energy space. There is no guarantee that the relatively small renewable energy divisions of oil companies would thrive as independent operations.

But the main point is that oil companies have come back to life as energy demand soars, economies roar back from their pandemic lows and renewable energy alone proves incapable of meeting rising demand. The climate crisis is far from ending the era of Big Oil. Too many energy investors want these companies to stay in business and expand, not disappear for the sake of the planet.

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