Big Oil's Murky Climate: Liam Denning

General Views Of The Thames Oil Port Project

The Thames Oil Port Project, a joint venture operated by Royal Vopak NV, Royal Dutch Shell Plc and Greenergy International Ltd., stands in Thurrock, U.K.

Photographer: Chris Ratcliffe/Bloomberg

Big Oil is getting religion -- sort of.

Ten major oil companies including Royal Dutch Shell, BP and Saudi Aramco declared on Friday that they totally get the climate change thing and would support measures aimed at preventing it. 

Yet, without committing to the most obvious measure to encourage fundamental change -- namely, widespread carbon pricing -- you could say the Oil and Gas Climate Initiative has taken a leaf from St. Augustine: yearning to be pure, just not quite yet.

The announcement comes ahead of December’s UN climate conference in Paris and not long after a more modern cleric, Pope Francis, took his call for greater efforts to curb carbon emissions directly to Congress.

For hardcore oil fans, the response to all this might be: so what? Oil’s importance as an energy source for a growing -- and more aspirational -- global population trumps everything else.

Yet that would ignore how much the steady drumbeat of calls on climate change complicates an already thorny issue for the biggest listed oil majors: How much should they be investing for long-term growth?

Big Oil has been doing its best this year to live down its name. Dividend yields for oil majors -- traditionally ports in a market storm -- have jumped this year. Even with a recent rally, Shell, BP and Total are trading at north of 5 percent. The reason is simple: In the 12 months that ended in June, the five biggest -- those three plus ExxonMobil and Chevron -- outspent their operating cash flow on capital expenditure and dividends by $39.4 billion collectively.

Even fortress balance sheets can’t sustain hits like that for too long. The majors must either cut their dividends or invest less. It looks like they’re choosing to do the latter: On Friday, oilfield services giant Schlumberger said it expected industry spending to drop again next year, the first such two-year decline since the 1980s.

Yet, for an industry that thinks in decades rather than years, this should be precisely the time to spend money. Prices are low and getting lower as cash-strapped oil firms squeeze suppliers (another cheery message from Schlumberger on Friday). Meanwhile, the U.S. exploration and production sector is trading at around its lowest levels since the post-crisis summer of 2009. Oil majors should be contracting idled rigs at cut-price rates and scooping up distressed assets. By and large, they aren’t.

Favoring the dividend reflects many factors. Pride is one, with companies such as Exxon boasting of multi-decade track records of not cutting payouts. More prosaically, it likely has a lot to do with baby boomers seeking yield income in a world of miniscule interest rates. What the hell do such investors care about projects sucking in billions of dollars of development spending today that won’t turn positive on a cash-flow basis for maybe a decade or more?

Expectations about how quickly the world will tighten regulations on carbon emissions create more stress for oil majors’ planning departments. Total recently scaled back its Canadian oil sands exposure via a deal with Suncor, in part to help shore up confidence in its dividend. It just so happens, though, that oil-sands projects, with their long lead times, heavy upfront investment and carbon intensity, also happen to be particularly exposed if, say, carbon pricing becomes widespread in the next decade.

It is notable that Saudi Aramco’s chief executive emphasized that his company aims to maintain its production capacity. After all, it is higher-cost rivals like Canada that will be forced out of the market first if carbon-related costs rise for the industry. 

What’s more, if your economy is tied overwhelmingly to oil and you’re worried that regulations and technology might threaten its long-term future -- something Saudi Arabia’s petroleum minister has been musing on this year -- it makes sense to pump more barrels out now.

On that front, the Pope’s calls for action represent a moment in the environmentalist movement’s fitful march from the fringe to the mainstream. 

While an old man who discourages sex before marriage is hardly the epitome of cool, his stance on climate change fits with the views of younger people. On the same day in June that the papal encyclical “Laudato Si” was released, the somewhat less exalted University of Michigan’s Transportation Research Institute released results of a survey on consumer attitudes towards different vehicle technologies. 

Younger drivers, as you might expect, were not only more concerned with fuel economy, but also ranked electric and plug-in hybrid cars more highly than older respondents.

Surveys aren’t gospel, of course, but the fact that some major oil companies even feel the need to tout their green credentials tells you they are rattled. With all this in play, they may feel they have little choice but to prioritize payouts over growth. 

And indeed, Schlumberger reminded everyone on Friday that natural decline will soon start to constrain global oil supply in the absence of spending on field maintenance. And that should set up the next cycle of oil price increases, thereby alleviating some pressure on cash flows.

Even that isn’t an unalloyed good, though. Every period of higher oil prices and occasional spikes gives further ammunition to those calling for radical curbs on fossil-fuel consumption. 

Big Oil truly is facing a conundrum of biblical proportions.

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners.)

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