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Big Oil's Investment Risk Is Spiking – OilPrice.com

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Big Oil’s Investment Risk Is Spiking | OilPrice.com

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David Messler

Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and…

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The major integrated oil companies: Shell,(NYSE:RDS.A, RDS.B); ExxonMobil, (NYSE:XOM); BP, (NYSE:BP); Chevron, (NYSE:CVX), and a few others, so named for their vertical stewardship of the hydrocarbon molecule from initial extraction to final refining, have come under increasingly accurate fire from climate change advocates. In the past organizations like Greenpeace and a host of other conservation organizations, have used direct measures to interdict oil company operations. Measures that were flashy, as they drew a lot of attention from the global press, but over the long haul did little to achieve their goals of stopping oil and gas exploration. 

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The companies themselves have had considerable success in pushing back these operations through the courts. As an example a Scottish court has fined Greenpeace £80K for its boarding of a Transocean rig, enroute to a BP North Sea location, in 2019. A boarding the court held to be in direct violation of an earlier edict prohibiting this type of activity.

“She said its breaches of the injunction were so serious she would be justified in jailing John Sauven, Greenpeace UK’s executive director, for up to two years or imposing a suspended sentence. He orchestrated the action from the start, knowing he was breaching a court order.”

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Now these activist organizations are increasingly turning to courts around the world, and with particular focus on U.S. courts, to further their aims. Filings in U.S. courts avail the claimants of the extensive body of American environmental law, and consumer protection legislation. A recent article in Reuters noted that this strategy held out new concerns for the big oils as activists became increasingly shrewd in their approach.

“Cases now are being fought on arguments such as consumer protections and human rights. This shift has been especially pronounced in the United States, where more than a dozen cases filed by states, cities and other parties are challenging the fossil fuel industry for its role in causing climate change and not informing the public of its harms.”

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Related: Apple’s “Holy Grail Of Data” Leaves Oil Traders Disappointed

State and Local governments are also jumping into the fray as costs mount to comply with air and water quality federal mandates. Using tactics that had proved so successful twenty years ago with cigarette manufacturers, the State of Minnesota and the District of Columbia filed suit against ExxonMobil last month. Among the allegations are that the company had misled the public on the adverse environmental impact of its products, and accusing it specifically of engaging in deceptive practices and false advertising. Reuters in an interview with Kate Konapka, Deputy Attorney General for Washington, D.C., noted-

“As awareness of climate change grew in the general public to the extent that their disinformation campaigns were no longer acceptable, there was a pivot to greenwashing,” 

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It remains to be seen how this approach will play out for the companies affected as it is early innings and the companies have had some success in pushing back. ExxonMobil in December of last year prevailed in a 4-year court battle with the State of New York, where it had been alleged that the company had failed to disclose what it knew about the effect its products were having on climate change.

The big funds are decarbonizing their portfolios

Pressure on the big oil companies also comes from the investment community, as major funds have begun limiting carbon based investing, or engaging in outright divestiture in legacy oil companies. As an example Norway’s $1 trillion dollar national wealth fund, rocked the energy world in 2019 by declaring it would no longer invest in companies primarily in the hydrocarbon energy business. They were followed in early 2020 by Blackrock’s similar decision to decarbonize its lending portfolio. In his annual letter to corporate executives, Larry Fink, CEO of Blackrock, put forth a sustainability rallying cry- “Climate change has become a defining factor in companies’ long-term prospects. Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”

A capital intensive business from the outset, hydrocarbon energy development has always depended on outside capital fund expansion. Those days could be coming to an end if this practice becomes widespread.

The big oil companies are taking note

Net Zero 2050 has become a catchphrase in recent times, as big oil companies led by BP have pledged to reduce their net emissions to zero by mid-century. Other major international and national oil companies such as Shell, Total, (NYSE:TOT), Equinor, (EQNR), Eni, (NYSE:E) and others have followed suit with similar pledges. This marks a shift in policy from these organizations from their past stance of not being able to control what became of their products after they were produced and sold. A recent article in Reuters noted this shift-

“Many oil and gas chiefs remain reluctant to commit to reduce emissions from the use of the oil they extract, arguing that they cannot control whether the cars Ford builds or planes Boeing designs run on oil. Commitments like BP’s move beyond that debate over responsibility for so-called Scope 3 emissions, which are indirect emissions in a company’s value chain including from use of products sold, by signaling a fundamental shift in corporate strategy toward new and cleaner energy businesses”

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In the case of BP what this means is likely to be a fundamental shift in the products that make up the company’s value chain. A shift that is noteworthy to investors as it signals a fairly abrupt about-face on major investments to achieve the goal of net zero carbon by 2050.

As a sign that they are intent on taking affirmative steps toward this goal major impairments have been announced in recent months by BP and Shell. In the case of BP specific aspects of its up to $17.5 bn impairment charge to be reported on second quarter earnings haven’t been disclosed as yet, but perhaps their announcement last week of the sale of their petrochemicals business is instructive in that area. BP’s CEO, Bernard Looney noted in a press release-

“This is another significant step as we steadily work to reinvent bp. Strategically the overlap with the rest of bp is limited and it would take considerable capital for us to grow these businesses. As we work to build a more focused, more integrated bp, we have other opportunities that are more aligned with our future direction. Today’s agreement is another deliberate step in building a bp that can compete and succeed through the energy transition.”

For its part Shell has been a little more specific with its comparable $22 bn asset write-down for Q2. Approximately $9 bn of that charge will be allocated to the company’s Western Australia LNG business, including their marquee Prelude Floating LNG ship. A bitter pill for a project that only came on line in 2018.

Source Next to the Prelude FLNG vessel a full-sized LNG tanker appears miniaturized.

In summary, while fighting these court cases one-by one on their merits companies like Shell and BP seem only to be resigned to, but rather are embracing these decarbonization initiatives. Investors may have cause to worry over the short haul as companies go about the task of “Reinventing” themselves. 

Stranded Assets

This brings us to one of the most troubling aspects of these companies for investors. The prospects of key assets carried on the books for billions being written-down (their market value reduced due to circumstances) is jolting. For example both Shell and BP have said that natural gas, a lower carbon intensive energy play than crude oil, will be a central element in their long-term energy mix. Whether that will prove a success remains to be seen as one of the key final forms natural gas often takes is as Liquefied Natural Gas, or LNG. Overbuilding in this space is causing project delays as companies deal with pandemic reduced demand. The unusual step of LNG exporters or importers cancelling LNG cargoes has been on the rise in 2020. This has led to a number of major LNG project cancellations or deferrals have been announced globally, as producers attempt to rein in oversupply.

Related: The Death Of The $2 Trillion Auto Industry Will Come Sooner Than Expected

Another example of a shift away from a previously orderly Final Investment Decision- FID, approval process for its GoM projects, Shell announced in April it would defer a decision on its massive Whale prospect. Previously anticipated by the EOY 2020, Shell slashed pre-FID spending and deferred the FID to 2021. With billions already sunk in seismic, leasing, and drilling and appraisal costs, a thumbs down on Whale development would be the very definition of a stranded asset. In that case, hundreds of millions of barrels worth as much as $20 bn in today’s market, would be left untapped.

What other forms these stranded assets may take, remains to be seen as the companies involved fine tune their product mix strategies going forward.

Your takeaway

The “Investability” of these oil giants is being increasingly called into question as they face battles on so many fronts around the world. Be it in U.S. or European courts, they are going to be confronted with thousands of climate change lawsuits with the advantage moving in the claimants direction. A single adverse decision could run into the billions. In spite of there being a clear need for hydrocarbon forms of energy well into the latter part of this century, increasingly the companies that produce it are being forced to alter their business practices to meet non-market, stakeholder demands.

Whether this will create or destroy value in these companies long term is yet to be determined. In some senses however, the market may have already spoken devaluing shares of Shell and BP by about 50% over the last six months.

Investors considering initiating new positions in these companies might take pause, as a single adverse court ruling could have long term consequences for the stock’s valuation. As we have noted in this article the environmental adversaries of the legacy oil companies have become increasingly cagey in their plans of attack.

By David Messler for Oilprice.com 

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Amazon completes $4B Anthropic investment to advance generative AI – About Amazon

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Amazon concludes $4 billion investment in Anthropic.

Customers of all sizes and industries are using Claude on Amazon Bedrock to reimagine user experiences, reinvent their businesses, and accelerate their generative AI journeys.

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The work Amazon and Anthropic are doing together to bring the most advanced generative artificial intelligence (generative AI) technologies to customers worldwide is only beginning. As part of a strategic collaborative agreement, we and Anthropic announced that Anthropic is using Amazon Web Services (AWS) as its primary cloud provider for mission critical workloads, including safety research and future foundation model development. Anthropic will use AWS Trainium and Inferentia chips to build, train, and deploy its future models and has made a long-term commitment to provide AWS customers around the world with access to future generations of its foundation models on Amazon Bedrock, AWS’s fully managed service that provides secure, easy access to the industry’s widest choice of high-performing, fully managed foundation models (FMs), along with the most compelling set of features (including best-in-class retrieval augmented generation, guardrails, model evaluation, and AI-powered agents) that help customers build highly-capable, cost-effective, low latency generative AI applications.

Earlier this month, we announced access to the most powerful Anthropic AI models on Amazon Bedrock. The Claude 3 family of models demonstrate advanced intelligence, near-human levels of responsiveness, improved steerability and accuracy, and new vision capabilities. Industry benchmarks show that Claude 3 Opus, the most intelligent of the model family, has set a new standard, outperforming other models available today—including OpenAI’s GPT-4—in the areas of reasoning, math, and coding.

“We have a notable history with Anthropic, together helping organizations of all sizes around the world to deploy advanced generative artificial intelligence applications across their organizations,” said Dr. Swami Sivasubramanian, vice president of Data and AI at AWS. “Anthropic’s visionary work with generative AI, most recently the introduction of its state-of-the art Claude 3 family of models, combined with Amazon’s best-in-class infrastructure like AWS Tranium and managed services like Amazon Bedrock further unlocks exciting opportunities for customers to quickly, securely, and responsibly innovate with generative AI. Generative AI is poised to be the most transformational technology of our time, and we believe our strategic collaboration with Anthropic will further improve our customers’ experiences, and look forward to what’s next.”

Global organizations of all sizes, across virtually every industry, are already using Amazon Bedrock to build their generative AI applications with Anthropic’s Claude AI. They include ADP, Amdocs, Bridgewater Associates, Broadridge, CelcomDigi, Clariant, Cloudera, Dana-Farber Cancer Institute, Degas Ltd., Delta Air Lines, Druva, Enverus, Genesys, Genomics England, GoDaddy, Happy Fox, Intuit, KT, LivTech, Lonely Planet, LexisNexis Legal & Professional, M1 Finance, Netsmart, Nexxiot, Parsyl, Perplexity AI, Pfizer, the PGA TOUR, Proto Hologram, Ricoh USA, Rocket Companies, and Siemens.

To further help speed the adoption of advanced generative AI technologies, AWS, Anthropic, and Accenture recently announced that they are coming together to help organizations—especially those in highly-regulated industries including healthcare, public sector, banking, and insurance—responsibly adopt and scale generative AI solutions. Through this collaboration, organizations will gain access to best-in-class models from Anthropic, a broad set of capabilities only available on Amazon Bedrock, and industry expertise from Accenture, Anthropic, and AWS to help them build and scale generative AI applications that are customized for their specific use cases.

Deepening our commitment to advancing generative AI, today we have an update on the announcement we made to invest up to $4 billion in Anthropic for a minority ownership position in the company. Last September, we made an initial investment of $1.25 billion. Today, we made our additional $2.75 billion investment, bringing our total investment in Anthropic to $4 billion. To learn more about the broader strategic collaboration between Amazon and Anthropic, of which this investment is one part, check out the stories below:

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Amazon doubles down on Anthropic, completing its planned $4B investment – TechCrunch

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Amazon invested a further $2.75 billion in growing AI power Anthropic on Wednesday, following through on the option it left open last September. The $1.25 billion it invested at the time must be producing results, or perhaps they’ve realized that there are no other horses available to back.

The September deal put $1.25 billion into the company in exchange for a minority stake, and certain tit-for-tat agreements like Anthropic continuing to use AWS for its extensive computation needs.

Amazon reportedly had until the end of the first quarter to decide whether to increase its investment to a maximum of $4 billion, and here we are just before the deadline, and the company has decided to throw in the maximum amount.

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Anthropic’s AI models are one of very few that compete at the highest levels of capability (however you define it) yet are available at scale for enterprises to deploy internally or in user-facing applications. OpenAI’s GPT series and Google’s Gemini are the others up there, but upstarts like Mistral may soon threaten that fragile triumvirate.

Lacking the capability to develop adequate models on their own for whatever reason, companies like Amazon and Microsoft have had to act vicariously through others, primarily OpenAI and Anthropic. The two have reaped immense benefits by allying with one or the other of these moneyed rivals, and as yet have not seen many downsides.

What we can take from Amazon’s decision to invest the maximum after (one must assume) getting a pretty close look at how they make the AI sausage over there is, really, pretty scant.

It makes too much strategic sense for these companies, which possess enormous war chests saved up for exactly this purpose (outspending rivals when they can’t out-innovate them), to pour cash into the AI sector. Right now the AI world is a bit like a roulette table, with OpenAI and Anthropic representing black and red. No one really knows where the ball will land, least of all the companies that couldn’t predict or create this technology themselves. But if your bitter enemy puts their chips down on red, it only makes sense for you to bet on black.

Especially if you can bet on black at a discount — which is what Amazon got here, since it could invest at Anthropic’s September valuation, which is most certainly lower than it is today.

That said, if things were looking sketchy over there — the way they must have looked at Inflection before Microsoft pounced on it — Amazon could have backed out or just invested less than the full supplemental $2.75 billion. But that might have sent a confusing signal no one wants getting out there, least of all existing multibillion-dollar investors.

We know Anthropic has a plan, and this year we’ll find out what Amazon, Apple, Microsoft and other multinational interests think they can do to monetize this supposedly revolutionary technology.

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Canada to tighten foreign investment rules for AI, other sectors

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Canada will require foreign companies to warn the government in advance before making investments or acquisitions in artificial intelligence, quantum computing and space technology, Bloomberg News reported on Tuesday, citing an interview with Innovation Minister Francois-Philippe Champagne.

The move will aid the government in conducting a national-security review before transactions get too far advanced and would-be investors may be restricted in their access to target companies’ user data or other property while the inquiry is taking place, the report said.


Click to play video: 'Canadians concerned about risk of AI generated fraud'
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Canadians concerned about risk of AI generated fraud

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The tougher rules will also apply to investments in critical minerals and potentially other sectors, Champagne said to Bloomberg.

Earlier this month, Champagne said Canada will crack down on foreign investment in the interactive digital media sector to stop state-sponsored actors from endangering national security.

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