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Oil Majors Stuck Between A Rock And A Hard Place

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The past few years have been historic for as far as crude oil forecasts are concerned. Back in 2015 the view that crude oil demand could peak during the 2020s or 2030s was still met with disbelief (and some ridicule…). Economic growth had been pushing crude oil demand up ever year for decades already, so why would things become different, so the reasoning went. Today, however, essentially all major energy forecasters, including BP, Shell, Total, DNV-GL, the IEA and even OPEC, have come round and acknowledge Peak Oil Demand as a realistic possibility.

The strategic response of the Oil Majors to this possibility has differed. But so far, none seem to have won over the investment community. What could be the reason for this? And does this leave the Majors at risk of being cut-off from capital?

Crude Oil during the 20th century

As Admiral of the Royal British Navy, Winston Churchill took a decision that not only shocked his nation, but also defined the role crude oil would play in the global economy during the 20th century.

Great Britain had become the world’s leading nation thanks to its invention of the steam-engine, coupled with an abundance of coal in the country. This enabled the country to be the first to mechanize industry, which made it not only the world’s industrial heartland, but also its leading military power, as Britain’s mechanized industry was able to churn out warships that were much larger and more heavily armed than its rivals could produce. And by fitting them out with steam-engines, these British warships were also able to travel faster and further, independent from wind. In other words, thanks to the steam-engine and coal, Britain became “the empire on which the sun never sets”.

Nevertheless, in 1912 Winston Churchill decided that the British Navy’s future would be based on crude oil, when he ordered construction of the Queen Elizabeth class of super-dreadnoughts based on an internal combustion engine design. Many were outraged. Steam-engines needed coal, of which Britain had plenty. But Churchill’s internal combustion engines needed liquid fuels derived from crude oil, of which Britain had only a negligible amount. So what on earth was he thinking? But Churchill was convinced that warships which coupled the technology of the internal combustion engine with the physics of crude oil could be made larger, more heavily armed, faster, and with a greater range of operation, than any warship that utilized a coal fired steam-engine. The introduction of the internal combustion engine would therefore ensure that in the competition with France, Russia and Germany, the British Navy would remain superior.

Churchill turned out to be right. Judging by speed, range, ease of operation, reliability and economics, the internal combustion engine fueled by a crude oil derivative did indeed outperform all other transportation solutions. And, as it turned out, these advantages applied not only to (war)ships, but also planes, trains and automobiles. As a result of this superiority of the internal combustion engine, oil became the most important source of energy of the 20th century.

The implications for the strategy of oil companies was far-reaching. Since there was no technology that could compete with the internal combustion engine, growth of the global economy ensured growth in demand for crude oil. Oil companies could therefore simply focus on finding crude oil, producing, refining and marketing it. For as long as they could do this at a price point that was lower than that of their competitors, they would always find takers for their product. They would be able to sell all the oil they could lay their hands on, and at margins which guaranteed record profits and rates of return.

The Crude Oil Business during the 21st century

Over recent years, a number of trends have developed that call into question the future of the internal combustion engine and crude oil.

Primary among these trends is sustainability. The first generation that grew up in the internal combustion engine and crude oil era, the baby-boomer generation, did not know much about the impact on the environment of crude oil production, refining and burning in an internal combustion engine, as this body of knowledge developed only during the 1970s. The baby-boomer generation therefore became environmentally aware after they had firmly established a certain lifestyle. The descendants of the baby-boomers, the Millennial generation, was brought up with knowledge of the environmental implications of crude oil. Consequently, they became not only aware of the environmental issues associated with the internal combustion engine and crude oil, but also concerned about them. As this generation educated its descendants, the so-called Generation Z, in these concerns from the youngest of ages, this latter generation moved beyond environmental awareness and concern, to action. Generation Z consumers are considered the “green generation” because for them, environmental concern is a key factor in day-to-day consumption decisions. For the sake of the environment they are willing to make do with products that are sub-optimal from a convenience perspective but deemed sustainable, and they are willing to pay a premium for products that are deemed sustainable.  This trend would be irrelevant for the internal combustion engine and crude oil had it not been for a second trend, namely technological innovation. Over recent years a number of technologies that greatly appeal to the Generation Z, the consumers of the future, have developed to the point where it becomes possible to imagine that they bring forth solutions that can compete with the internal combustion engine and crude oil on power, range, ease of operation, reliability and economics. Chief among these technologies are the electric drivetrain, batteries and hydrogen, which have made electrification of transportation not only possible but likely.

The third trend of importance to the internal combustion engine and crude oil is ESG investment. On the one hand not fall foul with Generation Z, and on the other hand to leverage this generation’s sustainability preference for financial gain, investors around the world are making sustainability a key tenet of their investing strategy. The bottom line of this trend is that less money will be available for investment in crude oil projects, while that which remains available will most likely come at a premium. 

All this means that there is a real possibility the crude oil business will experience a structural change during the 21st century, as the internal combustion engine could lose its role as the “engine of the global economy” to the electric drivetrain.

Crude Oil Strategy during the 21st century

If the above scenario – the Energy Transition scenario – were indeed to play out, the Oil Majors would be forced to change their strategies in a fundamental manner. If, namely, crude oil loses the pivotal role it plays in the global economy, growth in demand for it would no longer be guaranteed. In such a market environment, the traditional “find it, produce it, refine and market it” strategy would no longer guarantee the growth in profits that the Oil Majors’ shareholders have come to expect.

This potentiality appears to have triggered strategic reviews at a number of the Oil Majors.

Shell was the first to adopt the Energy Transition scenario as the core for its future strategy, as evidenced by the fact that over the past years  it has announced a number of decisions that are natural responses to this scenario. For example, in 2016 it launched a New Energy division to leverage the opportunities that would result from the Energy Transition, such as in electricity generation, batteries, grid management and hydrogen. in 2018 it adopted methane emissions intensity targets for its assets, which has led it to divest from crude oil resources with high carbon intensity such as the Canadian tar sands. In 2019 the company adopted a new ambition to become the largest power company in the world during the 2030s. And most recently the company announced that it would accelerate it transformation in response to the Energy Transition. It adopted “net zero” emissions targets in April of 2020, and in September 2020 launched a major restructuring to free up funds for investment in the New Energy area.

BP too has changed it strategy its strategy in accordance with the Energy Transition scenario, but more recently than Shell. After the failure of the company’s “Beyond Petroleum” strategy launched in 2002, it spent most of the 2010s managing the implications of the Deepwater Horizon disaster. But since the appointment of a its new chief executive officer Bernard Looney in October 2019, things have changed. In February of 2020, in pretty much his first major announcement, Looney announced the new strategic direction of the company using the slogan “Reimagining energy, reinventing BP”, accompanied by a very specific “Net Zero” ambition. Shortly thereafter the company restructured in accordance with this strategy, implementing a new organization structure and leadership team during May and June of 2020. In August it then set out the details of its new strategy, explaining it to the international investment community during September. Further that month it also communicated its new “core beliefs” about the future of global energy demand, saying it assumes this will continue to grow (“at least for a period”), but in a manner different from before, with a “declining role of fossil fuels offset ‎by an increasing share of renewable energy and a growing role for electricity”. On this basis BP then signed its first major M&A deal to add to its New Energy portfolio, also during September.

Although Total has not made the major announcements around the Energy Transition of Shell and BP, it has not stood idly by. It has been speaking about “integrating climate change” in its strategy since 2017 already, and has made a number of significant investment accordingly. Today, of all the Oil Majors, the Total portfolio of New Energy businesses is probably the most advanced, covering renewable power generation, storage, electric vehicle charging, and, through its Carbon Neutrality Ventures arm, even a hydrogen fuel cell powered commercial vehicles developer.

Over in the United States, however, ExxonMobil and Chevron are taking the contrarian position, with both maintaining a market outlook that is best described as “steady she goes”. Based on this outlook, ExxonMobil believes that heavily investing in addition crude oil, natural gas and petrochemicals capacity now sets the company up for success it the future, especially as its European competitors are speaking about decreasing the share of fossil fuels in their future portfolios. Consequently, the company’s strategic plan targets well over US$ 30 Billion of investment annually over coming years – all in fossil fuels.

 

Chevron is positioning itself in between the European Oil Majors and ExxonMobil, adopting a wait-and-see strategic approach. Its current strategy prioritizes dividends payments and share buy-backs over investment, as long as it is not fully clear what the future of energy will look like. The company’s top goal is to distribute US$ 75 billion – US$ 80 billion in cash to shareholders over the next five years.

The Stock Market Response Interestingly, at the end of September, the share price of all the mentioned Oil Majors was down significantly on the year. Shell was down 58%, BP 53%, Total 45%, ExxonMobil 52% and Chevron 40%. Part of this is due to the crude oil price decline during the year, and the lingering impact of the COVID19 pandemic on global crude oil demand. But since this should affect all Oil Majors more or less equally, it is fair to assume that the divergence in their share prices movement is related to the differences in their strategies. Based on this assumption, it appears that none of the mentioned strategies has so far fully convinced the international investor community.

As to the reasons why this could be the case, different considerations are likely at play.

As to where global energy markets are heading, the ambition of consumers, governments and international organizations is clear: sustainability remains the trend, to which investment community is responding by prioritizing ESG investment. The “steady she goes” strategy of ExxonMobil does not address this, as a result of which the company finds itself under significant investor pressure at the moment.

On the other hand, what is not helping the case of the transitioning Oil Majors Shell, BP and Total is the fact that the speed at which they envisage to transition does not align with the 1.5°C global warming limit as outlined by the Paris Agreement. Additionally, smart investors are asking questions about the ability of these companies, which for over a century have focused on fossil fuels, to actually deliver on their transformation ambitions. And, even if one assumes they will be able to, there is no doubt that transforming an Oil Major is harder than starting up a new venture based on the Energy Transition scenario. So why would a smart investor bet her Energy Transition money on a “fossil trying to change”, that will have to deal with a company culture and practices that were developed for the fossil fuel era of the 20th century, when she could also put this money in a New Energy focused startup unhindered by such deadweight?

This probably explains why Chevron, with its focus on returning cash from existing operations to shareholders, has relatively outperformed its competitors so far this year.

The Way Forward 

This author firmly believes that the Oil Majors cannot succeed without the Energy Transition, and that the Energy Transition cannot succeed without the Crude Oil Majors.

As to the first point, the need for the Oil Majors to adopt the Energy Transition strategy, in the world before Covid-19, sustainability was what futurologists and trendwatchers call a macro trend. That is, a general movement in society toward a comprehensively different way of life. Sustainability fell into this category because it was in the process of changing consumer preferences; social taboos as with flight shaming; societal priorities, as evidenced by national commitments made under the UN Framework Convention on Climate Change; government rules and regulations such as bans on single-use plastics and internal combustion engines; and national development policies as exemplified by China’s Industrial Green Development Plan and Europe’s Green Deal. Historically, only cataclysmic events, such as a pandemic or global war, disrupt macro trends. So far, however, the Covid-19 pandemic has not disrupted sustainability. To the contrary, as evidenced by the calls to use the current crisis to accelerate the transition to a carbon neutral economy, it is likely to only accelerate the sustainability trend. Consequently, the pressure on the Crude Oil Majors to transition is likely to increase as well. Those that are transitioning are likely to eventually find themselves under pressure to transition faster. But those that are not transitioning might find themselves cut off from investment, financing and funding.

As to the second point, the dependency of the Energy Transition on the Oil Majors, firstly, this has to do with the nature of a transition. Despite the global ambition for a carbon-neutral economy, the dependency of the global economy on the various derivatives of crude oil will not disappear overnight. Since nothing could be more disruptive for the Energy Transition than a shortage of transportation fuels and plastics during the process, even in their current form the Crude Oil Majors will remain an essential component of the global economy.

Secondly, this has to do with the competencies and capabilities the Oil Majors have built up over the decades. According to the OECD, to meet the needs of the global economy, around $6.3 billion of investment in the global energy infrastructure is needed annually until 2030. This number rises to $6.9 billion if all investments are made compatible with global climate ambitions. Clearly, the scale of this necessary effort is huge, and it is hard to imagine how it could be achieved without leveraging the Oil Majors’ experience in delivering massive, technologically complex projects in the most inhospitable areas of the world, and seamlessly connecting the energy produced with consumers globally.

For the sake of Energy Transition, therefore, the Oil Majors should transition, in a balanced manner, but with a sense of urgency. If they do this while communicating well with their stakeholders, there is no reason to believe the global investment community will not overcome its current hesitancy and come to support their transition strategies.

In a separate, future article I will expand on my ideas about what a balanced transition strategy should look like for the Oil Majors.

By Andreas de Vries for Oilprice.com

 

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Ford to make an announcement in Ottawa Monday afternoon – CP24 Toronto's Breaking News

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Premier Doug Ford will be making an announcement in Ottawa Monday afternoon.

Ford will be joined by Ottawa Mayor Jim Watson, MPP for Ottawa West-Nepean Jeremy Roberts and President and CEO of The Ottawa Hospital Cameron Love.

The announcement comes nearly two weeks after the province entered Step 3 of the COVID-19 reopening framework on July 16.

Step 3 allowed for indoor dining to resume and for gyms and theatres to reopen with capacity limits.

The provincial government said Ontario will remain in Step 3 for at least 21 days and until 80 per cent of eligible residents 12 years and older have received at least one dose of a COVID-19 vaccine and 75 per cent have received their second dose.

In addition, at least 70 per cent of eligible residents in all public health units must be fully vaccinated in order for the province to move to the final stage of the framework.

If all of these requirements are met, Ontario could enter so-called Step 4 at the end of next week which would lift the majority of public health and workplace safety measures.

However, last week Ontario’s top doctor recommended that 90 per cent of eligible residents be fully vaccinated before entering the final step, due to the risk of the Delta variant.

“If we remain at around 20 per cent of the population unvaccinated we won’t build a community immunity and you’ll get breakthrough infections in those individuals that are vaccinated because not all individuals, especially those that are elderly or vulnerable or immune suppressed, will get full protection from the vaccine,” Chief Medical Officer of Health Dr. Kieran Moore said to reporters.

Currently, about 80 per cent of those 18-plus in Ontario have had at least one dose and 67 per cent have had two doses. Meanwhile, 64 per cent of youth between the ages of 12 and 17 have had one dose and 40 per cent are fully vaccinated.

The provincial government has not said if it will raise the threshold for fully vaccinated Ontarians before entering the final step of the plan.

Ford is expected to speak at 1:15 p.m. and CP24.com will stream the announcement live.

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Officials say 90% of population needs vaccine to reach herd immunity – CBC.ca

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Like the last leg of a marathon, public health officials say reaching the final segment of the unvaccinated population will be a grind as Ottawa tries to attain herd immunity — when enough of the population is protected against COVID-19.

The city of Ottawa has set a daunting target to fully vaccinate 90 per cent of its population, including those still not eligible to be vaccinated, which has eluded most regions around the world. 

As of July 23, 73 per cent of the city’s entire population had received at least one dose of vaccine, slightly higher than the Ontario rate of 69 per cent, and one of the highest vaccination rates for first doses among cities around the world.

Ontario’s first-shot vaccination rate has dropped from a high of six per cent per week in May to below one per cent in July, and it continues to trend downward. That means it will take longer to inoculate the remaining portion of the unvaccinated population — likely a venture that continues into 2022.

“I think I can’t understate how important it is to get very high levels of vaccination,” said Dr. Trevor Arnason of Ottawa Public Health.

“If we head into the fall with vaccination where it is now, we’re definitely going to see outbreaks.” 

Trevor Arnason of Ottawa Public Health believes Ottawa can be a world leader in its vaccination rate because of its previous success getting the flu shot, and immunizing children. (CBC)

Vaccination targets need to change

Ontario, which has now been in Stage 3 of the reopening plan for 10 days, must reach 80 per cent of its eligible population with at least one dose, and 75 per cent with both doses, to consider removing all public health restrictions.

Some public health experts believe that target is not high enough due to the growing number of cases of the delta variant and the potential for breakthrough cases.

“We need to establish herd immunity, and we would need to be at a higher level: 85, 90 per cent vaccination rates,” explained Dr. Paul Roumeliotis, the medical officer of health for the Eastern Ontario Health Unit, who also heads a group of public health units across Ontario.

Roumeliotis and Arnason say restrictions could return in the fall if delta spreads, even if they’re not as strict as those we’ve seen throughout the pandemic. Ontario public health officials hope to avoid a spike in cases seen during the reopening in the U.K., Israel, and the United States.

A comparable situation exists in the Netherlands, which has a population only slightly larger than Ontario, and similar vaccination rates. There, cases jumped to 10,000 per day only a few weeks after reopening due to the delta variant, which is now responsible for more than 80 per cent of new infections in Ontario.

WATCH: Getting people ‘through the doors’ biggest part of vaccinating holdouts, doctor says:

Dr. Lorne Wiesenfeld says on the last day of the Lansdowne vaccination clinic’s operation, a team of health-care workers ventured into restaurants, grocery stores and businesses to encourage residents to get vaccinated if they hadn’t already. 0:55

‘Get them through the doors’

Officials estimate anywhere from five to 10 per cent of the population will never get the COVID-19 vaccine, but they need to target those who will roll up their sleeves to help avoid a “pandemic of the unvaccinated.”

Health-care workers at community clinics, including one at Lansdowne in Ottawa, have used lulls in the day to approach people nearby about getting the vaccine.

“The first thing is to get them through the doors, that’s the hardest part,” said Dr. Lorne Wiesenfeld, an emergency physician at The Ottawa Hospital who has also spent time administering the vaccine.

“You want to make it easy. Just remove one barrier that may hinder them, encouraging them in a non-judgmental way.”

Half of Ottawa’s community clinics closed last week as Ottawa Public Health refocused its outreach by offering mobile vaccine clinics at workplaces, community organizations and places of worship, as well as pop-up clinics throughout the city to target young adults.

in Ottawa, only 72 per cent of the population aged 18-29 have the first dose, which is the lowest of any age demographic. That is followed closely by 73 per cent of those aged 30-39 with at least one dose.

Doug Manuel believes public health messaging is difficult when case numbers are low, but that could change quickly if numbers begin to spike again. (Submitted by Dr. Doug Manuel)

Public health messaging difficult with low case numbers

The “receptivity” of public health messaging about the risk of a delta resurgence is non-existent when the number of active cases of COVID-19 remains low and pandemic fatigue persists, according to Doug Manuel, senior scientist at the Ottawa Hospital Research Institute, and a member of Ontario’s COVID-19 Science Advisory Table. 

People may only begin to become more sensitive to messaging if cases begin to rise, as they have in the U.K. and Israel, Manuel said.

Public health officials believe the 90 per cent goal is attainable partly because Ottawa has traditionally reached higher rates of vaccination for the flu and child immunization programs. 

Arnason says once children younger than 12 become eligible, which could happen in the fall, the city could see a bump of about 10 per cent with at least one dose.

“I think Ottawa is one of those places where there’s no reason why we can’t be a world leader,” he said. 

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Inter Pipeline walks away from friendly Pembina merger, will pay $350-million break fee – The Globe and Mail

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Inter Pipeline’s Heartland Petrochemical Complex, in Fort Saskatchewan, Alta., on Jan. 10, 2019.

JASON FRANSON/The Canadian Press

Inter Pipeline Ltd. is abandoning its friendly merger with Pembina Pipeline Corp., opening the door to a deal with rival bidder Brookfield Infrastructure Partners LP.

To walk away, Inter Pipeline will pay Pembina a $350-million termination fee, also known as a break fee. The payment was negotiated when Pembina emerged as a white knight in late May to help block Brookfield’s hostile takeover bid.

Brookfield has since raised its takeover price twice and also given Inter Pipeline shareholders the option to take their payout in cash if they favour Brookfield’s bid. Pembina’s friendly deal was to be paid solely in Pembina shares, and Pembina would not budge on the offer price it had agreed to in May.

Brookfield’s latest offer comes in two forms: Inter Pipeline shareholders can elect for $20 a share in cash, up from its previous bid of $19.50 a share, or they can take some shares of Brookfield Infrastructure Corp. at an elevated price instead of cash.

BIPC was created in 2020 to broaden the company’s investor base and shareholders who are limited in the types of securities they can own; its shares are effectively the same as the Brookfield Infrastructure’s limited partnership units.

When the most recent offer was made, Brookfield’s stock portion was worth $23.85 for every Inter Pipeline share. However, Brookfield is only willing to pay a maximum of 32 per cent of its total purchase price in shares, and BIPC’s shares have also dropped eight per cent since the offer was made.

Two leading proxy advisers, Institutional Shareholder Services and Glass Lewis, both recommended Inter Pipeline investors vote against the Pembina bid.

While Inter Pipeline’s board has scrapped its support for Pembina’s deal, its directors have yet to fully embrace Brookfield’s offer. In a statement Monday, Inter Pipeline said it is “open to engaging with Brookfield in an effort to reach a mutually agreeable transaction in the best interests of shareholders.”

Brookfield’s shareholder vote is set for August 6.

The battle for Inter Pipeline has been heated from the very beginning. Brookfield started building a position in Inter Pipeline in 2020 and privately approached the target’s board about a deal last fall, but was repeatedly rebuffed. Brookfield then went hostile with a bid worth $16.50 in February.

Many analysts believed Brookfield was likely to face little competition in its pursuit of Inter Pipeline, but Pembina emerged as a white knight in May, agreeing to an all-share deal worth $8.3-billion. Brookfield’s original hostile bid was worth $7.1-billion.

Brookfield and Pembina ended up taking each other to court, with both sides filing arguments with the Alberta Securities Commission.

The arguments were heard in early July and the ASC ultimately ruled against Brookfield by raising the percentage of shares that must be tendered to Brookfield’s hostile takeover bid. Pembina had alleged Brookfield was using “coercive tactics” to win the takeover battle.

Before the ruling, Brookfield needed the support of a simple majority of Inter Pipeline’s independent shareholders, but it will now need the support of 55 per cent under a modified tender condition.

The ASC also shot down Brookfield’s request to have the potential $350-million break fee to Pembina scrapped.

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