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So, Roger, I'm interested. Do you think that the oversupply
we've seen in the last few years will continue to be a major focus
for the oil markets in the decade ahead? Or, do you think we'll see
oil prices back from production restraint in OPEC and
elsewhere?
Roger Diwan:
Yeah. So I think this Seventies' prologues to the 'Twenties in
oil doesn't really work. You had two supply shocks. Here we have
the biggest demand shock ever. So, in many ways we're at a time of
extreme abundance and, as we speak right now, we have about 16
million barrels per day of spare capacity, which is exactly
contrary to what we had in the 'Seventies, no spare capacity and
prices rising. So, I think we're in a different moment. The
question that you're asking here is, "Is this moment where we
create so much pain that we have not enough investment in the
industry to meet demand two, three, four years down the road in a
post-COVID recovery golden age?" Not '75 as you're on, but more
like the early 'Sixties and the 'Fifties where everybody goes out
and starts spending money and you had a big boom, an inflationary
boom, if you want.
I don't see that. I think the industry right now, and the
abundance of resources that we have, means that oil prices in the
medium-to-long term are capped, actually, because at $60/$70 we can
deliver a lot of resources. So, oil is not likely to be the source
of inflation and energy in general. Actually, I think, it might be
a source of deflation. Carlos, what do you think about that?
Carlos Pascual:
Well, I would say that the story of the 2020s is going to be the
story of demand, as opposed to what it was in the 1970s, which was
the shortages of supply. And I think, Roger, that our views
coincide with one another, but the critical issues that we're going
to see …shat we see right now with the pandemic is that you've had
a massive contraction of demand because of the inability to drive,
to move, for the economy to function, to people being engaged
economically. And, as a result of that, it's had a huge contraction
on GDP. It's had a huge impact on oil demand. And, the recovery is
going to depend on how we get out of that pandemic and how demand
in the world resuscitates itself again.
But that's going to transition and other issues: When is peak
demand going to occur? Is energy transition going to be accelerated
as a result of this process? Are people going to begin to see that
there is an inevitability of change and start to embrace it? How is
ESG going to play into these questions? And so I think that the
story that we're seeing evolve right now is a story of what is the
demand for energy going to be in the future? What is the mix of
that energy going to be? And at what point do we start to embrace
change? Do we recognize that this change is inevitable and you
embrace it and then, potentially, accelerate that transition
process even further?
Rachel Beaver:
That's really interesting to hear you say that, Carlos, because
I wonder whether ... I mean, obviously, environmentalism is an
issue that was around in both decades, in both eras. In the
'Seventies the US observed Earth Day for the first time in April
1970. Nixon created the Environmental Protection Agency later that
year and, as you've highlighted, ESG concerns continues to be high
on the agenda in the 2020s and continues to be influencing policy.
But I think, importantly, do you think investors in traditional
energy companies share the same environmental priorities?
Carlos Pascual:
Well, the first thing I would do is question the wording
"traditional energy company" because that's one of the things
that's fundamentally changing. If you look at the international oil
companies: Repsol, BP, Shell, Total, have all made commitments to
net zero carbon emissions by the year 2050. That's going to mean
that they're not going to look traditional after some period of
time. Oil and gas is going to be part of their future for some
period of time, but new things are going to come into it, and then
Equinor and Eni have also made extensive commitments. The US oil
and gas companies are not in exactly the same space. So, I think
that's one piece.
The second piece of it, when you come back to the point of
investors, and here I want Roger to jump in, what struck me is that
investors in the end are thinking about the return that they get,
but they're also thinking about volatility. And one of issues that
we've seen in the past decade and we see a major concern right now,
is the concern about price volatility. They want dependability. And
so I think there's also going to be pressure out of investors, out
of concerns that they traditionally have, that this price
volatility is not good for what they're trying to do with their
investment funds. And so I think we're going to see changes from
both sides. Companies are going to change, investment patterns are
going to change, and the interesting question that we come back to
is this point that I've been thinking about a lot, is when does it
get to the point where you just start hugging this, right? Because
this change seems so inevitable that you feel like you have to
embrace it and go with it.
Roger Diwan:
Well, we are at the moment of embrace, correct? I mean, major
oil companies talking about, "net zero." This is the embrace. And I
think the embrace is coming, not only out of... this is what their
shareholders are asking, et cetera, I mean, this is where the
future is. Technology is shifting. They're in the energy business
at the end of the day. They're not on the oil business. They need
to think that they're here to deliver energy whatever form it is.
The question is can they transform their portfolios to go
there?
In terms of returns, as you said, Carlos, it's not clear over
the last five, six years, even with the ... particularly with the
shale revolution, that the returns in the oil business has been
better than any other aspect of the energy chain even with lower
returns like certain renewables, et cetera. But even that now, I
think, would be debatable, which is what we just saw. So I think
from delivering values to their shareholders they're going to need
to find new business models, and oil is not the slam dunk that they
had to make an arbitrage between, "Let's make money with oil or be
green." That bargain doesn't exist anymore. Shale has transformed
that, the peak in demand, all of these issues, technology and
bringing oil to the surface at $35/$40 in the United States, et
cetera, et cetera, changed that debate.
But, at the same time, I think, you can't have these companies
too unmoored from their societies, correct? I mean, their
shareholders are pensioneers at the end of the day, and pensioneers
also have values, and I think what we're seeing, with the rise of
the ESG investing, how these companies present themselves, how they
present their carbon footprint, how they appeal to new generation.
I mean, talking to my kids about these companies, when you say,
"Oil," it's a dirty word, correct? So that has to also evolve with
society.
So I think it's both an issue of values and value that they will
have to transition, and it's happening. The important transition
for me is really happening on the capital markets, correct? I mean,
this is where the pressure is coming from. It's not coming from the
government in the United States. It's coming from the financial
side of the business putting pressure on oil companies, saying,
"Look, you don't see the criteria that are for companies that we
want to invest in, in terms of returns, but also in terms of your
ESG footprint." So that changes then that capital transition is
actually happening probably faster than the transition in the
energy mix that already exists within these companies.
Carlos Pascual:
And just one thing I would add to that just on the national oil
companies, I mean, one of the fascinating things is that, look at
the Middle East. The intent has been to use oil to reduce
dependence on oil, right? To create the financial resources to
facilitate diversification. And one thing I would say is watch
sovereign wealth funds from the oil producing States. Watch how
many of them are going to be investing in oil related activities. I
bet you, even in those sovereign wealth funds, what you're going to
see is a real change in their investment patterns.
Carlos Pascual is Senior Vice President, Global Energy
at IHS Markit.
Roger Diwan is Vice President, Financial and Capital
Markets at IHS Markit.
Posted 19 June 2020
This article includes information from an audio conversation
and has been professionally transcribed as accurately as possible.
Some words or phrases may have been unintentionally
excluded.
