TheEconomistJanuary15th 2022 Business 55ing on exploration and production, which
declined from around $500bn globally in
2019 to $350bn in 2020. Daniel Yergin, a Pu
litzerprizewinning energy wiseman at
ihs Markit, a consultancy, warned that
“preemptive underinvestment” risks
hurting the world economy.
Not in concert
Listen closely, though, and the cacophony
reveals the mix of strategies that big oil is
pursuing as it looks ahead to the next de
cade and beyond. The Europeans are
increasingly going all in on greenery. The
statecontrolled giants such as Aramco are
biding their time. And the Americans are
engaged in a delicate balancing act some
where in between.
The European firms’ approach repre
sents the sharpest break with the past.
They are divesting many oil assets, espe
cially the dirtiest ones, and replacing them
with bets on greenpower generation. In
December Shell, a British giant, completed
a $9.5bn sale of shale fields in America’s
rich Permian basin. bp, another British
major, and TotalEnergies, a French one,
have sold off, respectively, some $3bn and
$2.3bn in assets since October 2020.
Bernard Looney, bp’s boss, has defend
ed his firm’s shift by insisting that “this
isn’t charity, this isn’t altruism.” Perhaps.
But nor is it as good a business as pumping
oil. ihsMarkit estimates that global in
vestments in oil and gas have generated a
median annual operating return on capital
of 8.3% since 2010, compared with 5% for
renewables. Moreover, green energy is un
familiar territory for the oil companies,
where they face stiff competition from in
cumbents such as Orsted and Vestas, two
European renewables giants. One analyst
calls it the “low return, low regret” strategy.
By contrast, the national oil giants’ ap
proach could be summed up as “high re
turns, no regrets”. The Persian Gulf behe
moths, led by Aramco, have the biggest
conventional oil reserves and lowest costs.
In an ironic twist of geology, Saudi Arabia’s
reserves are also among the least carbon
intensive to develop. Largely impervious
to pressure from shareholders and envi
ronmentalists, their share of global oil in
vestments has risen from around a third in
the early 2000s to more than half. Accord
ing to Bob Brackett of Bernstein, an invest
ment firm, the dilemma for the statecon
trolled behemoths is how to keep oil prices
high without choking off demand.
American oil companies cannot afford
to be as patient as the Gulf petrostates.
They also reject the European retreat from
crude. Their strategy does involve a degree
of decarbonisation. But its centrepiece is
trying to become ever more efficient at
pumping oil while resisting the urge to
splurge on new capacity whenever oil
prices go up.
The American firms’ decarbonisation
drive is different from the European one intwoways.Theyarefunnellingfarlessof
theirfuturecapitalspendingtolowcar
bonprojectscomparedwithcounterparts
acrosstheAtlantic.Andthelion’sshareis
notgoingonventuresthatreplacehydro
carbonsbutonlimitingoroffsettingthe
companies’climateimpact.
Most ofAmerica’sbig oilcompanies
haveplans to limitleaks ofmethane,a
powerfulgreenhousegas,fromtheirpipe
linesandtoproducehydrogen,a promis
ingcleanfuel,fromnaturalgas.Exxon
Mobilisspearheadinga proposed$100bn
carboncaptureandstorage consortium.
Analysts observe thatthe shallowwater
leasesintheGulfofMexicothatthefirm
recentlyacquired do notfitwithitsoil
strategybutaresuitedtostoringcarbondi
oxide.Moreambitiouslystill,Occidental
Petroleumishelpingscaleuptheworld’s
largest“directaircapture”facilitytosuck
carbondioxidefromtheair,whosecon
structionwillbeginthisyearinthePerm
ian.“Thereis nomore arguing...climate
changeisrealandwehavetoaddressit,”
insistsVickiHollub,Occidental’sboss.
Intime,suchprojectsmayplaya rolein
cleaninguptheclimaticmessthattheoil
industryhashadahandincreating.For
nowtheyremaina sideshowand,inthe
candidwordsofoneAmerican oilboss,
“providecover”forinvestorswhoneedto
genuflecttoesgactivists.Indeed,boththe
shareholders and managers of America’s
oil companies have a clear primary objec
tive—to milk the high oil prices without
succumbing to capital indiscipline that
has often followed spells of pricey crude.
Nowhere is this clearer than among the
country’s shale producers. s&p Global
Platts, a research firm, points to big im
provements in productivity and efficiency
in America’s shale patch, which contains
some of the world’s cheapest remaining
hydrocarbon stores. The time required to
get new projects online has shortened dra
matically in the past few years. Costs have
fallen, too. Many shale producers now gen
erate cash when oil trades at $40 a barrel,
down from a “breakeven” price of $80 a
barrel a decade ago. Doing frackin’ great
Shale firms made more money last year
with oil at $70 a barrel than they had when
prices surpassed $100 in 2014. Having
burned through $150bn in cash from 2010
to 2020, they will generate cumulative
cashflow of nearly $200bn between 2010
and 2025, reckons ihsMarkit. Devon Ener
gy, a big shale operator, has managed to cut
its operating expenses in the Permian by
nearly a third since 2018. That, plus rough
ly $600m in annualsavings from a merger
with wpx, a rival, has pushed its breakeven
point down to as low as $30 a barrel, boasts
its chief executive, Rick Muncrief.
Mr Muncrief attributes his firm’s sparPrice of the pumpSources:RefinitivDatastream;IHSMarkit;JPMorganChase *Explorationandproduction †Estimate500-50 100 150 200Totalreturns,2021,%,$ termsOrstedVestasWindSystemsS&PGlobalCleanEnergyindexMSCIACWIESGLeadersindexS&P00indexChevronS&P00EnergyindexExxonMobilDevonEnergyUnited States, shale-oil sector cumulative
free cashflow since 200, $bn
2001000-100-200
252220181614122010FORECAST600
500
400
300
200
100
0
2625242322212019182017Worldwideupstream*oilcapitalexpenditure
$bn
FORECAST^100806040200
052003 10 15 21†Worldwide upstream* oil capital expenditure
% of total by type of companyIndependentInternationalNational