Oil and gas companies should consider whether they would deliver more shareholder value by winding down production or diversifying into renewables as the energy transition gathers pace, a new report has said.
The “Navigating Peak Demand” study by UK think tank Carbon Tracker warned that traditional energy companies and shareholders should be prepared for “potentially rapid corrections in securities pricing” as demand for oil and gas in power generation, transport and heating is gradually replaced by wind and solar generation, electric vehicles and heat pumps.
The impact of falling commodity prices as demand drops on the net present value (NPV) of company portfolios could be significant, even for producing fields, it said. The hit to values of planned developments that are yet to produce are likely to be even higher.
“At some point market consensus will be reached that the transition is inevitable, and significant downwards price movements could then result,” the report said.
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While the supply shock following Russia’s invasion of Ukraine has provided a temporary reprieve and seen companies make record profits, it has also encouraged governments to accelerate the roll-out of renewables to meet demand and improve energy security.
“A strategy aimed at maintaining, or even growing, production via significant new development and exploration is increasingly risky and could significantly erode shareholder value as the transition accelerates and prices fall,” the report said.
“It may even be better to cash in now and sell assets while they still command a premium,” it said.
Global demand for fossil fuels is set to peak before the end of the decade, according to the International Energy Agency. The agency forecasts demand for oil, which passed 100 million barrels a day in 2019, is set to fall to 92.5 million barrels a day by 2030 and to 54.8 million by 2050 if current government policy pledges are met.
Many large energy companies, including US oil giant ExxonMobil and Saudi state oil giant Aramco, are ignoring these forecasts and planning on continued growth in demand. Some firms are planning their output levels based on Opec forecasts that would see oil demand rise to 116 million barrels a day by 2045.
Last month ExxonMobil and Chevron announced huge deals to buy producers Hess and Pioneer, while Shell and BP have recently rolled back planned production declines, indicating that they now plan for a slower transition.
“If demand falls short of expectations, the market is likely to become oversupplied, putting more downward pressure on long-term prices,” Guy Prince, senior oil and gas analyst and co-author of the report, said.
“Revenues from all projects would be hit and, as the transition accelerates, only the most cost-competitive are likely to remain economic. Assessments of company valuations must account for this and recognise the pace at which the transition could unfold,” he said.
