08 Apr 2019
The renewable energy revolution that many have been seen as a threat for the oil and gas industry will actually benefit one significant segment of it: Big Oil. That’s what Goldman Sachs’s head of natural resources research in the EMEA region told CNBC this week.
The reason for the counterintuitive conclusion has everything to do with size: the same factor that has made Big Oil the most likely winner in the shale patch as long as oil and gas prices don’t slump too low.
“The decarbonization push, the push from the market to adapt to climate change, is tightening the financial conditions in the sector so much that we’re recreating the barriers to entry and we’re reconsolidating the market structure we lost at the beginning of the 2000s,” Michele della Vigna said.
As the barriers to entry rise higher, there is less competition for Big Oil and more opportunities to maintain and improve profitability. In other words, the rise of renewables had provided the world’s supermajors with one more competitive advantage over smaller oil and gas companies.
Yet this competitive advantage from renewable energy is not the only factor working for Big Oil. According to della Vigna, the world’s supermajors will also benefit from the slowness of the transition process from fossil fuels to renewable energy.
“We hear a lot of stories of long-term substitution of oil demand with electricity but it’s going to take a long time. And in the meantime, demand remains robust, particularly in the emerging markets which continue to buy a lot of crude.”
This is nothing new, in fact. China, India and other emerging economies are the main swing factors where oil demand is concerned. Every bit of economic data coming from that direction swings prices in the blink of an eye and will likely continue to do so amid what now looks like permanent supervolatility in the oil market.
Again, the supermajors are better placed to respond to demand from emerging economies, not least because their size and the scale of their operations allow for deeper cost cuts. This, in turn, makes their oil—and their gas—more competitive than the commodities of smaller producers lacking the financial and other resources to reduce their costs sufficiently.
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So, it seems, we are now witnessing what Goldman’s analyst calls “the restoration of the industry’s oligopolistic market structure.” After the flurry of independents that made the so-called first shale revolution possible before the 2014 price crash, now things are returning to their normal state with the supermajors dominating the landscape in oil and gas, in both shale and conventional production.
And if that isn’t enough, here’s some more good news for Big Oil: according to della Vigna, the oil market will swing into a deficit in the next decade, reflecting the slump in investments in new production during the downturn. Those with big cash piles will be the companies to benefit from the tighter supply situation.
There is always the possibility of a surprise, of course, but bar any of these, supermajors have scarce competition to look forward to over the next few years.