Equinor backs oil and gas for longer

Equinor released its annual long-term global energy scenarios in November, just weeks after counterpart BP. The two firms’ outlooks appear to be driving their corporate strategies—but it is also perhaps the case that the latter is impacting the former.

Both companies are shifting gears to accommodate the transition to lower-carbon energy, as reflected at least to some degree in all six of their energy scenarios. But BP is planning to upgrade renewables in its energy portfolio, and downgrade oil and gas, much quicker than Equinor, reflecting relative respective optimism and pessimism across its three scenarios.

According to Spencer Dale, chief economist of BP, when releasing Energy Outlook 2020 in mid-September, the major’s scenarios are not predictions but a range of possible futures through mid-century, pushing the company to craft a strategy that is “robust and resilient” under all three.

But, on the flip side, based on a concept from cognitive psychology known as ‘confirmation bias’, the strategies towards which the two European oil firms are already tending—which are impacted to a certain degree by their current circumstances—are likely at least feeding into their outlooks for the future.

Equinor is partly an IOC, following the company’s partial privatisation in 2001 and extensive, if not always hugely profitable, international expansion since then. But it also remains majority state-owned and partly Norway’s NOC, primarily responsible for the development of oil and gas resources on the Norwegian continental shelf (NCS).

In contrast, London-based BP is a genuine global major. These differing circumstances impact each firm’s room to manoeuvre strategically—with BP currently having much more room than Equinor—and colour their outlooks and strategies.

Global oil consumption serves as a thumbnail sketch of BP’s and Equinor’s differing views of energy in the future, when considering all three energy scenarios for each company, and their views on peak oil demand.

Consumption trajectories

Trajectories for oil consumption are remarkably similar (see Fig.1) through to 2050 for Equinor’s and BP’s business-as-usual scenarios—Reform and BAU, respectively—and their alternatives that assume the Paris agreement goal of well below 2°C is met—Rebalance and Rapid Transition—but diverge widely for each of their other scenarios.

Equinor’s third option is its Rivalry scenario, where geopolitical competition among the major powers reigns supreme and the energy transition fails to take off in earnest due to a lack of government support. In this world, global oil demand rises by 17pc between 2018 and 2050, to 113mn bl/d.

In contrast, BP’s other reality is its Net Zero scenario, where global greenhouse gas emissions are reduced by more than 95pc on the back of supercharged government policies. In this scenario, global oil consumption collapses by three-quarters to just 24mn bl/d over the projection period.

In terms of peak oil demand, Equinor’s Energy Perspectives 2020—released in mid-November—is explicit in expecting it by around 2027 or 2028. This is two-to-three years earlier than last year’s report, primarily due to the economic carnage caused by the Covid-19 pandemic.

BP is less forthright but does allow for the possibility that global oil consumption may have peaked in 2019, a major shift from its previous year’s report. Two of its three scenarios assume this to be the case, while under the BAU scenario global demand increases modestly through to 2030—the company’s previous best-guess peak demand year—before declining thereafter.

Growth in global energy consumption is actually stronger across BP’s three scenarios than for Equinor’s through to the middle of the century. But despite this, oil and gas demand is hit much harder because BP tends to assume a more extreme transition to low-carbon fuels in its scenarios (see Fig.2 and Fig.3).

On average, global energy consumption increases by 16pc in BP’s scenarios between 2018 and 2050, ranging from 10pc for both Rapid Transition and Net Zero to 27pc for BAU. Global energy demand increases less than a third as much in Equinor’s scenarios, with 21pc growth under Rivalry and a 15pc decline in ­Rebalance.

But global oil demand declines almost three times more on average under BP’s scenarios than Equinor’s—47pc versus 17pc—through to 2050, while global gas consumption increases a mere 1pc on average in the former but 9pc in the latter.

On the other hand, renewables—including solar, wind, bioenergy and geothermal, but excluding hydro—gain substantially more share of the global energy mix between 2018 and 2050 in a BP rather than Equinor world. On average, renewables’ slice of the pie increases by 37 percentage points to 41pc in BP’s scenarios, but by only 15 points to 27pc under Equinor’s three worldviews—albeit BP does not account for traditional biomass, whereas Equinor does.

It should not come as a big surprise then that BP has undergone a large strategy shift over the past year, with the firm’s new CEO Bernard Looney leading the charge. Looney announced a new company slogan—“Reimagining energy, reinventing BP”—in February, followed by a new organisational structure and leadership team in May and June, and detailed BP’s shift from ‘international oil company’ to ‘integrated energy company’ in August.

Strategies

BP plans to redirect spending from oil and gas to low-carbon technologies such as wind and solar power, allowing the firm’s oil and gas production to decline in the process. In particular, it aims to ramp up annual spending on renewable energy projects to $5bn with the twin goals of increasing its renewable electricity generation to 50GW by 2030, 20 times more than now, while reducing oil and gas production by roughly 40pc to 1.5mn bl/d oe over the same timeframe.

The UK firm’s increasing enthusiasm for its paradigm shift saw a first major move to add to its new energy portfolio in September—a $1.1bn strategic partnership to develop major offshore wind assets on the US East Coast with a previous IOC first-mover in the area. Its new partner? Equinor.

The Norwegian firm’s primary strategic goal is maintaining oil and gas production from the NCS “at current levels towards 2030”, at which point the province is expected to enter a more mature phase. Equinor produced 2mn bl/d oe in 2019, roughly two-thirds at home and the rest from international operations. “The NCS is, and will continue to be, the backbone of Equinor for many years,” the firm ­asserts.

All the same, Equinor is, in global terms, a relatively environmentally conscious oil company, as are most European producers, with plans to gradually grow its New Energy Solutions business unit over time. The main focuses of the unit are offshore wind projects and carbon capture and storage.

The latter should further help decarbonise oil and gas production in Norway and abroad. The carbon intensity of producing the country’s oil and gas is already around half the global average, and one of the lowest in the world.

Source: petroleum-economist.com

Read the latest issue of the OGV Energy magazine HERE.