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Royal Dutch Shell, the third largest oil company in the world, saw several clean energy executives quit after disagreeing about the speed of the company’s energy transition. The Financial Times reported that the departing executives wanted to see a quicker acceleration away from oil, while the C-suite management was more inclined to stick with their bread and butter. Meanwhile, rival British Petroleum announced plans to cut oil and gas production by 40% by 2030 while simultaneously increasing low-emission investments tenfold over the next decade. In September, French Total said it planned to cut oil product sales by 30% by 2030.
The energy transition towards cleaner energy is inevitable. Companies that are able to invest in climate-friendly ventures and develop a pipeline of renewable projects are more likely to succeed. However, this does not mean that oil is “dead” –rather, it symbolizes a new era of oil optimization in which companies prioritize strategic jurisdictions with high quality crude and low breakeven points, while heavily investing in cutting emissions through research and new ventures.
Among the major oil companies, ExxonMobil’s prioritization of key assets appears to be paying off. On December 11, it announced its first hydrocarbon discovery in Suriname, building on its position as a leader in South American oil exploration. The discovery was made in Block 52, located 75 miles offshore of Paramaibo in the Guyana-Suriname basin. Exxon had recently farmed-into block 52 by acquiring a 50% stake from Malaysia’s Petronas.
The increased success in the Guyana-Suriname basin should come as no surprise. The area has the third largest undiscovered resources in Latin America, behind only the Campos and Santos basins located in Brazil. The latest U.S. Geological Survey in 2012 estimated that the Guyana-Suriname basin could contain 14 billion bl of oil, 21 Tcf of gas, and 574mn bl of NGLs. Large discoveries in Guyana and recent findings in Suriname reflect that the actual numbers are likely significantly higher.
Despite the recent announcement in block 52, regional success has not been devoid of serious obstacles. In November, ExxonMobil and its partners disclosed that their deepest exploration well in Guyana, the Tanager-1, did not have commercial potential as a stand-alone development. In Guyana’s recent Oil and Gas Summit, the risk of corruption was highlighted time-and-again due to the country’s weak institutions, limited transparency and billions in incoming revenues. Earlier this year, Guyana experienced a 5-month political impasse to decide the winner of its Presidential elections. This political turmoil delayed important regulatory developments and the approval of new oil licenses, hindering investor confidence.
In Suriname, newly elected President Santokhi replaced President Bouterse, who lost his grasp in power after 10-years of a dictatorial regime. In 2019, prior to the elections, Bouterse was convicted to 20 years in prison for the execution of 15 political opponents in 1982. Suriname’s oil sector is also highly politicized and corrupt, with state-owned Staastolie solely in charge of awarding concessions to foreign oil companies and establishing Production Sharing Agreements (PSAs). Staastolie’s supervisory board includes the Vice President’s brother and the President’s wife, reflecting the extent of its political enmeshment.
This week, on December 18, the International Court of Justice will also decide whether it has jurisdiction in the territorial dispute between Guyana and Venezuela. The case involves an arbitral award in 1899 that granted Guyana three-quarters of its territory. Venezuela, seeing its neighbor’s large oil discoveries, is seeking a diplomatic settlement. Its navy has even started carrying out hydrocarbons seismic work.
These risks, however, have not been enough to discourage most investors. Between 2015 and 2019, oil and gas companies invested $8.1 billion in exploration and development activities in Guyana’s offshore sector. Exxon, the lead operator in Guyana’s Stabroek block, continues to reiterate that Guyana, along with Brazil, is a key asset. Guyana’s $35 breakeven cost and high quality, sweet crude have become more appealing as crude prices collapsed and the International Maritime Organization implemented stricter fuel emission policies. Suriname is expected to see even lower costs than its neighbor as it leverages Guyana’s existing oil infrastructure and improves the efficiency of drilling techniques.
Guyana and Suriname’s cheaper, cleaner oil have also allowed major oil companies to shed dirtier, costlier assets and focus on these types of jurisdictions. Due to increased investor pressure, Covid-19 losses, and stricter environmental regulations, oil majors have become more selective about spending money and more serious about protecting the environment. To build good-will across the world, including among Guyana’s people and politicians, oil companies should double down on their carbon capture projects and invest heavily in climate-friendly ventures. This will allow them to step into their new roles amidst this accelerating energy transition.
Just last week, Exxon received a letter from an activist investment firm pressing it to focus more on clean energy as a means to improve its financial performance. Although a recent project to capture and bury carbon dioxide in the Madison formation in Wyoming was shelved, Exxon has had success with FuelCell Energy in Alabama. This project allows them to turn carbon emitted from industrial operations into fuel cells, which generates power instead of emissions. By focusing on strategic high-quality assets, while investing in carbon cutting technologies, Exxon will regain favor among its investors.
As it stands, both European and American oil companies are at a crossroads that will determine their future success: one path points to an increase in hydrocarbon investments while sticking to their core assets; another path, the recommended one, points to an optimal balance between strategic oil assets and renewable energies focused on cutting emissions. Although the routes will lead to largely different outcomes, the common denominator will be a portfolio of high-quality assets such as Guyana and Suriname. The winning route, however, is also likely to be have a substantial mix of solar and wind projects that will help drive this new energy transition forward.
Regards
Arthur Deakin
