The world’s largest oil companies have endured a lost decade in the stock market, struggling to convince investors they can grow in a world where demand for their main product is expected to peak in the coming years.
The S&P Global Oil index, which tracks 120 leading international oil producers, is no higher now than it was in 2015. With the exception of a sharp dip during the Covid pandemic, it has flatlined while investors have flooded into Big Tech.
Oil majors are no strangers to boom-and-bust cycles. But now the challenge may be structural. The rapid adoption of electric vehicles, especially in China, has surprised the industry. Many oil majors now concede that their production will probably peak within the next decade.
“There’s no doubt that in the grand scheme of things, this is a sunset industry,” says Paul Gooden, head of natural resources at asset manager Ninety One. “We can debate how far the sunset is away, but companies need to recognise that — and increasingly they are recognising that.”
László Varró, Shell’s head of scenario planning, echoes the sentiment. “There is very little doubt that peak oil demand is coming,” he says.
A fractured response
The oil sector remains split on how imminent the peak is, and how to respond. European companies have acknowledged the energy transition and have begun to pivot. Their US rivals, along with state producers in the Middle East, remain more bullish.
ExxonMobil does not see any decline in oil demand until 2050 and is expanding production accordingly. Chevron has also played down the prospect of a near-term peak.
Even in climate-conscious Norway, Equinor, the state energy company, plans to maintain 2020 oil production levels until 2035. “What we are working on is to make sure that we are able to squeeze every molecule out of the Norwegian continental shelf. So we have to drill around 100 wells a year for the next decade,” says Anders Opedal, chief executive, adding that Norway’s oil has a smaller carbon footprint than that of many competitors.
Shell plans to hold its oil production steady until 2030, while BP — once alone in promising production cuts — now targets a modest increase by the same date.
Pumping after the peak
To shore up their investment cases, oil companies stress that peak demand does not mean the end of oil. Use is expected to persist for decades — driven by aviation, shipping, petrochemicals, and road transport in emerging markets — especially if politicians scale back their climate ambitions and focus on energy security and affordability.
“We will have a gradual decline,” Varró says. A sharp drop, he argues, would only occur under an aggressive political push towards net zero emissions by 2050 — a challenge he says is “significantly outside society’s current comfort zone”.
Shell says global investment in new oil and gas, currently about $600mn a year, would be needed for decades to come, since oil and gasfields are depleting faster than demand is falling.
Varró also notes that roughly 20 per cent of the world’s oil production lies in “countries that are under sanctions, have military conflict, have fragile governments or extremist terrorist movements with a track record of targeting oil and gas infrastructure”.
Mixed success at transformation
Since electricity is the fastest growing part of the world’s energy system, most European oil companies have tried to build power businesses to diversify themselves — with mixed results. Shell and BP, which focused on renewable energy, found they were uncompetitive and have now largely abandoned their efforts.
TotalEnergies, which also operates several gas-fired power plants, has been more successful. Italy’s Eni has bundled clean energy with traditional cash-generative businesses, such as petrol stations and retail gas and power. It now expects its new businesses to out-earn oil and gas by 2040.
Gas remains a strategic focus for most majors. “Gas plays a very important role in the electricity sector, so it benefits from the surge in electricity consumption,” says Varró, adding that Asian economies can reduce their emissions by switching from coal to gas, and that industry can get closer to its climate targets by capturing and storing the carbon emissions.
When the world hits net zero emissions — and oil and gas demand is roughly a third of its current levels — Varró says Shell will continue to pump oil to make chemicals, to sell gas, trade power, and have a large new business of capturing carbon dioxide and selling both hydrogen and biofuels, once those markets develop. “That’s the vision in a nutshell,” he says.
Future consolidation
As organic growth fades, however, mergers and acquisitions are likely to increase. “It is not credible for a big company to tell its investors and employees that it is going to shrink,” says Ninety One’s Gooden. “Instead of drilling in the ground, they will be drilling on Wall Street. We will see consolidation.”
