Where will the oil-producing countries go after the countdown to the end of the oil era?

SMM: global oil demand is expected to peak in 2030, and then begin to shrink. Natural gas and renewable energy will become a new generation of energy solutions. By 2040, at least 1/3 of the world's electricity will be provided by wind and solar energy, 1/3 of urban vehicles will be electric, and the energy efficiency of the global economy will increase by 1/3. In order to mitigate the impact of climate change, investors have left the coal industry, the coal industry has entered dusk, and the oil era is expected to usher in a sunset in 2030-2040. The energy industry needs to choose its future path, choosing between the Reverend strategy or the sunset trip.

Reverend Bray's strategy

In 2011-2014, the average price of crude oil exceeded $100 per barrel, and in 2019, Saudi Arabia was unable to push the average price of crude oil above $70 by cutting production. The growth of energy demand in China, the United States and other countries began to slow, while India, although the growth rate of energy demand is extremely high, but its total is too small to lead the global energy development. In the case of slow demand growth, not only new oil supplies need to consider the possibility of long-term investment, existing oil suppliers also need to consider the future path.

As the world moves towards natural gas and renewable energy, it is estimated that by 2040, 1/3 of the world's vehicles will be powered by electricity, 1/3 of the electricity will be provided by wind and solar energy, and 85 per cent of the world's oil will now be consumed for combustion. After the golden age of oil, oil and gas companies may adopt two strategies to deal with it.

The first option is Reverend Bray (Vicar of Bray). The Vicar of Bray is an 18th-century satire about a pastor in the Bray area of (Berkshire), Berkshire, who distorts his principles in order to keep his ecclesiastical office. The pastor successfully retained his church office during the changes from Charles II (Charles II) to George I (George I). No matter who is in power in the change, the priest will retain his post in the mine area. Extended to the energy industry, it can be said that even if the global energy from oil to natural gas, renewable energy changes, energy companies can still occupy an important position in the energy field.

Through reasonable timing and elegant implementation, oil and gas companies maintain a leading position, capital and human capacity in the transition from fossil fuels to clean energy in the energy industry. The early attempt was in 2000, when BP rebranded beyond Oil (Beyond Petroleum) under Lord Brown (Lord Browne), investing 8 billion dollars in clean energy, some of which were later written off. Shell tried to acquire Siemens solar company (Siemens Solar), in 2002, hoping to gain a leading position in the emerging solar field. Six years later, Shell sold the subsidiary and failed. David Klein (David Crane), NRG's former CEO, also suffered a setback when he turned the company into a clean energy company.

Recently, major European oil companies are planning a Reverend strategy. (Statoil), a Norwegian national oil company that has been investing in offshore wind energy, carbon capture and sequestration, recently renamed it Equinor, to remove Oil from its name. Reverend Bray's strategy may need more disruptive innovation (disruptive innovation), but the establishment of a clean energy business within oil and gas companies faces resistance from the capital markets.

Clean energy companies are roughly divided into two categories: technology providers and asset companies. Fossil fuel investors know all the exploration and development risks, sovereign risks, and even interest rate risks, but know little about how to expand into a technology provider. Asset-based clean energy business, compared with oil and natural gas business development, is less risky, but usually produces a smaller return on investment. Because of the high volatility but high return on investment, investors have invested in oil and gas, and these investors will not invest in clean energy.

A trip to sunset

The second option for oil and gas companies is sunset tour (Sunset Ride). Accept the expectation that the fossil fuel industry is about to enter a long-term recession and manage its business accordingly. Sunsets are long and slow, the world will use fossil fuels and petrochemicals in the coming decades, and companies that begin sunset trips will have a broad, revenue-generating future, even if there is a final time limit. The only safe place in a declining market is at the bottom of the cost curve. The oil price of $60 per barrel is a safe option for sunset trips, below $40 per barrel, and developing countries will lead a surge in demand above $60 per barrel, with large amounts of unconventional oil production increasing while accelerating the growth of oil alternatives.

Oil and gas companies on sunset trips must morally ensure that they can operate for a long time. Natural gas is easier than oil at this point. Natural gas is seen as a partner in renewable energy, and natural gas is stored on a seasonal basis, some of which is used to make up for power supply during periods of low wind energy. Electricity and natural gas will occupy the energy share of oil used in transportation, and oil production may be under great pressure of green environmental protection when the world shifts to renewable energy.

The coal industry has now entered a forced sunset, and investors simply do not believe that coal companies' money will be invested in clean energy, managing the $1 trillion Norwegian national fund to reduce carbon emissions. announced that it would no longer invest in the coal business. Investors who want to reduce the use of coal and increase the use of clean energy do not need the help of coal companies, and can achieve the goal of reducing coal production faster and at lower risk by adjusting their portfolios.

Reverend Bray's strategy or a sunset trip has potential value and risk. The Reverend Bray strategy is more socially and morally accepted by environmental groups, but the Reverend Bray strategy is more difficult to implement. Companies that choose the Reverend Bray strategy need to exit or sell much of their existing business, replace old investors with new investors, and rebuild corporate culture and skills. Disruptive innovation will pose a huge risk to the company. In the face of drastic changes in the industry, some companies have carried out radical innovations, such as Microsoft and IBM, while Nokia successfully carried out an innovation, but failed in the second innovation.

If you choose a sunset trip, the original skills and advantages of oil companies will deter backward challengers. Even if ExxonMobil missed the shale production explosion in 2018, ExxonMobil, which entered the Permian basin, succeeded in achieving a drilling cost of $15 / barrel in the Permian by relying on strong capital and pipelines and the upstream and downstream industrial chain of the refinery. And can make a profit under the oil price of US $20 per barrel. Independent producers with cheap land leases are still struggling near the production profit-loss line of $30 per barrel. But for companies that choose a sunset trip, the environment is a shrinking market in which demand growth needs to be carried out.

Saudi Arabia, Canada and Nigeria: three different Futures in the Post-Oil era

Saudi Arabia represents the traditional Gulf states. Canada is a typical country dominated by green environmental protection. Nigeria represents oil-producing countries in sub-Saharan Africa.

1. Saudi Arabia

Saudi Arabia wants to diversify the kingdom's economy. In the face of expectations of a peak in future oil demand, Saudi Arabia has invested in refineries in India, China and the US, hoping to gain an edge in the downstream chemicals business. Reliance will give priority to Saudi crude after Saudi Arabia acquires a stake in India's Reliance (Reliance). On the other hand, Saudi Aramco went public through IPO, hoping to liberate the kingdom from its addiction to oil and diversify its economy with funds raised by IPO. Although Saudi Aramco's IPO received extremely poor feedback on the international market because of the arrogance and arrogance of the Saudi royal family and cancelled the London roadshow, the median valuation of international banks was $1.5 trillion. Saudi Aramco insisted on selling 1.7 per cent of its shares at a valuation of $1.7 trillion and a share price of 32 rials, raising $29.4 billion.

After the IPO in Saudi Arabia, the United Arab Emirates and Kuwait also revealed the intention of IPO. It is expected that the royal countries in the Gulf will choose to occupy the downstream chemical business in the post-oil era and strive to diversify their economies. Even if economic diversification fails, with countries such as Saudi Arabia at the bottom of the cost curve, countries such as Saudi Arabia could decline to the ranks of middle-income countries. Saudi Aramco is listed and heavily subscribed by Saudi nationals and wealthy households, so when the price of crude oil plummets, Saudi Arabia must also ensure that the share price of Saudi Aramco is no less than 32 rials. Saudi Aramco is not expected to list on the international market until the Saudi royal family abandons its high valuation.

2. Canada

Canada chose the Reverend Bray strategy. Canada is a typical representative of the European model, and the green environmental protection organization is strong. Canada has the third largest oil reserves and the second largest heavy oil reserves in the world, but its oil production is only 5 million-6 million barrels per day. Saudi Arabia, which has the second largest oil reserves, produces about 11 million barrels per day.

The United States and Russia, which do not have the top three oil reserves in the world, also produce more than 11 million barrels per day. Canada's main oil producer is Alberta (Alberta),. Alberta's main oil reserves are oil sands. The process of exploiting the oil sands produces 18 per cent more carbon emissions than conventional oil production, which costs Alberta a carbon tax of about $1 billion a year. At the same time, the shipping pipeline is constantly blocked, and the Keystone XL pipeline to the Gulf of Mexico of the United States has been delayed again and again. The National Energy Administration of Canada approved the pipeline in March 2010, but a US court ruled that the construction was not compliant, and the Keystone XL pipeline is expected to continue to delay.

Environmental groups, represented by green forces in Europe, the United States and Canada, will force some oil producers to follow the path of Reverend Bray. On the other hand, in European countries such as Canada and Germany, the oil industry does not play an important role in national decision-making, and the rise and fall of oil companies does not affect the development of the country. Canada's oil industry accounts for about 16% of Canada's GDP. With the continuous depletion of oil fields in the North Sea and rising calls for clean energy, oil producing countries such as Norway have rationally chosen to continue to develop the giant Johan Sverdrup oil field. By taking shore electricity hundreds of kilometers away and building 100000-200000 meters of undersea oil and natural gas pipelines, they have not only achieved operating costs of less than US $1 per barrel, but also achieved carbon dioxide emissions of 0.67kg per barrel. The world average is 18 kilograms of carbon dioxide per barrel. In countries with oil as the main industry, even if green groups are active, they will still choose a sunset trip, but it will reduce carbon dioxide emissions and reduce the social and moral pressure on environmental groups.

3. Nigeria

The future of Nigeria is not optimistic. Countries such as Nigeria, Angola and Chad may face a tragic outcome in the post-oil era. On the one hand, Nigeria's oil production is outsourced to oil companies such as ExxonMobil, and production costs remain high. On the other hand, countries such as Nigeria do not have their own industrial systems. Nigerian gasoline is obtained in the international market through the exchange of oil for gasoline. Countries such as Nigeria, Angola and Chad do not have Saudi Arabia's hundreds of billions of foreign exchange reserves and Saudi Aramco, which is valued at 1.5 trillion, nor the $1,000bn fund that Norway prepares for a rainy day.

Countries such as Nigeria do not have enough foreign exchange reserves to follow the path of Pastor Bray, nor can they afford a sunset journey because of the high cost of crude oil production. To make matters worse, countries such as Angola and Chad like to buy and sell dollars in advance with Glencore and Trafigura. Glencore and Trafigura paid US dollars in advance and Angola and Chad later repaid through oil. Such actions are extremely vulnerable to the collapse in oil prices, and one year Chad's annual oil production was used to repay prepaid dollars. It is expected that in 2040, countries such as Nigeria, Angola and Chad will be cleared out of the international crude oil market and become full of poverty or war.

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