CALGARY — A rising chorus of voices is calling for the oil industry to reduce spending on growth and begin rewarding shareholders through things like higher dividends and share buybacks.
Investment researchers, think-tanks and newspaper editorials have recently begun advocating that big petroleum companies return as much capital to shareholders as possible as the transition away from fossil fuels gathers momentum and profits fade.
"Demand forecasts are way too positive," says Paul Sankey, managing director of New York-based Wolfe Research.
"Really the essence of the opportunity for oil is to be dividend stocks to pay out. Not to attempt to grow, but actually to orderly liquidate."
Increasing action on climate change
Speaking at a PwC energy forum in Calgary last week, Sankey said lower than expected oil demand growth and increasing action on climate change will mean alternative energy sources will displace oil in the next 30 years.
His comments echo a recent Financial Times editorial that oil companies are entering their twilight years and should focus on dividends and share buybacks. The newspaper specifically singled out the high-cost, high-carbon Canadian oilsands as having some of the lowest justification for growth.
"The essence of the opportunity for oil is to be dividend stocks to pay out. Not to attempt to grow, but actually to orderly liquidate."
At this year's ExxonMobil annual general meeting, a shareholder resolution called on the company to increase dividend payouts and share buybacks in light of the risks of climate change policy and stranded assets.
The resolution only garnered 4.1 per cent of shareholder support, with Exxon recommending shareholders vote against it because it is already factoring in carbon policies in growth decisions and has steadily increased its dividend.
Sankey said it's hard for companies to accept that they face eventual decline.
"It's very tough for companies such as an Exxon, with a big corporate ego, to really reflect that it's the end of the oil age and they should shrink."
Broken business model
Paul Stevens at the London-based Chatham House think-tank published a report earlier in May that also argued that the business model of major oil companies is broken.
Stevens said there is "growing disillusion on the part of their shareholders with a business model rooted in assumptions of ever-growing oil demand, oil scarcity and the need to increase bookable reserves.
These assumptions increasingly lack validity, he said.
"It's very tough for companies such as an Exxon, with a big corporate ego, to really reflect that it's the end of the oil age."
However, if the major oil companies can shift their business models they will be able to "slip into a gentle decline but ultimately survive, albeit on a much smaller scale," he said.
Al Monaco, chief executive of Enbridge Inc., said at the PwC forum that the industry is already responding to a changing world with lower costs and emissions and that it's moving away from the idea of growth for growth's sake.
"I think the industry has done a very good job over the last, let's call it five years, focusing on returns on capital. So it's not just about production growth for our industry, it's about making sure that when we invest capital it's earning a very solid return," said Monaco.
Energy analyst Jackie Forrest at Arc Financial said even if demand drops in the future, oil companies still need to invest in more production to maintain output.
But she said potential increases in carbon prices mean companies will likely opt for smaller expansion projects, while megaprojects like some in the oilsands will be harder to justify.
"Those projects are more challenged right now, and it's not just because of carbon policy. It's because there's real uncertainty around the future trajectory of the oil price, and the belief that it will be quite volatile," said Forrest.
Capital spending is already down considerably in Canada's oil and gas industry, with the Canadian Association of Petroleum Producers forecasting it will have dropped by $50 billion or 62 per cent from 2014 by the end of the year.
Those cutbacks are being echoed across the globe and the lack of spending on new production will mean big spikes in prices in the near to mid term, said Sankey. But with a long-term price decline coming, he said future investment should stay low.
"In the medium term we're very bullish on prices, and so we think you're going to make a lot of money over the next 10 years," said Sankey. "But you're going to want to prepare for liquidation over the next 20."
Follow @ibickis on Twitter.
Also on HuffPost:
More people are dying in road accidents, as falling oil costs translate into cheaper prices at the pump - increasing the number of journeys. "A $2 drop in gasoline price can translate into about 9,000 road fatalities a year in the US," sociology professor Guangqing Chi said last month. Chi told The Huffington Post that it typically takes almost a year for drivers to adopt new driving habits in response to changes in gas prices. Last year, US road deaths rose by 9.3% in the first six months of 2015. In the UK, while road deaths have fallen almost every year since 2004, provisional data suggests that fatalities increased in 2015 by 3%, alongside a 2.2% increase in traffic. Research has yet to reveal a link between these in the UK.
Pirates are unlikely victims of the global reduction in oil prices. Piracy in West Africa’s Gulf of Guinea is now at its lowest level since 2002. Speaking to Bloomberg, Florentina Adenike Ukonga, executive secretary of the Gulf of Guinea Commission, said: “With oil at a low bottom price of below $30 per barrel, piracy is no longer such a profitable business as it was when prices hit $106 a barrel a few years ago.” Attacks on oil transported declined by around a third last year, according to a report. Dyrad Maritime found sea crime figures for 2015 "painted a picture of optimism" - although the threat to vessels not carrying oil remains high.
Falling oil prices have translated into rock-bottom "bunker" fuel costs for shipping firms - reducing their incentive to take economical shortcuts. Rather than use routes via the Suez Canal, huge container ships are returning to ports in Asia via the "long way around" the southern cape of Africa. As prices tumble, burning more fuel is cheaper than paying passage rates through the waterway. For one-way passage, an oil transporter can pay as much as $325,000 (2008) to travel through the Suez canal. "For many services it is cheaper to sail south of Africa on the [return journey] than to use the canal routings,” SeaIntel, a shipping monitor, said.
Thousands of oil workers have been sacked as a result of dwindling oil prices. In the UK alone, 70,000 oil-related jobs are feared to have been lost since the price war began 12 months ago. Last month, oil giant BP shed 3,000 jobs on top of previously announced redundancies. An estimated 250,000 jobs have been lost across the oil industry as a whole worldwide.
The plunging oil price has added to turmoil on stock markets the world over, affecting many of the world's biggest pension funds. According to Reuters, shares fell sharply this week as oil prices dropped after Saudi Arabia effectively ruled out reducing the output of oil by its producers. Oil prices, lowered by increased production, are one of a number of factors worrying investors. The FTSE 100 index of Britain's biggest traded companies was down 15.38% on a year ago as of Wednesday. The index holds millions of Brit's pension pots. "The markets are really worried that we are missing something here, that the global slowdown may be more significant than we are recognizing and that slowdown could be causing oil prices to drop, and commodities prices in general," Tracie McMillion of Wells Fargo Private Bank told Reuters.
Perhaps the most surprising effect of diving oil prices has been that demand hasn't risen significantly. Despite costs plunging, European economies remain weak, China is decelerating and growing energy efficiencies mean vehicles need less fuel. So the overall effect has been a flatlining of demand, rather than an increase, according to PwC (PDF).
And despite all of this, airfares for passengers flying in and out of Britain jumped 46% from November to December 2015, the Office of National Statistics found. The increase in fares was the highest since 2002. The "highly variable" changes were a result of increased consumer demand for air travel, the ONS said. In America, air passengers were more likely to benefit from tumbling costs - airfares there were lower throughout most of last year.