Oil tanker (Image: Getty)

    Why it might be time to purchase shares in oil again

    29 October 2020

    If you are an ‘ethical’ investor sworn to do your bit to tackle climate change, you may have sold your oil companies long ago. If you are motivated solely by the desire to make money for yourself, you may also have given up on the industry. Since oil prices suffered a calamitous fall in 2014, shares in the oil majors and in the wider oil services industry have been great destroyers of wealth. BP and Shell shares have more than halved this year as the pandemic and resulting global slump has impacted on demand.

    What, then, to make of the unexpectedly good results put out by both those companies this week? Shell, expected to make $146 million on the third quarter, actually made a profit of $955 million – and increased its dividend again, having cut it in the spring.

    There is a popular narrative that the oil industry is doomed. Its reserves will become stranded assets and the world turns to clean energy – a process that will only speed up as we ‘build back better’ after the pandemic. Maybe, but then again maybe not.

    For one thing, the ambition of many countries to go carbon-neutral by 2050 does not necessarily mean that it will be achieved. Such a vast change to the economy relies on a combination of new technologies becoming economic on a commercial scale by that date.   We still don’t know, for example, how we are going to store energy generated by intermittent wind and solar farms.

    Up until the pandemic, global demand for oil was still rising, and as economies recover demand for oil is likely to recover, too, along with the price. And yet oil shares are on the floor.   Investors are stranded, but not necessarily oil companies’ reserves, which are likely to maintain their capital value long after the value of many other assets has withered to nothing — such as the current global fleet of road vehicles and aircraft, much existing industrial plant and many buildings.

    Moreover, there is nothing to say that oil companies will not turn out to be part of the drive towards decarbonisation. What if we could use their product without adding carbon dioxide to the atmosphere? That is the whole point of carbon capture and storage (CCS) technology – which extracts carbon dioxides from the emissions of power stations and pumps it underground to be stored, hopefully for ever after.

    A decade ago, CCS was all the rage. There were demonstration projects all around the world, as well as a competition by the Cameron government  for a £1 billion grant to develop a full, commercial scale CCS plants for an existing UK power station. But that was abandoned in 2015 and we heard little more.

    There are, as the competition exposed, serious problems to be overcome. CCS at the moment is expensive and inefficient – meaning that around a third more coal or gas has to be burned in order to generate the same amount of electricity. There are questions as to how permanent carbon storage could be – if it leaks out of the ground or sea in 50 years’ time it would be pointless, as well as potentially dangerous. Moreover, the technology doesn’t currently allow for all carbon to be sucked out of a power station’s emissions – it is more like 90 percent of it.

    Yet, more recently there has been a realisation that if we are to reach net zero emissions, CCS is pretty well going to have to be part of the solution. There are some industries, such as quarrying, cement-making and steel production, which are going to be very difficult to decarbonise. If we want net zero emissions we will have to have some way of generating negative emissions – such as equipping biomass power stations with CCS.

    In other words, CCS will have to be developed anyway. And if it ends up working for biomass plants, it might well also end up working for oil and gas plants. We are still a long way from efficient CCS, but there is nothing to say that it can’t outflank technologies such as hydrogen and battery storage, to become a large part of a transition to zero carbon. So, no, it is not a foregone conclusion that oil companies will be brought down and their assets stranded – even if Greenpeace would very much like them to be.