As fourth quarter and full year 2019 earnings season draws to a close, we pause to reflect on a difficult year for the industry but also take note of a future holding both challenges and opportunities. Many of these are coming from the changing industry environment wrought by the worries about climate change and what that means for companies involved in producing and refining petroleum. A reckoning is certainly coming as fossil fuels come under increasing scrutiny, most recently from the financial investment community, but opportunities are also present for those companies that can navigate the demanding times ahead. As Boston so aptly put it back in 1978 in the title cut from their second album, “Don’t look back, A new day is breakin’”.
The Integrated Majors all reported lower downstream earnings for Q4, driven by lower crude discounts and seasonal demand effects. Full year 2019 results were also lower than prior year as the industry suffered from very weak Q1 margins resulting from high gasoline inventory levels and narrow crude differentials. Lower average oil prices in 2019 also contributed to reduced upstream earnings, bringing the focus on continued capital discipline and cost efficiency.
In the first of a series of blogs, we share key takeaways from the earnings calls for the Integrated Majors, focusing primarily on their downstream businesses, and also highlight efforts being taken to address climate change as the industry transitions to a low carbon future. In subsequent blogs over the next few weeks, we will review the earnings calls for the U.S. Independent Refiners and, Canadian Integrated Refiners and U.S. Midstream Operators.
Exxon kicked off the earnings season for the Majors by announcing it had begun oil production from its prolific Liza field in offshore Guyana, ahead of planned schedule. The company expects production for Phase 1 (the first of multiple offshore projects planned in the Liza field) to reach full capacity of 120 MBPD in the coming months and reported a total recoverable resource base in Guyana of more than 8 billion oil-equivalent barrels. Exxon also reported a better than expected pace on the 250 MBPD expansion project at its Beaumont refinery. Crude is expected to be sourced from the Permian Basin where Exxon continued ramping up production. The company reported a 5% y-o-y liquids growth in 2019, largely driven by growth from the Permian. The project requires relatively limited expenditures in downstream units, primarily some low-cost debottlenecks and expansion of hydrotreating capacity and incremental production will largely replace purchased feedstocks at the Beaumont and Baytown refineries. The Beaumont crude expansion project is expected to be completed by 2022.
Along with the Beaumont expansion, Exxon also provided an update on good progress being made on the Baton Rouge polypropylene projects and also confirmed the recently sanctioned resid upgrade project at its Singapore refinery, intended to improve conversion complexity. The resid upgrade project will upgrade resid to higher quality distillates and Group 2 lube base stocks, utilizing proprietary process and catalyst technology and breaking new ground in upgrading heavy fuel oil streams into Group 2 lube base stocks. In addition, the company has also begun work on its hydrotreater project at Fawley which is expected to increase ULSD production by 38 MBPD and be completed by 2021.
These projects all come on the heels of major projects completed over the last two years in Exxon’s NW Europe refineries, in Rotterdam and Antwerp. Very positive results from the hydrocracker addition in Rotterdam and the coker project at Antwerp were highlighted, especially the contributions they made in providing improved results even in a generally low margin industry environment.
Finally, Exxon reported progress on work to develop new lower emissions technologies to help address climate change. The company highlighted it had signed or extended eight agreements with a variety of companies and institutions to expand research into lower emissions technologies, adding to the more than 80 collaborations it reportedly has in place to scale up advanced biofuels, carbon capture technology, and less energy intensive manufacturing processes.
Chevron made headlines in December when it announced more than $10 billion in impairments and write-offs against various gas-related assets. This spilled over into the earnings call as the company defended its decision to prioritize its capital on most advantaged, highest return assets. It appears this decision by Chevron was underpinned by the company’s lower long-term crude and natural gas price outlook.
Similar to its major competitor, ExxonMobil, Chevron has invested heavily in the Permian Basin. The company reported a 2019 liquids production increase of 4% y-o-y, driven primarily from growth in the Permian. With its acquisition of the Pasadena refining system from Petrobras last year, Chevron expands its refining footprint on the U.S. Gulf Coast while also integrating with its upstream operations, providing processing capacity for its Permian shale equity crude. Chevron also mentioned on the earnings call the recently announced agreement to acquire terminals and retail sites in Australia, allowing for further integration of refinery production in Asia with a growing retail network.
Chevron was also asked what the company was doing around investments in lowering carbon footprint. CEO, Mike Wirth, talked about metrics announced last year tied to methane emissions and flaring that are driving changes already in what the company is doing and additional metrics to be included in compensation related to carbon intensity of oil and gas production. Chevron also pointed to other initiatives such as the integration of renewables with bio feedstocks, and investment in technology to decarbonize sectors where energy intensity is high.
BP’s Q4 earnings call focused on its continued fuels marketing successes as it expanded into new markets. In December, the company signed an agreement with Reliance Industries to form a fuels retail and aviation joint venture in India. This is in addition to the announced opening last year of the first BP branded retail station in Shandong Province, China, through its joint venture with Dongming, marking the start of its five-year plan to add 1,000 new sites to their existing network in China of more than 740 sites. BP also reported progress in their advanced mobility agenda from their joint venture with DiDi, a mobile transportation platform, to develop electric vehicle charging infrastructure in China.
As one of the leading oil majors in the energy transition, BP provided an update on steps the company is taking toward a low carbon future. Executives touted progress being made on its Lightsource BP joint venture, focused on investments in solar energy, with the partnership having expanded activities from five to 13 countries and a development pipeline of 12GW in just over two years. In early December, BP also announced it had completed the previously announced formation of a joint venture with Bunge to create BP Bunge Bioenergia to expand renewable energy in the fast growing biofuels market of Brazil.
Finally, the Q4 earnings call was the last one for outgoing CEO, Bob Dudley, who had been at the helm at BP since 2010 and had announced his retirement in October after a 40-year career. Dudley took over the CEO role shortly after the Deepwater Horizon tragedy and has been largely credited with stabilizing the company, restoring trust and returning BP to profitability after the company came very close to the brink of bankruptcy. Incoming CEO, Bernard Looney, previously upstream chief executive, is now tasked with guiding BP through the energy transition and building upon the foundation set by his predecessor.
Shell reported 2019 successes of its floating liquefied natural gas facility offshore Australia having delivered its first LNG cargo to customers in Asia, with one carrier a week now offloading LNG, LPG or condensate. The company also reported that its Appomattox field in the Gulf of Mexico achieved first production last year with production ramping up to 75 MBPD.
Similar to BP, Shell announced progress being made in their retail business, building on their position in existing markets, and increasing their presence in five growth markets of China, India, Mexico, Indonesia, and Russia. The company has opened 1000 sites in these growth markets over the last two years with plans to reach 5000 new sites by 2025. China, in particular, is an important strategic market for Shell. They have seen growing demand for their premium fuel, V-Power, which is now being offered at over 900 service stations across China.
In the area of energy transition, Shell provided updates on its progress in building an integrated low carbon power business. In Q4, it announced the completion of its acquisition of ERM Power, an Australian commercial and industrial electricity retailer. The company also acquired Hudson Energy, a renewables-only power retailer in the U.K., adding to Shell’s presence in the B2B market with over 900,000 customers through its Shell Energy Retail business. In addition to investments in the power sector, Shell has also been pursuing opportunities in wind energy with its onshore U.S. wind farms it already operates and most recently expansions in the offshore wind space. In Q4, Mayflower Wind Energy, in which Shell is a joint venture partner, was selected by the State of Massachusetts to supply 804 MW of clean, renewable power. To cap off its investments in the energy transition, Shell is also building capabilities in solar power generation through direct investments and partnerships with other companies in addition to investments in electric vehicle charging companies in Europe and North America.
Total highlighted on the earnings call its focus on growing in petrochemicals and reinforcing the strength of its integrated refining-petrochemical platform. This was evident with the recent expansion of the ethylene cracker at the Daesan integrated complex in South Korea, which increased ethylene production capacity at the site by 30%. The company also plans to expand polyethylene production by 50% (a project nearing completion) and polypropylene production by 60% by 2021.These projects are designed to process propane feedstock from U.S. shale gas to capture margins across the ethylene-polyethylene and propylene-polypropylene value chains. The company also announced progress being made on the steam cracker project at its Port Arthur integrated refining-petrochemical site which is expected to be completed next year. It is in the FEED stages at its ethylene-polyethylene project at Jubail (with partner Saudi Aramco) and in Algeria (with partner Sonatrach) on its propane dehydrogenation-polypropylene project.
Total provided an update on progress on its low carbon solutions, an area where it allocates 10% of total capex in. The first is the completion last year of the 50,000 tons per year biorefinery at La Mede in France. The site was converted from a crude refinery and now processes vegetable oils and animal fats to produce hydrotreated vegetable oil, biodiesel and biojet. The transformation of La Mede into a new energies complex also includes an 8MW solar farm and a unit to produce AdBlue, an additive that reduces nitrogen oxide emissions from trucks. The company also celebrated the startup last year of the first bioplastics plant in Thailand through its joint venture partnership with Corbion. The 75,000 tons per year site produces a broad range of biopolymer resins from locally sourced renewable sugarcane.
Our Take on the earning calls
While Q4 2019 was a disappointing quarter for Integrated Majors and the industry as a whole, executives were quick to move past it and focus on ensuring their refineries were ready to capture opportunities with IMO 2020. With lower seasonal demand during the quarter, many refineries took the opportunity to complete scheduled maintenance and in some cases, moved up some turnaround activities planned for this year. With the price spreads between low and high sulfur fuel oil already widening as of Q4, executives were asked why we hadn’t seen this play out yet in the crude discounts and in distillate cracks. As expected, many were still believers that the IMO effect will eventually come, only a matter of time. We are too.
It was also evident from the calls that oil majors are shifting growth investments away from refining and into other sectors as petrochemicals, and retail fuels in high growth markets. In many ways, they are also increasingly divesting refining assets as a way of meeting overall company asset divestment targets while reducing their carbon footprints. The focus on energy transition to a lower carbon future was also glaring during the calls as each company went to great length to outline activities being taken to invest in biofuels, renewable power, solar and wind energy, electric vehicle charging infrastructure, and many other initiatives to meet Environmental Social and Governance (ESG) goals.
Speaking of ESG, the industry has consistently been the target of environmental groups and more recently the financial investment community to show meaningful progress towards carbon reduction in the midst of a shift in attitude on climate change. A growing number of investors are now employing varying degrees of ESG valuation metrics in evaluating company investment decisions. We believe this will only continue to grow, putting more pressure on the industry to do more on carbon reduction initiatives. Oil Majors have responded and their efforts should be commended, especially European majors who have clearly taken the lead in this area, but the facts remain that while the world will continue to demand cleaner and more affordable energy, there will still be a role for fossil fuels in the future energy mix to meet the world’s growing demand for energy.
Turner, Mason & Company, continues to monitor developments in the global refining industry. Our latest views are being incorporated in our Crude & Refined Products and World Refining Construction Outlooks. We are publishing our first update this year later this month with the next issue due out to clients in August. If you would like more information on these reports, or for any specific consulting engagements with which we may be able to assist, please go to our website and send us an email or give us a call at 214-754-0898.