Big Oil Could Reap Windfall on Fossil Fuel Limits, Goldman Says

(Bloomberg) -- Cracking down on fossil fuels could actually boost profits for the world’s biggest oil companies, though the industry must shift toward cleaner fuels or be left behind by investors, according to Goldman Sachs Group Inc.

Major producers including Exxon Mobil Corp., BP Plc and Royal Dutch Shell Plc can slash carbon emissions and still see “materially higher” returns on drilling projects, in part because greenhouse-gas limits will make oil more expensive, the bank said in a note to clients late Monday.

Oil explorers will have to “re-imagine their business” to include less-polluting alternatives such as renewables and natural gas-fired power generation, analysts led by Michele Della Vigna said in the report. Carbon-intensive assets like refineries and Canada’s oil sands will have to be deemphasized or abandoned, the report counseled.

“Their core business of oil and gas becomes in some ways so under-invested by the broader market that the returns in the legacy business go up a lot and fund what is going to be a series of investments in lower-return technologies like renewables and carbon capture,” Della Vigna said in a telephone interview. “They can and they will have to reshape their business and I believe they can do it profitably.”

Such a transformation would allow the world’s seven biggest oil companies to cut carbon emissions 20 percent by 2030, even as returns on the biggest oil and gas projects rise by about 5 percent, the analysts wrote. Oil and gas would account for about 45 percent of their production at that point, down from 59 percent in 2014.

The analysis came the same day the United Nations warned the world urgently needs to reduce global warming emissions to avoid catastrophic damage to the climate. Pressure is building for the oil industry to react, the Goldman analysts wrote.

“The fossil-fuel divestment movement is gathering pace, with the number of institutions divesting coal investments up fivefold in the past four years,” the analysts wrote. “We believe it is very important for Big Oils to lay out a strategy towards becoming Big Energy.”

©2018 Bloomberg L.P.