Equinor’s Transition Plan Shrinks Oil Footprint, Focuses on Fatter, Faster Returns Offshore
After Equinor laid out its strategy to maximize oil and gas profits as it transitions to business that minimizes carbon emissions, stock analysts asked if the less-profitable units can sustain the dividend.
Equinor recently offered another possible future for engineers in oil and gas exploration and production (E&P) during the transition.
By the end of the decade, the Norwegian energy company plans to be producing about as much oil as it did in 2020 but with a lot smaller global footprint. That is part of its plan to maximize its cash flow to support the growth of carbon-emission-lowering ventures, such as offshore wind power and long-term carbon storage.
“Early on, oil and gas will mostly contribute to that return. As we move to 2030, it will be more and more renewables,” Anders Opedal, Equinor’s chief executive officer, said during the company’s recent Capital Market Day with investor analysts.
Before explaining how the transition is changing its oil and gas unit, Al Cook, Equinor’s executive vice president for development and production, warned that he would be using the word “focused” a lot—as in, focusing on 15 countries in 2021, down from 30 with E&P operations in 2017.
The company will be operating assets in only seven countries as it focuses on what it does best, operating and engineering challenging offshore oil and gas projects.
“We are moving from the frontier to the familiar,” Cook said. “We are moving from exploration for reserves to exploration for profit.”
This marks a break from the industry’s long-time goal of at least replacing oil and gas reserves produced each year to ensure a long-term supply of oil and gas in the ground.
Instead, the focus is on maximizing the margins now to help build its new energy ventures that promise to grow as hydrocarbon demand declines.
It can also be seen as giving oil investors what they have asked for: more attention to ensuring the company generates the cash flow needed to sustain stock prices and raise dividends.
What the company is doing sounds like basic management thinking: Focus on doing what you do best, projects with the most upside, and shed marginal businesses at a good price.
In the US, that means continued growth in the Gulf of Mexico, where Equinor announced two discoveries last year—Monument and Blacktip—and backing away from US shale, which is finally becoming a solidly profitable business now that oil prices are around $70/bbl.
“We will no longer operate onshore unconventionals,” Cook said. “Instead, we will partner with some of the best local companies, Chesapeake and Southwestern in the US and YPF in Argentina,” who have more expertise and the scale to operate more efficiently.
Equinor no longer will be operating in the Austin Chalk in south Texas and the Utica in the Northeast US.
When asked if there will be more such changes to come, Cook said, “this is is milestone not a destination.”
Equinor has sold its Bakken acreage and is working on selling assets in Australia, Mexico, and Nicaragua as it focuses on a bigger opportunities, particularly Brazil.
Recently, Equinor and its partners decided to invest $8 billion to begin developing the Bacalhau project in the Santos presalt. It is the first field operated by an international company in that prolific play. The first phase of the plan calls for a floating production, storage, and offloading vessel able to handle 220,000 B/D, with production beginning in 2024.
The company is exploring off Angola with a focus on targets that can be tied into existing infrastructure. Cook said these tiebacks to existing platforms could offer “exceptionally fast payback time.”
In Canada, Equinor has the Bay du Nord development, which is a hub serving six fields. Thirteen wells have been drilled there to make sure what is in the ground is understood before a final investment decision in made.
While the footprint of its oil business shrinks, Equinor’s cash flow from that unit is expected to rise 90% by 2025, assuming a $60/bbl price, Cook said.
Over the decade, investment will shift toward renewables and low-carbon solutions—such as carbon storage in offshore formations—said Irene Rummelhoff, executive vice president for marketing, midstream, and processing for Equinor.
By 2030, Equinor’s capital investment will be split 50/50 between the oil business and the new energy businesses, she said.
Equinor executives stressed that their oil-development projects emit half as much carbon as the industry average and that the need to adapt to an era where addressing climate change makes renewables the business of the future.
But the questions from analysts kept coming back to the potential downside of transitioning to new lines of business where the margins are roughly half what they can be in oil projects, based on the many profit ranges cited during that day’s discussions.
A question about whether speeding the growth of renewables is leading to deteriorating margins led to a response by Equinor executives about its ability in project financing and selling off stakes in projects to increase returns.
Comparing projected profits from oil, where prices are unpredictable, and renewables, where the technology and competitive landscape is rapidly changing, is a slippery process. Clearly, oil at $60/bbl or more is the more-profitable option.
But long-term contracts for offshore wind projects appear far more predictable than oil, which crashed last year for the third time in the past decade.
Equinor pointed out that its electric sales contracts for offshore wind stretch out an average of 19 years, offering a more predictable income stream than oil prices.
“These have a very different risk profile than our oil and gas business,” said Pål Eitrheim, Equinor’s executive vice president for renewables.
Based on the descriptions of what Equinor has done to reach those deals, though, it is also clear that other companies getting into the business late could be looking at less-attractive terms and less-predictable payouts.
As with its oil business, the company has focused on deep water and predicts that, by 2030, two-thirds of its offshore wind capacity will be on floating platforms.
Floating designs makes it possible to access locations in deep water where the number of companies able to bid is limited by the technology. Equinor began developing the designs that it is now scaling up back in 2009, when few companies in the industry were working on floating wind turbines.
To maintain its margins in wind, Equinor has focused on opportunities in frontier offshore wind markets, such as off the densely populated US Northeast coast.
Now, as it finalizes the power purchase contracts that will finance the development, it is looking for the next generation of contracts in Asia, where it has established a position in South Korea.
On the carbon-storage side, the company is working on large projects in the North Sea.
And, in all the oil and gas projects it described, it reported that emissions would be half the average carbon emissions for projects globally, which is seen as a competitive tool. “In a world that cares more and more about carbon, we see this as a competitive advantage,” Cook said.