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Breakingviews - Chevron makes bet on being last man standing

A Chevron gas station sign is seen in Cardiff, California, U.S. January 25, 2016. REUTERS/Mike Blake/File Photo

LONDON/NEW YORK (Reuters Breakingviews) - Chevron Chief Executive Mike Wirth is doubling down on oil. The boss of the $180 billion U.S. fossil fuel firm told Reuters on Tuesday that he was a fan of the 2015 Paris Agreement to cut carbon emissions, but also didn’t think crude demand would permanently plummet any time soon. There’s a way to square that circle, but it leaves the U.S. oil giant looking a lot different to European rivals.

Wirth acknowledged that Covid-19 had hit demand but reckons the same fundamental drivers are in place. For him, the increase in global population from today’s 7.5 billion to a possible 9 billion by 2040 means energy demand will grow, and he thinks the oil sector’s percentage contribution will remain similar to what it is now. By contrast, the UK’s BP said in September that it envisaged its fossil fuel production dropping 40% by 2030.

Those opposing starting points drive diverging strategies. BP wants its wind and solar capacity to increase 20-fold to 50 gigawatts by 2030. Wirth is more focused on ways to offset carbon emissions from the oil he plans to continue pumping.

His bet is rational enough. The hope of recovering demand and a commitment by Saudi Arabia to constrain supply mean the price of Brent crude has already crept above $56 a barrel. With investment in new projects depressed, prices at or above that level aren’t an unrealistic scenario. Research firm Rystad Energy predicts 2021 will have the largest shortfalls in crude supply in years.

Part of the deficit is likely a result of bankruptcies last year. Chevron has the advantage of size, and can outlast smaller rivals. If oil prices slump again the company could buy or merge with larger ones, although Wirth said the suggestion of combining with giant Exxon Mobil – almost a reprise of the old Standard Oil – was an “incendiary” idea to speculate on.

With a net debt-to-EBITDA ratio of just above 1, about a third of Exxon’s leverage, Chevron is entitled to a degree of insouciance. But a greener U.S. government under President-elect Joe Biden may force him towards renewables. And while he thinks Chevron’s share register will look pretty similar five years from now, big asset managers and investment capital could shift faster than he thinks to climate-friendlier places. It’s a bet on being the last oilman standing, but a risky one.

Breakingviews

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