Even today most discussions on
environmental risk for integrated oil companies
are focussed on the risk of volume declines.
But experience over the last 20 years serves a useful
note of caution about the perils of confusing
volume with value. As understood ,
investors have been better served by
favouring industries with the biggest declines,
rather than increases, in sales volumes.
For example, despite global tobacco consumption
shrinking steadily, tobacco companies have
delivered a remarkable 13 per cent annualised
total return in the last two decades.
Not only did this overshadow the 4.5 per cent of the overall
market, it also trounced the 2.3 per cent managed
by the telecommunications services sector
despite volumes tripling across G7 countries.
At least three things need to happen for the
oil majors to become profitable on declining
volumes. First, capital discipline must be
imposed on the largest oil groups to prevent
supply from increasing much further.
Second,downside risks – from being a stranded asset,
from carbon pricing and from the rise of electric
vehicles – must be containable, at least in the
Third, investors must pay attention to
decisions made by policymakers.