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Reinvention Is Needed To Secure The Future Of Big Oil

News Article Sponsored by Vector Controls

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The big international oil companies are among the most enduring institutions of western capitalism. Royal Dutch Shell grew out of a trading business set up in 1833. ExxonMobil and Chevron have their roots in Standard Oil, incorporated in 1870. BP’s ancestor company was founded in 1909.

Threats have come and gone, and Big Oil has kept its central role in the world economy. Now, however, they are facing what is arguably the greatest challenge in their history.

 The real danger is not the collapse in oil prices over the past couple of years — that is just a symptom of the upheavals in global energy markets that are putting the international oil companies’ business model at risk. If they are to last another hundred years, they will need a fundamental rethink of their operations and their strategy.
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Throughout their history, big oil companies thrived because of two competitive advantages. They supplied the fuels that dominated transport, and they had superior access to the crude oil used to make those fuels. Today, both are at risk.

On the supply side, large companies are no longer in privileged positions as producers of crude oil. The US shale boom was led by small and midsized businesses that learned faster and were more agile than their larger rivals. Their shale reserves are highly competitive against the mega-projects that are the big oil companies’ forte, such as developments in deep water or in Canada’s oil sands.

On the demand side, the pledges made by governments at the Paris climate talks to curb carbon dioxide emissions will impede the growth of fossil fuels, including oil.

Advances in battery technology mean that by the mid-2020s electric vehicles could have a noticeable impact on oil demand. The comforting assumption in oil company boardrooms that economic development will inevitably mean steadily rising use of their products could be misplaced.

It is quite possible that at some point crude prices will rise back above $100 per barrel. The world’s reliance on supplies from the Middle East means that disruption caused by conflict is always a risk. But a strategy that works only in that event is a road to ruin.

Large oil companies have been working hard to live in a world of $50 crude, cutting thousands of jobs, and slashing their investment budgets. It is still an open question, though, whether they will be able to fund the new projects they need to keep themselves from gradually withering away.

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One answer is to seize the opportunity in climate policy. Big oil companies are as much gas companies, and there is still enormous potential for cutting carbon dioxide emissions by shifting power generation from coal to gas.

Another escape route could be investing more in renewable energy, although the record of diversification by oil companies is generally dire.

The other answer could be for big oil companies to become larger shale producers themselves, taking advantage of the crippling burden of debt that encumbers their smaller US rivals. Already Exxon and Chevron are the most active drillers in the Permian basin of west Texas.

Here too, though, the record of large slow-moving multinationals trying to compete with agile, focused independents has been mostly unimpressive.

Big Oil has proved adaptable in the past, surviving challenges such as the break-up of Standard Oil in 1911 and the wave of nationalisations by Opec members in the 1970s. Investors need to be convinced that the present generation of executives is facing up to the even greater test they face today.


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