Major cuts to oil production, an equally major boost to clean energy project development, and ambitious emissions reduction targets: this was Big Oil’s pledge for the future last year. It’s worth acknowledging the effect the coronavirus pandemic had on oil demand, which motivated oil companies to diversify beyond their core business, but the motivation was already there as pressure from investors started growing for a more environmentally responsible way of doing energy business.
The majors themselves are confident they have the means and expertise to turn into the global utilities of tomorrow. They are betting big on electricity generation and distribution, EV charging, and, of course, wind, solar, and hydrogen. And they are making it sound like it will be smooth sailing. But it won’t be.
The renewables pivot of Big Oil has been hailed by many and criticized by many, the latter of those who remember previous attempts—at least stated attempts—by oil and gas supermajors to shift to cleaner energy. Yet now things are different from previous attempts to go green: the pressure from governments and investors is much stronger as ESG investing turns into a steady trend, and environmental activism reaches new levels of influence over all industries. So what are the challenges?
First, Big Oil has a talent shortage problem. The problem is not new or unfamiliar, but it is potentially serious, according to Vicki Knott, chief executive of control room operations automations solutions provider Crux OCM.
On the one hand, the industry has an aging workforce that does not want to change, Knott told Oilprice. “This workforce remembers how their businesses were impacted by the last green initiatives and have reservations on taking those risks again.” On the other hand, it is getting increasingly difficult for oil and gas companies to find new talent, not least because of the negative image of oil and gas among younger generations.
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Workforce behavior and attitudes are factors that tend to get overlooked when publicizing oil and gas companies’ efforts to change, but they are factors. There has been a lot of upbeat talk about retraining the existing workforce for a future that is not exclusively focused on oil and gas, but the actual execution of these retraining initiatives might turn out to be tricky.
Then there is the competition. Sure, Big Oil has the money to buy into solar and wind farm projects—and it is using this money for this purpose—but it is not the only player in this field. It is, in fact, venturing further into a well-populated field, featuring utilities such as Spain’s Iberdrola and Italy’s Enel, and renewable energy companies such as NextEra, which notoriously dethroned Exxon as the most valuable energy stock in the U.S. for a while last year.
These companies have been doing what Big Oil wants to start doing now longer and this gives them an edge over the supermajors even with their expertise—organic and inorganic—in matters related to power generation and distribution.
“I don’t worry about the oil majors at all,” the chief executive of NextEra said at an investor conference call last year, as quoted by the Wall Street Journal. “If I have 100 things I worry about at night, it’s not even on the top 100.”
This might be an attempt to downplay the threat but, as one oil industry insider told Oilprice last year, the supermajors are not utilities, they don’t have the expertise to compete successfully with utilities, so they should stick to what they know how to do.
Be that as it may, Big Oil does have relevant expertise, Crux OCM’s Knott notes. It has operated vast supply chains for decades and it has the means to build new ones around renewable energy and operate them efficiently. And yet it seems Big Oil’s biggest advantage over the renewables competition is its core business.
“ Big Oil has an established supply chain infrastructure to distribute oil and gas for energy purposes,” Knott told Oilprice. “It also has an established infrastructure for home heating and cooking that is affordable. Big oil also is able to fuel power plants’ base load demands reliably (wind and sun are variable, you can take a power plant offline if the wind isn’t blowing but you can’t make the wind blow).”
Most of the world’s largest oil companies have pledged to become net-zero businesses by 2050. For many this is an impossible task, with environmental lobbyists noting the industry’s lofty goals sound better than they actually are.
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“Each of them wants to remain a fossil fuel giant, only not look like one,” said Mark van Baal from Dutch-based shareholder advocacy group Follow This said last year in comments on the above findings. “Apparently far more pressure from society and responsible investors is needed to make oil executives see the writing on the wall.”
But it may be that Big Oil does not really need to become Big Electricity, or at least not Big Renewable Electricity. It may be smartest to play to its strengths and reduce emissions at the same time but without undertaking a complete—and potentially risky—transformation.
By Irina Slav for Oilprice.com
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If by some fluke of nature it does happen, Big Oil may never survive the price it has to pay with catastrophic implications for the global economy and humankind as a whole.
The truth of the matter is that Big Oil has neither the intention to transform itself into a green energy industry nor the ability to achieve the lofty goal of zero emissions by 2050. It will be doing itself, the global economy and climate change a great service by maintaining the core business that has sustained it for decades while sensibly reducing its emission footprint.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London