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Diversify Or Die? Big Oil’s Dwindling Options For Survival

China Oil

French Total has emerged as perhaps the smartest member of the Big Oil club, wasting no time waiting for oil prices to return to early 2014 levels, instead, venturing into the brave new world of renewables and power storage systems.

This move by the French giant was recently lauded by Lux Research in a paper titled Superpower Darwinism: What Big Oil Can and Cannot Do About Total’s Billion-Dollar Battery Move.

Total is preparing for a world that will be dominated by renewable energy, and betting on it to ensure its long-term success. Meanwhile, other supermajors are finding it hard to acknowledge climate change—the single most important factor that is spurring the renewables boom.

Until relatively recently, this acknowledgement could go unnoticed. Renewable energy was more hype than anything else: it couldn’t be stored for any practical length of time, it was – and still is – heavily subsidized in order to be able to compete with fossil fuels. It just wasn’t a serious competitor of coal, gas, crude and nuclear power plants.

Things are quickly changing, however, with the advent of more economically viable energy storage systems and the concept of distributed generation, with the latter set to transform the face of the power distribution market globally. While many skeptics think it’s too early to talk about any economic viability in renewable energy, Total, at least, doesn’t seem to think so, judging by their $1.1 billion spend on the Saft acquisition. Related: 30 Years After The Disaster: Ukraine Plans Huge Solar Farm In Chernobyl

It’s been said here time and again that diversification would be a smart choice for oil majors for a future where their product is not the single source of energy on the market. It’s nothing more than common sense – you need to move with the times if you want to survive. We’re talking about long-term survival here, of course – interesting and promising as they seem, energy storage systems are just starting.

It’s this nascency of this market that is perhaps the greatest challenge for oil supermajors that are considering following Total’s example, according to Lux Research. As the battery business continues to gain prominence, it also gains value, and the worthwhile companies that buyers can choose from are getting increasingly expensive.

Still, as researcher Cosmin Laslau notes, “As Darwinism looms for the future of power, oil supermajors looking to evolve must choose among more expensive, broader battery players. But they should still act, as waiting longer or doing nothing, would be an even worse outcome.” Related: OPEC Output Freeze Plan In Limbo After Oman Refuses To Join

If we are to believe Lux Research, there is no time to waste, and Big Oil should use the cash it has, while it still has it, to enter the energy storage market. It has become abundantly clear that lying low and waiting for oil prices to reach former heights is useless, since nobody can say with certainty whether or even if this will happen at all.

If we are to believe Big Oil, all is well, and crude will soon jump back to $100 a barrel to the joy of shareholders all around. If it doesn’t, Big Oil will just continue cutting costs and maintaining dividends. The problem with this approach is that it’s unsustainable over the long term. This is just basic survival, while in the meantime, other leaner, more far-seeing companies bet on a future in renewable energy, and will be sure to be the first to capture that flag.

By Irina Slav for Oilprice.com

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  • JHM on August 11 2016 said:
    For the long view consider that EV batteries can offset about 200 gallons of gasoline or 5 barrels of oil per kWh over lifetime use.

    So $1B invested in a Gigafactory with 10 GWh annual output can offset some 1500 M barrels over 25 years. This is comparable to buying an oil field with 1.5B barrel reserve for $0.67/b. Straight off we see that this makes traditional oil reserves with a new discovery cost in range of $10/b quite obsolete. It is far cheaper to locate and build a new battery factory than to explore for new oil reserves.

    Next that 1 kWh EV battery will need about 1.25 MWh of charging over its useful life. So this is about $50 of wholesale solar or wind power. By 2020, the battery cost will be about $100/kWh. Combining both costs, we have a producer cost of $150 to offset 200 gallons of gasoline (or diesel). Thus, $0.75/gallon wholesale. Note that refining and distribution costs are largely circumvented. Even at retail power prices of 12 c/kWh, the charging costs over the life of the batter is around $150; thus, batteries compete with retail gasoline at $1.25/gal as early as 2020.

    Both batteries and renewable energy should continue to decline in cost over timer. Thus the prospects for oil at competitive prices in 2030 is even more bleak. The real problem for the oil industry over the next 10 years is not that volume of consumption will decline that much, but that to be merely competitive with EVs and renewables in 2020, crude will have to trade at below $30/b. Moreover, the value of oil in reserves is quickly dropping. They will be worth less than $1/b within about 5 years. Large reserve holders like the Saudis know that they have to maximize production now before their reserves become worthless. This is why they are motivated to keep increasing production even two years into a glut. And the glut will persist as essentially a liquidation sale on reserves.

    Waiting for EVs and renewables to become fully competitive economically is a foolish strategy. Within that span of time reserves lose practically all value and many other assets become stranded as well. So oil major assets will be so heavily impaired by that time, that they will be in no financial position to branch into other industries already dominated by efficient early movers.
  • Sam V on August 14 2016 said:
    JHM that's well thought out and a renewable future is what I would like to see so we should invest for it. I agree the very long term outlook for oil is bleak, I believe the obstacles to renewables can be overcome with a fraction of the funds spent looking for oil each year.
    However in the next 3-4 years there is uncertainty around the ability to mass produce electric cars. It will happen but there will be teething troubles and Tesla may not emerge as one of the ultimate victors.
    In the U.S. that 12c electricity unfortunately comes from burning coal and nuclear - neither of which we should be doing. Nuclear is a toxic waste timebomb for our distant decendants.
    Y'all are spending billions to clean up the Uranium in Southern Utah but leaving a massive unpaid bill for future generations.
    With present technologies, places like Hawaii and the Southern States could use solar economically. Further north hydro and wind could really go much further than people expect but it will need to be backed up by aeroderivative gas turbines for grid stability.
    As far as you guys are concerned the rest of the world doesn't exist (LOL).
    Anyways the cost of renewables is dropping but realistically that 12c U.S. per kwh is probably close to the cheapest it could possibly get when the technology is mature. That's a big call but my best educated guess. You included the cost of the factory but not any return on investment or the cost of actually building the cars themselves. Electric cars will compete and I believe overtake petrol powered but it's not quite as simple as you (or the article) may lead people to believe.
    Until that time oil is poised for a major recovery. If Total was smart they would be using the low cost in the industry to look for more oil and gas. When oil is $100 per barrel and rig utilisation is high (=expensive), that's the time to be investing in renewables.
    Total is doing the opposite, not smart. No great things were ever achieved by a commuter of expensive suits with the same backgrounds and bland conformity of ideas so this is not surprising.

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