No Country For Old Oil Men
Wal van Nierop
Apr 8, 2019
As published on Forbes.com
Oil and gas (O&G) executives are rarely subjects of empathy. Indeed, it is risky to portray them as anything but the “bad guys” in dramas of climate change, geopolitics and innovation. Well, I believe strongly enough in a carbon-zero future to take that risk.
Traditionally, O&G CEOs check their stock prices almost hourly. Now, they’re probably checking even more obsessively and tossing and turning at night, wondering how the energy transition will affect their businesses. Can they stay in control? These CEOs have a fiduciary duty to shareholders, who for years have seen flat stock prices and only stay in for the dividends (at least for now…). They also have a social responsibility to pensioners, employees and a planet suffering from their products.
Meanwhile, demand for oil and gas is increasing and the industry plans to pump more oil in the next decade. Thanks to a booming world economy, CO2 pollution has increased significantly in the past year. Despite the rise of renewable energy and electric vehicles, the U.S. Energy Information Administration projects that fossil fuels will account for 77% of energy use in 2040 – not least because hydrocarbons still offer significantly better margins than renewable energy.
I’m not here to defend O&G CEOs. Rather, I offer the perspective of a venture capital investor who partners on cleantech innovation with fossil fuel companies including Shell, Total, Kuwait Petroleum, Petronas, Chevron, Husky, Cenovus and others. How do their leaders navigate an energy transition that will erode the value of their flagship product? How do they protect everyone who still depends on their industry? There are no easy choices for O&G CEOs.
Choices, choices, but which is the best?
There are many attractive projects a large energy company can invest in and there is serious competition for capital. What are the best options that will satisfy shareholders in the short and long term? How about all the interest groups that are concerned about the environment, economic growth and social stability?
The first option is obvious: Milk the Cow Until it Dies. Some CEOs have decided that the energy transition will not happen under their watch. Their plan is to maximize short-term profit until their tenure is up. Full stop.
Second, there’s the Hydrocarbon Light option: get out of the highest-cost, highest-carbon content oil and shift to cheap, flexible sources like fracked oil and, more importantly, gas. This option may please many shareholders while advocating that the move to gas is the first phase in the energy transition.
Third, for conspiracy theorists (but maybe not), there’s the Catch-and-Kill Strategy. Just as the National Enquirer buys up and shelves scandalous stories to protect allies or manipulate celebrities, CEOs may do the same with cleantech startups. It’s not farfetched. 14 years ago, the documentary Who Killed the Electric Car? alleged that automakers and oil companies bought technology in the 1990s to derail electric vehicle commercialization.
Catch-and-kill cleantech acquisitions could provide great PR for O&G companies. A Machiavellian CEO could slow the scale-up speed of acquired technologies, restrict them to certain markets, or give the startups just enough capital to ensure that they will fail. While a few CEOs might still dream about pursuing this option, most know better. It doesn’t work and in the long term, it will almost certainly backfire.
The better option?
Finally, there is the “Prius Meets Elon” (PME) option. More enlightened CEOs need a way to protect their core business while getting on track for the energy transition. The PME Plan could fuel share-price growth and begin mitigating environmental damage. But, the startup costs could be difficult to defend in quarterly analyst calls.
For example, when Toyota debuted the Prius in 1997, it became the first mass-produced hybrid gasoline-electric vehicle. No one took Toyota seriously. “The Toyota Prius was derided as little more than a green-marketing science project when introduced to the U.S. market in 2000,” wrote Consumer Reports. It would have been hard for American carmakers to justify a hybrid project to shareholders back then, especially since Toyota sold just 5,562 units in the U.S. that debut year. Sales peaked at 236,655 units in 2012, more than justifying the risks Toyota took.
Toyota spotted the transition to clean vehicles and innovated ahead of the curve – it didn’t lose its core business but instead strengthened it. Today, change is going even faster than when the Prius was conceived and it is happening across the industry value chain: in engines, car design, infrastructure, maintenance, etc. If O&G CEOs don’t act, Elon and the other electric vehicle makers will blindside them.
What a PME Plan may look like
The PME Plan calls for CEOs to decentralize their O&G businesses from upstream oil to downstream utilities and electricity. That begs for acquisitions and new operations in battery storage, EV charging, renewables and smart grids.
It is encouraging that several O&G companies already seem to be on this path. For example, Shell recently invested in AutoGrid (smart grid software) and acquired GreenLots (electric vehicle charging infrastructure), Sonnen (home energy storage) and LimeJump (virtual power plants).
Meanwhile, Total invested in Ambri (energy storage), PowerHive (off-grid energy management), Stem (energy storage and virtual power plants) and EREN Renewable Energy (solar, wind and hydro). It also acquired the majority stake in SunPower (solar cells).
These investments are more than lip service to environmentally conscious consumers. Ed Crooks and Anjli Raval of the Financial Times assert that a “battle for power” is emerging between the oil majors and utilities. “Shell,” note the authors, “has floated the idea that by the 2030s it could be the largest power company in the world.” Total, similarly, is vocal about rebranding as an “energy company” and focusing on electricity, the fastest-growing segment of energy consumption.
It Ain’t Easy
O&G CEOs who choose the PME Plan will still take flak from the media. That may, at least temporarily, result in a bit of yo-yoing in the stock market, as profits may not match the old oil margins initially. It ain’t easy to play this option cool. The traditional C-room mantras – stay in control, avoid investor uncertainty, manage risks, etc. – will create all kinds of booby traps.
An unavoidable question awaiting CEOs who follow the PME plan is: will they be on the bleeding edge of commercializing cleantech in receptive markets, like California and Northwestern Europe? Can they lead the industry to a very profitable and sustainable future? The end of “milking the cow” seems near and sticking with the status quo doesn’t any longer look like a good option in the modern energy industry.
I commend O&G CEOs who push innovation towards the new energy industry. There are costs to forcing changes too early, too widely and too coercively. Brexit, Trump and the Yellow Vest Movement demonstrate what can happen when change leaves too much of society behind.
Still, a new era is emerging. The tossing and turning CEO can either wake up as a dinosaur or dare to be a rock star who creates the world of the future. Today, there is no country for old oil men.