Big Oil goes looking for career change
As legacy business fades, investments in renewable electricity, biofuels and EV charging points may pay off
For most of the past century, Big Oil executives found it pretty easy to explain to investors how their businesses worked. Just locate more of the commodities that everyone needed, extract and process them as cheaply as possible, then watch the profits flow.
That’s all over now. The change has been so profound that the chief executive officer of BP recently found himself hyping the profit potential of another commodity. “People may not know — BP sells coffee. We sold 150 million cups of coffee last year,” Bernard Looney said in an interview in August, referring to beverage kiosks attached to the company’s fuel stations. “This is a very strong business. It’s a growth business.”
Perhaps it was tongue-incheek, or a way for the leader of the world’s fifth-largest international oil company to emphasize a relationship with consumers. But it’s clear Looney and other oil bosses are struggling to sell their plans for a future in which the world wants more green energy. Last year, for the first time in history, solar and wind made up most of the world’s new power sources, according to BloombergNEF. If the margins on cappuccinos look good right now, that’s an indication of how hard it will be for Big Oil to rapidly ditch its winning formula of drilling, pumping, and refining while spending its way into renewables.
“This is a time of energy transition,” says Daniel Yergin, the oil historian and vice chairman at consultant IHS Markit. “The supermajors were born of the trauma of the late 1990s,” he notes, and now “this global trauma of the pandemic will also be a decisive period.”
Legacy energy companies are for the first time sketching new strategies that in the near future — as soon as 2030, in some cases — would eliminate hydrocarbons. The industry would like everyone to believe it’s turning its back on fossil fuels for the good of the planet. After decades of denying its role in global warming, however, the reality is that Big Oil has been forced to change by green campaigners, local politicians and pension funds.
The green transition is more evident in Europe, but the same forces are hammering the industry in the U.S. In another unmistakable sign of the times, last month Exxon Mobil was dropped from the Dow Jones Industrial Average for the first time since 1928. In the S&P
500, the energy sector is now the smallest component. (The mostly state-owned oil giants of the Middle East, India and China are, for now at least, largely carrying on as before.)
What is the future of Big Oil without oil? At the extreme of this approach are the pathways sketched out by BP and Italian oil group Eni. These companies claim that in the next decade they will come to resemble a cross between a slimmer version of a traditional oil company and what’s today more like a utility (with, yes, a coffeeselling convenience store chain for drivers of electric vehicles). As the legacy business fades, the theory goes, investments in renewable electricity, biofuels and EV charging points will pay off.
If in the past the biggest names of the industry were known as “international oil companies,” the new jargon describes this approach as creating “integrated energy companies.” Michele Della Vigna, the top oil industry analyst at Goldman Sachs, expects to see oil giants attempt the same all-in strategy as before. “We believe the coming decade will see them integrating vertically in gas, already evident, and in power,” he says.
Industry executives insist their legacy business is resilient even as they shift away from oil and natural gas, but their actions suggest otherwise. BP and Royal Dutch Shell have already slashed their dividends. Returning profits to shareholders has long been a pillar of oil’s strength on financial markets. And those like Exxon who are keeping their shareholder payments untouched are taking on far more debt to do so.
The fossil fuel industry as a whole has taken billions of dollars in writedowns, in part linked to the rise of U.S. shale production and the impact of the coronavirus pandemic. If demand peaks earlier than expected, the most expensive and polluting oil fields such as tar sands in Canada may never be developed.
Add it all up and the Not-SoBig Oil of tomorrow looks greener, smaller, and nimbler — and less profitable, more indebted and paying lower dividends. That spells the end of a business model that has not changed much since it was pioneered by John Rockefeller: integrate oil production with refining, and market it under a single umbrella.
This formula built an industry that made possible 20th-century automobile culture, reshaped cities, produced political dynasties and defined modern life. With hydrocarbons occupying a central role in the global economy, the model became a cash machine and a darling of long-only shareholders who adored its fat and predictable dividends. Oil interests became a powerful political force. The model was durable enough to survive the oil crisis of the 1970s, the rise of OPEC, wars in the Middle East, and the emergence of the ecological movement in the ’80s.
When crude prices plunged in 1998 and the oil giants appeared on the brink, the industry responded in true fashion: doubling down on oil in a series of mergers that created the modern petroleum industry. The five companies that have dominated since — Exxon, Chevron, Shell, Total and BP — have been doing roughly the same things their predecessors did decades earlier.
In the 2020s these companies are trying to figure out how to do something completely different — renewable energy — while quickly reducing or offsetting emissions from the oil and gas they sell.
The answer from BP is far more radical than from Chevron. But even the smaller steps by American supermajors are remarkable by the standards of a conservative and slow-moving industry. Chevron’s last update to its shareholders in July highlighted an oil project, a deal to buy fuel stations and investment in solar power. It looks like the end of an era.