Could ‘Big Oil’ Secure Its Future With Renewables Start-ups?

‘Big oil’ will need to evolve and work with green start ups to stay afloat, writes Ricardo G Barcelona

Is ‘big oil’ condemned to follow the demise of old king coal? It appears so judging by the “low carbon” narratives that dominate the business press.

However, in the same breath, ‘big oil’ is reported to invest in more gas, and more renewables. In these apparent contradictory moves, literature may help to clarify how this story may unfold.

‘Gulliver’s Travels’, Jonathan Swift’s classic novel, serves as backdrop for today’s energy conversations. “Big oil” can be viewed as Gulliver, while the low-carbon start-ups are the ‘Lilliputians’. Two themes emerge from their interactions:

Lilliputians are pitched in battle against Gulliver, alternating as protector or fiend, that should be befriended or contained. These contrasting views are inspired by Gulliver’s forays into Lilliputians’ turfs. In today’s scale, however successful the Lilliputians become, they represent rounding errors to ‘big oil’s’ financial returns.

So, why the fuss?

‘Big oil’s’ strategists presumably see decarbonisation as diminishing fossil fuel’s value. To combat this threat, managers can either hinder renewables’ uptake, or join the bandwagon. If they fail in these tasks, “big oil” is condemned to oblivion, the conspiracy theorists claim.

Seen under this simplistic (and erroneous) lens, “big oil’s” responses appear predatory or at best, contradictory.

For example, electric vehicles (EVs) will usher in a future that electrifies transport. Just like in power generation, where diesel and bunker fuel were reduced to irrelevance, the same is feared for petrol. With Shell acquiring New Motion (2017), and BP’s purchase of Chargemaster (2018), they now own the largest vehicle charging operations. To top this, Shell commits $2 billion annually for alternative fuels and energy.

It’s almost gone unnoticed that ‘big oil’ spent $145 billion in 2017 to bolster its depleted oil and gas reserves due to under-investment since 2008.  And what about the power companies? They are too busy restructuring, shutting down plants, or shifting to renewables, with uncertain outcomes.

One could be forgiven for being bewildered. Why spend more on dirty fossil fuels that could become obsolete?

One could be forgiven for being bewildered. Why spend more on dirty fossil fuels that could become obsolete?

Managers inhabit dynamic energy markets, where transitions are recursive and tentative. Their decisions are prone to errors, where expectations often diverge from future outcomes. To hedge their bets, they maximise their strategic flexibility by diversifying portfolio, by taking actions such as these:

  1. Learning the business of the future by incubating start-ups, acquiring and scaling viable technology leaders, or opening pathways to profitable transitions;
  2. Reshuffling portfolios to gain focuson businesses that meet today’s fiduciary objectives; or
  3. Monetising business development by spinning off new or extant businesses that cease to deliver. One firm’s poison could be another’s meat.       

‘Big oil’ is hampered by competing capital needs that tend to favour operational to strategic investments. A good use of development capital is to fund agile start-ups that enjoy the freedom from the rigid capital allocation that ‘big oil’ suffers from. By acquiring, ‘big oil’ pays a premium, while possibly avoiding early stage costs of failures.

‘Big oil’ today has proven adept at spotting the next big waves in energy transitions, by design or by acquisitions to catch up. Shell divested coal as they exited apartheid-era South Africa. In its stead, gas and power emerged when gas was a fledgling and unproven fuel, populated by small operators. As gas gained traction, ‘big oil’ consolidated through acquisitions, with state-owned Gazprom serving as template for resource holders to commercialise their gas reserves.

In today’s transitioning energy market, timing, pace and scale are the uncertainties confronting managers. Going by experts’ views, it could take a decade or at least two generations to achieve a low carbon future. Judging by Energiewende’s experience, experts could and often do misjudge these uncertainties.

Seen in this context, managers have to tackle real problems with real solutions today. A low carbon pioneer, aiming to reap the promise of fifty years hence, serves no purpose if it fails to earn a profit within the foreseeable future. Bankrupt pioneers are as good as firms trapped into inaction by inertia – they both fail. Nokia’s demise on Apple’s then puny smartphone onslaught serves as reminder.

Gulliver’s future routes? Their success is premised on successfully nurturing Lilliputians. Failing this, they could go the way of European coal mines, or repeat Nokia’s fall from grace.

Ricardo G Barcelona is an adviser, academic, and author of Energy Investments: An adaptive approach to profiting from uncertainties (Palgrave Macmillan).

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