Energy expert: Oil companies must shrink and diversify or face rapid decline

exxon gas station photo
CC BY 2.0 Mike Mozart

Oil companies have about ten years to figure out a new business model, says Professor Paul Stevens, Distinguished Fellow, Energy, Environment and Resources at Chatham House—a think tank focused on international affairs. If they don't, he argues, they could face a rapid and "brutish" decline within the next ten years.

That's the thinking he lays out in a new research paper entitled International Oil Companies: The Death of the Old Business Model.

While it's tempting for us TreeHuggers to give all the credit to recent innovations in green technology, victories on the environmental policy front and a growing divestment movement—all of which are no doubt contributing to the industry's woes—Stevens says the issues that BP, Exxon and the like face are more fundamental, and a lot more deeply seated than these relatively new challenges.

Because oil companies have spent the last 30+ years trying to maximize shareholder value, increase their bookable reserves (discovered oil that they can claim on their books) and outsource much of their day-to-day production operations, they were already in a position where they had too many eggs in a highly unstable basket. Now, with oil prices crashing while the cost of production does not; with campaigners scoring victories from the Paris climate agreement to major institutional divestment from fossil fuels; and with increasingly viable competition from electrified transportation, efficiency and renewables—oil companies may be facing a unique confluence of uphill challenges.

After all, when the car that's generating the most buzz among the public burns literally zero oil; when Saudi Arabia says it's got to diversify away from oil; and when the Governor of the Bank of England says many of our known reserves are unburnable, a strategy based on discovering and selling more oil in the future starts to look uncertain at best.

But what's the solution? Stevens does offer a relatively straightforward suggestion. Unfortunately, it's probably the last thing that many folks in the board rooms will want to hear:

"In this new world, the only realistic option for the IOCs lies in restructuring and realizing many of their current assets to provide cash for their shareholders. Inevitably, this means that they must shrink into the remaining areas of operation, functionally and geographically, where they can earn an acceptable return. This would require a major change in the corporate culture of the IOCs. It remains to be seen whether their senior management could handle such a fundamental shift. If they can, the IOCs will be able to slip into a gentle decline but ultimately survive on a much smaller scale."

Oh well, let's look at it this way: It's not like an incumbent and seemingly monolithic industry has ever been caught napping to the extent that it suddenly found the old rules of the game no longer apply. Right?

Energy expert: Oil companies must shrink and diversify or face rapid decline
Business as usual is no longer an option. And they don't have long to figure out a new model.

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