Something unthinkable is happening in Big Oil, and it’s not the demand slump or the spending cuts or the layoffs. With the exception of the demand slump, we’ve seen all this before–more than once, in fact. No, what’s unthinkable is that Big Oil appears to be planning to stop being Big Oil.
It’s not a joke. Three of the world’s biggest oil and gas companies are planning to become net-zero carbon emitters by 2050. And, as Energy Intelligence noted recently in an industry analysis, there are only two ways to attain the net-zero state: reduce the production of oil and gas, and capture the already emitted carbon dioxide.
The three top performers in the field seem to be focusing on the first way. Shell, BP, and Total—along with Italy’s Eni and Spain’s Repsol—all plan to boost their output of renewable energy at the expense of oil significantly over the next few decades. And the U.S. supermajors, as reluctant as they have been to join the green wave in energy, might at some point simply be forced to do it by their shareholders and by the new, post-coronavirus world order.
It would be an understatement to say that the pandemic had some role to play in the transformation looming over the energy industry as we know it. The pandemic, and the oil demand slump it brought on the industry, had a significant role to play in that transformation. The extent and speed of this demand slump were literally unprecedented, but now that the precedent has been set, Big Oil is preparing for the future.
Related: $40 Oil Is The New NormalThe industry, Energy Intelligence wrote recently, is facing a major disruption that will change business models that have been used for decades. But there is no way around it. According to Energy Intelligence analysts, the traditional integrated business model is on its way out because this latest crisis has revealed it as wanting in many respects. Restructuring is also in order and already underway to boost the companies’ resilience to future crises. But the main thread running through this disruption is diversification into alternative energy sources.
“The world’s carbon budget is finite and running out fast; we need a rapid transition to net-zero,” BP’s Bernard Looney said at the launch of the company’s net-zero program, announced in February before Covid-19 really struck.
“We all want energy that is reliable and affordable, but that is no longer enough. It must also be cleaner. To deliver that, trillions of dollars will need to be invested in replumbing and rewiring the world’s energy system. It will require nothing short of reimagining energy as we know it.”
Reimagining may indeed be the most accurate way of putting it, but it’s only the start. The oil and gas industry will need to transform into something else. And it will be neither easy nor, unfortunately, quick. “Keep it in the ground” is much easier said than done.
“We’re seeing that if you want to somehow cut out 25% energy use or hydrocarbon-based energy use, you need draconian measures to get to that reduction,” Shell’s Ben van Beurden recently told Bloomberg in an interview.
“You need to lock down people. You need to shut down the economy. It shows the magnitude of the challenge, how complicated it is, and what the consequences would be if you really wanted to have a very simplistic approach to getting rid of oil and gas.”
What the industry is therefore planning on using—and already using in some cases—is a more intricate approach. One aspect of this approach is the restructuring of the business into entirely new divisions, dispensing with the traditional upstream/downstream division, and organizing its priorities around the new divisions. Another is the much bigger focus on every other business except oil and gas. Power generation and distribution, biofuels, hydrogen, EV charging, they are all there.
A third aspect of the transition looming over oil and gas is technology. Tech will not only help Big Oil become more efficient–it may turn out to be instrumental for their net-zero ambitions, as Energy Intelligence points out in its analysis.
So, a change is underway, and while it may not be the change that the most radical environmentalists want to see, such as the instant suspension of all oil and gas production, which is an impossibility, it is a change for the better. And the important thing is that Big Oil has the perfect incentive to pursue this change. Not out of altruism, of course. For-profit.
The thing is that the transition to clean energy is not just a challenge. It is a huge business opportunity as BP’s CEO recently told IHS Markit’s Daniel Yergin. It is an opportunity for Big Oil because only companies of this size have the means and resources to be reliable, clean energy providers to equally large companies such as the tech giants.
This is not the most pleasant truth, but it is a truth nevertheless. If Google wants clean energy for its data centers, Looney said, it will want a reliable energy provider, and this will most likely mean a large provider, with the capacity and backup capabilities to fulfill the tech giant’s requirements.
So Big Oil may well stop being Big Oil and become Big Energy over the next few decades. Even the U.S. supermajors will likely be swept into the wave when they figure out exactly how profitable the alternatives of oil and gas can be. All European majors can’t be wrong, after all, can they?
