Large Oil Companies Consider An Uncertain Future – 11/14/16

Falling prices, rising fuel efficiency standards, increasing fleets of electric vehicles in China and other important markets, and near universal agreement of world leaders on climate change are forcing large oil companies to consider changing in their business models.

Few energy experts believe the existential threat will come in the immediate future. But change is coming so many oil executives are hedging their bets. Some of the largest of the large oil companies, including Royal Dutch Shell, BP and Saudi Aramco, pledged last week to jointly invest $1 billion over the next decade to develop systems to capture and store emissions of greenhouse gases and improve energy efficiency. Exxon Mobil has also financed research into carbon capture and sequestration and lobbied for a carbon tax.

Jeremy Bentham, Royal Dutch Shell’s vice president for global business environment, said Shell and other oil companies could adapt and prosper to meet the world’s energy needs, which should continue to grow.

“Our portfolio mix would adjust over time,” he said, “such that the level of the demand for oil would be met and the level of demand for overall energy would be met… To have a demand at a much lower level you need a significant restructuring of mobility systems with more compact cities and with more public transport that can be electrified… a whole restructuring that isn’t driven by energy production.”

Still, changes in the global energy system are slow going. The electric car market has only shown signs of a breakthrough in the United States recently due to improvements in battery technology after years of promises. The effects of higher fuel efficiency standards have been more consistent though regulatory uncertainty surrounding them has spiked with Republican control of Congress and the White House.

The most pressing concern for large oil companies continues to be the low price of oil. With prices stagnant around half of their level in 2014, many investments in the Arctic or other difficult to reach areas have lost their luster for companies. The glut has also hampered shale drilling as many of the U.S. firms whose surging output created the oversupply have gone into bankruptcy, or at least slashed budgets. Combined with pressure from environmentally conscious shareholders, the low prices are encouraging U.S. oil firms to diversify their energy holdings though they continue to resist assessing possible climate change risks.

In comparison to U.S. firms, European companies have been more open to acknowledging climate change as a threat to their current operations. Be it national companies like Norway’s Statoil, or multinationals like Total S.A., the French oil supermajor, European firms are accelerating their investments in renewable energy. Statoil alone has announced new investment decisions totaling more than $1 billion including an offshore wind farm.

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