One of Britain’s most influential energy experts, Paul Stephens, has warned oil firms that they face a “nasty, brutish and short” end within the next 10 years if they do not completely alter their business models. He argues in his research paper that major oil companies are unfit for the world economy, after taking hits from low crude prices, tightening climate change regulations, and flawed business strategies. He states that these companies require drastic cultural and strategic changes if they are to rebound. IOCs (international oil companies) have largely tended to follow the same strategies and make similar decisions.
This has resulted in less than optimal performance and unexpected outcomes. Furthermore, their strategies of risk assessment (based upon the CAPM model) are flawed. According to Stephens, the CAPM model grossly understates risk, resulting in poor decision making. He criticizes the lack of R&D investment in large IOCs, resulting from a tendency to outsource key functions. Stephens continues to highlight the various flaws in the strategies employed by most IOCs and how they will fail them in the future. Most importantly, the basic business model of maximizing reserves and minimizing costs will not work under the relatively low demand of today and the future.
He goes on to say that their solution would be to diversify into green energy, greatly downsizing operations, or consolidating by merging with rival firms, as Shell did with BG, back in January. He recommends a large restructuring and realising of assets to provide cash for shareholders
Similarly, an international thinktank, called the Carbon Tracker Initiative, called for large oil companies to steer away from expensive deep ocean drilling and the carbon-heavy Canadian tar sands. It seems that oil companies require a drastic change in strategy, even if oil prices are to rebound. Oil stocks continue to rise after bottoming out recently, however, they are nowhere near 2014 levels, and it seems unlikely they will reach those levels again. XOM earnings decreased by $3.1B YOY for Q1, and other companies are facing similar performance downfalls.
Incidentally, Shell, Europe’s largest oil company, just announced the opening of a new green energy division. Shell has already been involved in hydrogen, biofuels, and electrical activities, but the new division will also make efforts to proliferating wind power. Shell has committed $1.7bn in capital investment to the division, with annual expenditure of $200m. Climate change NGOs are unlikely to be satisfied as the annual expenditure is not even 1% of the total $30bn that Shell pumps into oil and gas. A much stronger effort will be needed to satisfy investors and activists alike.
Writer: Lalit Sharma
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