From black to green

The oil companies still are in retreat. Especially the Ben van Beurden quote saying that there are decades of opportunities left in oil and gas is indicative of not really knowing what’s next and where to go, especially at ‘big oil’ scale. Shale really is the core of the problem for big oil: recoverable reserves of tight oil are growing and will continue to depress the oil price for decades to come especially as countries such as China develop their shales for national security reasons. It is likely that oil prices will remain this low into the medium to long term. That this is likely should have influenced oil companies years ago when we could realistically assess shale. That oil companies haven’t probably is a consequence of their culture where talk of technological disruption (which is what shale is) isn’t that welcome, and where business as usual suddenly is threatened.

Shell is especially typical here, its list of failures recently is impressive.
Shell retreated from the arctic very late, writing off billions. But it was already very plain that the fields wouldn’t be viable considering the rise of shale. Plus it was largely deaf to the concerns of environmentalists who have great political clout especially in Shell’s home markets. In the same manner, the tar sands never were likely to pay off, billions were and continue to be wasted.
Shell was played when it rushed into shale and then bolted taking losses, again billions were written off. And yet shale technology is very valuable, the ability to develop shale resources cost-effectively fits Shell’s portfolio and fortunately now the company does consider shale production to be vital.
Sakhalin 2? Maybe we shouldn’t list it as a failure, but Shell was robbed for billions by Putin and in loss of future earnings. Many have commented on how Shell misplayed its hand.
Nigeria? Maybe we should not list it as a failure either but selling one’s stake often to politically less accountable players certainly is not in the interest of the Nigerian environment and Shell has failed to convince organisations such as Greenpeace that it can be the best of bad choices.
Borrowing money in order to pay out dividends while cutting investments everywhere? Shell used to be a very secure investment paying out excellent dividends. But is spoiling investors a viable strategy?

BG purchase? On that the jury will be out for a long time. The price was high but natural gas is in Shell’s DNA and it can and should build out its strengths there.

Alternative is growing thanks to regulation and fears of climate change in the market but here oil majors aren’t the nimble players that can quickly bring technological improvements to market. Alternative is a different species of R&D, it is manufacturing and relatively simple engineering (manufacturing and installing of e.g. panels and windmills).

Oil companies should be worried. Moving into natural gas is inevitable and trying to reshape part of the companies’ engineering talent into engineering and governance services is another good bet. Buying stakes in smaller and more nimble energy players and growing those may be yet another good bet.

 

This post in response to an article on the financial times:

http://www.ft.com/cms/s/0/922add24-3d12-11e6-9f2c-36b487ebd80a.html