Global Energy Professors Mathieu Blondeel, VU Amsterdam and Michael Bradshaw, Warwick Business School, delve into the current state of the oil industry and explore the strategies being undertaken by the oil majors to steer through the rapidly changing energy landscape.
Going with the Flow or Tightening the Valves? The Energy Transition and Oil Major Strategies by CoBS Editor Muskan Chourey. Related work: Energy Security, Transition Risks and No Regrets: The Long-Term Strategies of the Oil Majors,Mathieu Blondeel and Mike Bradshaw, World Financial Review.
The oil industry has always been a driving force in the global economy, with the largest publicly traded oil and gas companies known as the “oil majors” controlling a significant portion of the market. However, as the world shifts towards a more sustainable future and addresses the challenges of energy security and climate change, the future of these oil majors has become uncertain.
The end of the oil age seemed imminent until last year. The pandemic and its economic fallout caused a massive drop in oil demand, leading some to believe the industry would never recover. But fast forward a couple of years and the oil industry is back on its feet, with the world’s largest oil and gas companies reporting staggering earnings of almost $200 billion in 2022.
However, despite the short-term success, the oil majors (Shell, BP, TotalEnergies, Chevron, and ExxonMobil) are facing challenges from all sides. Shareholders are revolting, climate lawsuits are being filed, and policymakers are demanding investment in both fossil fuels and infrastructure for energy security, thus committing to a net-zero future.
This creates a precarious position for the oil industry as they face an uncertain future in a world that is rapidly transforming its energy systems. Climate change is driving the need for action, and if we are to meet the Paris Agreement’s goal of limiting global temperature increase, oil consumption must decrease significantly this decade. In sum, the oil industry is facing existential threats, and it remains to be seen how it will adapt and thrive in this changing landscape.
Stranded in the Storm: The Risks of Investing in Fossil Fuels
A financial think tank, Carbon Tracker, estimates that up to $1 trillion in oil and gas assets are at risk of becoming “stranded.” As the world shifts towards a low-carbon, climate-friendly economy, many industries face financial and business risks associated with the transition. The financial sector is also subject to transition risk as capital investment in oil and gas infrastructure may go unrecovered due to reduced demand and prices.
Private, publicly-traded oil giants such as BP, Shell, and ExxonMobil are more vulnerable to these transition risks compared to state-owned companies like Saudi Aramco or Rosneft. As such, these private companies are factoring in the threat and have begun to evaluate the impact of climate change on their overall enterprise risk.
As activists call for divestment from fossil fuel companies, the total value of oil and gas assets up for sale across the industry was over $140 billion in 2021. The current push to invest in new fossil fuel supply may only exacerbate the risks, making it a crucial time for stakeholders to re-evaluate their investments in the industry.
Going with the flow or fighting the current?
When the Danish energy company Ørsted, formerly known as Dong Energy, announced its complete transition from a fossil fuel company to the world’s largest producer of offshore wind energy, many in the industry were sceptical. However, the company’s bold move paid off and it soon became a leader in renewable energy. This story serves as a reminder that change is possible, even for the largest players in the oil industry, and companies that embrace change and invest in renewables will be the ones to thrive in the upcoming years.
Profs Blondeel and Bradshaw explore the different approaches being taken by the oil majors in response to the energy transformation, using a framework they call the “transition strategy continuum.” The first one is a conservative “core business” strategy, pursued by companies like ExxonMobil and Chevron, which aims to reduce emissions and invest in offsetting technologies while continuing to focus primarily on oil and gas production. The second strategy is one of the “integrated energy company” embraced by European majors like Shell, BP, and TotalEnergies, which seeks to balance investment in fossil fuels and renewables. And finally, there is the “radical transformation” strategy, represented by companies like Ørsted, which have fully taken on the transition to renewables.
Each strategy has its own strengths and weaknesses, and the oil majors face a difficult path as they manoeuvre through the energy transformation. But as they chart their course into the future, one thing is clear: the world is changing, and these companies must change with it.
Balancing Profits and a Low-Carbon Future
Oil majors have been enjoying financial benefits as energy security and fuel prices take centre stage, but long-term threats remain. The big question now is how to use the impressive cash surpluses generated and it is not an easy one. Invest in new upstream projects? Increase share buybacks and dividend payouts? Boost spending on emerging renewables and low-carbon initiatives? The oil majors can afford to do all three, but the moment oil prices start to drop, difficult decisions will have to be made.
A smart strategy would be to use the current windfall to prepare for a low-carbon future, as governments and the public are more likely to accept oil companies’ profits if they promote a greener future.
Stuck Between a Rock and a Hard Place
The current energy crisis highlights the need for a managed reduction in demand to prevent negative impacts on the most vulnerable consumers. Russia’s ongoing war in Ukraine, supported by oil and gas revenues, adds to the urgency of reducing our reliance on fossil fuels.
The tension between the climate crisis and the importance of oil to the global economy is palpable. As we face a crisis, it’s crucial to make informed decisions for the future. Oil majors must choose whether to reinvent their business models within sustainable boundaries or to continue down a path that may bring short-term gains but ultimately contribute to catastrophic climate change.
In sum, the oil majors are at a crucial crossroads, facing challenges from both the market and society as the world transforms its energy systems. The COVID-19 pandemic and the associated economic downturn have shaken the industry, but the oil majors have proven their resilience. However, the journey ahead is uncertain, and the oil majors must steer through a rapidly changing energy landscape while balancing the demands of energy security and the push towards a more sustainable future. Only time will tell what the future holds for the oil industry, but one thing is certain, the oil majors will continue to play a significant role in shaping the energy world as they have always done.
Useful links:
- Link up with Michael Bradshaw and Mathieu Blondeel on LinkedIn
- Read a related article: Energy Supplies and the Planet: Will Russia’s war in Ukraine affect them?
- Discover Warwick Business School
- Apply for the Warwick MBA or EMBA.
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