Every large global corporation currently has a choice. They can try to survive by moving around pennies, or they can use this economy as a wake-up call. One response is a strategy that moves investment away from low-value commodities towards a strategic role in solving problems.
The Oil and Gas Industry, and how they respond to climate change, is an excellent case. From a societal and environmental perspective, we need ‘Big Resources’ to step up – moving from being largely the problem, to being a big part of the solution. The company that is the first to see business opportunity, rather than focusing on climate as a risk and a marketing problem – will reap the rewards.
Traditional thinkers in the oil and gas industry would tell you that they already provide solutions to our energy demands. And we can likely all agree that oil and natural gas will continue to be a significant part of our future. However, we can also agree that in order to address climate change, we need to develop alternatives to meeting huge energy demand, with carbon reduction. This transition to a lower-carbon economy will inherently reduce our relative reliance on fossil fuels. This is especially true if you assume a global carbon price.
Further – there’s the simple fact that oil supplies are finite. Let us say, as the National Petroleum Council’s Hard Truths about Energy report does, that by definition there must be a global peak of oil supply. Further, and probably more importantly, carbon price and rapid growth of global population and income will outstrip supply regardless of whether we have peaked. The NPC report also predicts a declining market share for oil and gas through 2030, and a slower growth rate, relative to other energy sources.
There is also the likelihood that investors will shift their analysis on oil and gas. Investors have traditionally valued oil and gas companies based on their access to reserves. As we approach Copenhagen in 2009, embark on new U.S. political leadership, hear China’s stated willingness to participate in climate talks, and navigate a volatile economy, investors looking for growth will seek companies that show management leadership that thinks long term and is solving tomorrow’s problems in new ways.
All of this is to say that the smart oil and gas company needs a new strategy – and cannot simply put their head in the sand if they are to be in business in 30 years, and enhance the future value of their current share price.
The industry has moved quite a bit from lobbying against legislation to lobbying for federal (and global) consistency. Now it is time for oil and gas companies to move beyond risk avoidance to a view of climate change as an opportunity.
There are three key ways that these companies can create value by proactively addressing the reality of climate change as an opportunity:
– Energy diversification: Companies should move beyond interesting pilot investments to a serious strategy and gradual shift over time towards a diversified portfolio which includes not only lower carbon-intensive liquid fossil fuels, but also renewable energies that are best suited to oil and gas companies’ abilities: specifically geothermal energy and next generation biofuels.
–‘Big’ mitigation techologies: Oil and Gas companies, and the industry that supports them (EPC companies such as URS, and technology suppliers such as Schlumberger), know how to drill and extract. Technologies such as Carbon Capture and Sequestration will be essential parts of climate change mitigation – and no other industry is better positioned to scale this technology, and collect a nice reward for doing so (both due to the benefits of enhanced oil recovery and carbon mitigation).
–Leveraging talent: Oil and gas companies of made up of engineers, energy traders, managers that deliver large-scale resource projects, and deal-makers. All of these skills will be essential to shifting our global energy economy towards sustainability. No other global industry today possesses the capital, talent and ability to create rapid shift in the energy economy . Companies must begin to see their assets beyond the oil field to the service capacity of their talent.
If oil and gas companies wake up to their window of opportunity, there will be significant need for them in the long-term economy. If not, they may end up where U.S. automakers are today – begging for a short-term bailout, because they couldn’t shift quickly enough to create products that society really needs.