Why Big Oil Misses the Big Picture


Just when you thought that Big Oil was coming around, that maybe they thought it might be a good idea to invest in our collective future, not just oil futures, Royal Dutch Shell announces that it will focus its “renewable investment” portfolio on oil, gas and biofuels (ignoring solar, wind and other alternatives).
Never mind that oil and gas are hardly renewable resources by any stretch of the imagination; this news strikes a blow at the heart of the renewables industry because it begs the question: if one of the largest energy companies in the world won’t invest in our renewable future, who will?

“Not Big Oil”, says Mr D, a 28-year veteran of the oil and oilfield services industry, who agreed to provide his insights into the “oil mentality” on condition of anonymity. The incentives, it seems, are all wrong: “The driving force behind oil companies today is on getting maximum returns out of their oil and gas assets. This means increasing performance, reducing costs, furthering efficiencies, developing fields. They see time as running out and are maximizing returns – now.”
Think about it. Oil companies own many many expensive assets, of which a quick rundown include: oilfields and oil rigs (or the rights to use them, anyway); drilling apparatuses; the trucks, helicopters and boats that ferry supplies to and from distant outposts; the outposts themselves, many of which are large compounds replete with 18 foot walls and generators powerful enough to supply a small city (with highly trained ex-military guards to boot); not to mention the hundreds of thousands of miles of pipeline needed to transport the black gold across the great expanses of the planet (there are an estimated 55,000 miles of pipe in the U.S. alone). With physical asset liabilities worth hundreds of billions of dollars, is it really surprising that Big Oil is unwilling to leave it all behind?

Vertical innovation

And then there are the people. Thousands and thousands of them, engineers mostly, all highly trained in such dark arts as “log analysis”, “reservoir management” and “flow assurance modeling”. In what is perhaps one of the most self-contained, boutique industries around, the collective intelligence of every Big Oil employee is harnessed for one purpose, and one purpose only: to get oil out of the ground.
Perhaps not surprisingly, this makes for a conservative culture, where innovation is primarily focused on how to make a better drill head, pipeline sensor or improved reservoir model. Says Mr D.: “Innovation is restricted to oil-specific processes. It’s very limited and very conservative. In fact, it’s more of a slow evolution than anything else.” Put bluntly: “They’re not a very innovative bunch.”
Let’s be fair: focused, “vertical” innovation is to be expected within a specialized industry; nobody can fault the auto industry for coming up with 20 versions of a cup holder, tailpipe or headlight (except maybe GM’s flimsy models). But “evolution” is an interesting choice of words because it implies that Big Oil is responding to environmental factors – as in, the international economic system and global resource crisis we are all facing – even when all indicators suggest that the opposite is true.

Renewable Record?

It’s not that the majors haven’t toyed with sustainability and investment in renewable energy. At various points each has invested more or less in the pursuit of alternatives to oil, from Shell’s investments into solar, to BP’s wind projects, to more radical initiatives like Hydro’s investment in Pelamis Wave Power. While at first glance this might all seem encouraging, there is no escaping the fact that Big Oil is sending very mixed signals when it comes to its interest in sustainability.
Exxon-Mobil is the most consistent of the majors (which isn’t saying much): in June of 2005, Exxon’s chief made it clear that the company was going to stay out of renewables, bucking the then nascent trend of oil companies foraying into the space. The company stuck to its message through late 2006, until in mid-2008 it decided to reverse its policy, with its chairman stating “We’re focused on safely and reliably meeting the growing energy demand while working to reduce our impact on the environment.” Fast forward to 2009, and CEO Rex Tillerson seems adamant that Exxon will not be going “into investments that are dependent on a government providing a tax system to make them viable.” The investments he was referring to? Alternative energy and renewables.
It’s the same story for the others: BP started out the millennium with an $8 billion commitment to renewables in 2005, toyed with selling off the clean energy unit in early 2008, changed its mind four months later, put new money into cellulosic ethanol two months after that, only to shutter its UK-based renewables operations shortly thereafter. Shell, for its part, invested in photovoltaics early on but offloaded the business arm in 2006, only to launch a new wind energy investment with Texas utility provider TXU in mid-2007. Beyond investments into renewable energy, Shell has lately taken a positive, measured stance on climate change more generally, even going so far as to call for global action on CO2 emissions.
Clearly, Big Oil’s record on renewables is spotty at best, or hypocritical at worst. Much of this, Mr D. continues, owes to the fact that the majors “are suffering from an identity crisis in which they can’t decide if the market will reward them for expanding their energy horizons”, or punish them for their transgressions.

A Force for Good

There is a potential silver lining to all of this. One of the main weaknesses of the oil industry, suggests Mr D., is also one of its greatest strengths. “Oil companies know supply chains, distribution and logistics.” So what if the equation were flipped? What if the thousands of miles of pipeline could be modified for other uses, such as electricity transmission from far-away wind farms? What if the pipes themselves were covered in thin film photovoltaics, the rigs converted into wind farms or luxury accomodations, and the engineers all retrained to look at the world in a more sustainable way, to apply their hard-earned petroleum focused skills to global alternative energy solutions?
Wishful thinking perhaps, but not necessarily too far off base. While the US auto industry struggles to re-imagine itself, and the financial system reorganizes according to a different set of operating principles built on measured growth and absolute transparency, who is to say that the oil industry can’t do the same? The one thing that Mr D. knows to be true is this final thought: “Oil needs to rethink what business it wants to be in.”

A self-described surferpreneur working at the intersection of business, philanthropy and government. Based in San Francisco, an impressively fantastic place that is only eclipsed by the amazing people that live in it.

8 responses

  1. Excellent post, but let’s be realistic – what’s the path toward accomplishing what you propose in the last paragraph? I mean, I totally agree, but imagine that you’re an oil exec, how in the world would you get there? That’s not to excuse these guys from being total jerks, but one definitely has to think about how insanely complicated and expensive it would be. Plus there are a lot of shareholders who would riot if the company took the losses needed to start the process… it’s a tough job!

  2. To quote Jeff Siegel’s post here: “Can you imagine if you owned steakhouse, and the government had the audacity to come along and ask you how much you have invested in vegetarian restaurants? It’s absurd.”
    I think both of these posts have valid points, but at the end of the day we need to stop the damn subsidies of these guys. then competitors will come in and change the picture, or maybe these guys will change.

  3. @Saul: I hear you, but I think that’s the point: being “realistic” totally depends on where you sit. For an oil exec, re-purposing unused oil infrastructure doesn’t make sense based on oil’s short time line. Extend the time line, however, and the drivers for innovation and alternative growth channels will shift as well.
    @Editon: Definitely made me laugh! Having said that, it would be more accurate if we lived in a world where beef was a finite commodity. Then how would the absurdity of the proposition change? I totally agree that subsidies are a big problem, but maybe a necessary evil (if administered correctly).

  4. If the mass unite and demand change, it will happen. unfortunately people don’t change until the brink of their existence is threaten. I feel that brink is coming soon.

  5. @Shane: you are absolutely right, and this would suggest that we DO need subsidies (combined with an aggressive lobby to push alternatives to oil) to create the right incentive structure.
    No matter how monumental a challenge, I would love to figure out how to convince oil companies to be more creative when looking at their collective future. Ideas anyone?
    @ter: Let’s hope so!

  6. The oil companies wont stop producing oil until it is gone. The only way they would walk away from their massive investments is if the demand for oil becomes so low that the profit margin isnt there anymore. For this to happen we as consumers need to reduce our use of gasoline, plastics and other petrol based products. In turn the government needs to continue to raise fuel efficiency requirements for automobiles encouraging efficiency and alternative fuel development.

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