How to Decarbonize an Oil Company (for executives)
While many amongst the political left and younger generations would like to see oil companies sacked or regulated out of existence, the reality is that oil companies are still the foundation of our economy and our society. As much as we would like to see oil & gas extraction swiftly halted (myself especially), we cannot destroy the foundation on which we stand. Oil underpins our transportation, our food, the materials out of which we make our homes and clothes. Further, the profits from oil companies feed pension funds and entire governments around the world. An abrupt end to oil profit would disrupt entire societies and likely result in major conflict.
So, how does one transition an oil company from its present business model to a zero-emissions business model while preserving its value to stakeholders. It is an interesting problem and it deserves some critical and creative thinking.
Let’s start with some criteria for a good transition strategy:
Preserve a similar risk/return profile for shareholders.
Leverage existing expertise and resources.
Large enough to to replace the revenue of oil
Lucrative enough to present opportunities for long term growth
Executable at a small enough pilot scale to mitigate learning risk
Strategies:
“The Orsted Strategy” (i.e. Find a new clean energy niche and stake your claim)
CCUS in specific geographies. This strategy is being actively pursued by Occidental Petroleum and it seems like the logical first technology for oil & gas companies to explore. Essentially, they can keep their existing business of extracting and refining hydrocarbons the same as long as they can bolt-on carbon capture, use, and sequestration technologies. Most of the technology risk exists at the carbon sequestration stage but the real challenge is finding locations and parts of the economy that can act as large carbon sinks. This strategy can therefore be very geographically constrained, but it can certainly make a lot of sense for well-positioned oil companies. Lastly, it does carry the risk of leakage and the future regulatory scrutiny applied to even very small leaks of CO2 into the atmosphere.
Wind and solar development: Perhaps equally as obvious (if not more so) than CCUS, wind and solar generations development is already being pursued by many of the oil & gas super majors (and is the very strategy Orsted pursued to successfully pivot out of oil). However, this market has become so competitive, it is hard to see the returns coming anywhere close to what has been the historical norm for oil & gas. Further, there are many other well-capitalized players (e.g. NextEra, Iberdrola, private equity) that will compete for contracts and suppress returns further.
Offshore nuclear: As described in a previous post, offshore self-contained nuclear plants manufactured in shipyards and leased to off taking countries or industrial complexes have many of the characteristics of offshore oil drilling today. It would involve the same shipyard suppliers, similar offtake and siting contracts, similar operations, and similar financing. While offshore nuclear introduces new regulatory and licensing risks, it presents a large market for growth and revenue if the first-of-a-kind risks can be put to bed.
Geothermal: Geothermal energy sources have many similarities with oil & gas today: drilling deep holes, identifying the best sites, studying the subterranean geology. New enhanced geothermal techniques even borrow technologies from oil & gas such as horizontal drilling and hydraulic fracturing. Advancing geothermal drilling technology and reducing its cost will make geothermal much easier to site and deploy globally.
Geologic storage: For much the same rationale as geothermal power, geologic storage of hydrogen, water, and other zero carbon energy carriers can leverage many of the same skillets and assets of existing oil & gas companies. Some oil companies are already in this market. The acceleration of renewable generation will increase demand for large-scale geologic storage facilities.
“The Gen-tailer Strategy”
Already pursued by Shell New Energies, Gen-tailers refer to power generators + power retailers. Gen-tailers have a higher risk/return profile than electricity transmission and distribution utilities, but it is still a very regulated sector in most geographies with risks of price controls by governments. The electricity retail component of this strategy is very competitive but offers interesting avenues for long term growth in the conversion of end-use technologies to electrified alternatives (e.g. heat pumps, electric vehicles, energy efficiency, microgrids, electric furnaces, etc.)
“The Digital Strategy” (I.e. monetize the nexus between data and energy)
Energy infrastructure fintech
Bitcoin mining: Bitcoin and Etheream mining are not without their flaws and controversy, but the business of bitcoin mining has a very similar boom & bust profile to that of oil extraction. It is capital intensive, risky, and a race to capture the best sites. The opportunities in this space have probably best been illustrated by companies like Crusoe Energy, which leverages stranded energy assets like gas wells to to power mining rigs. The drawback of bitcoin mining specifically is that it has a limited market size (depending on your beliefs on future growth), but the infrastructure for bitcoin mining can be expanded into a very large industrial electrification business to power process likes electrochemicals, indoor agriculture, hydrogen electrolysis, steel production. (several of which are existing or adjacent business lines for oil & gas companies). This concept is elaborated on in previous posts.
Extract data rather than oil: If one takes the claim that “data is the new oil” literally, then perhaps a reasonable strategy is to build new data sets about the world that can be sold like base commodities to other industries. This could start with the subterranean geospatial datasets oil companies already hold and expand into new applications of computer vision on multispectral satellite imagery, group penetrating radar, sensors in the built environment and industrial facilities, sensor on agricultural assets or natural capital. Some of this data collection might be speculative like prospecting for new oil fields; some will require a lot of refining and cleaning to turn it into something valuable downstream. The biggest risk for this strategy is likely one of transitioning culture. Data companies can require a more free-form, fast-paced, creative destruction approach to discovering product-market fit. However, as data markets mature, there may be value in a more disciplined process for collecting and cleaning key data feeds known to be valuable.
“The Slim Pickens Strategy” (i.e. Wind the company down and return capital to shareholders)
Inspired by the character in “Dr. Strangelove” who rode a nuclear bomb down to his final end.
While a bit tongue-and-cheak, sometimes the best option for an oil company unable to easily pivot is to simply wind down a business line and return the capital to shareholders by maximizing the dividend. Staff and expenses can be reduced to a minimum and assets can be sold to creative developers looking for repurposing opportunities.
When a company is poised for this path, the worst thing to do is allow further investment in what will become stranded assets.