Thursday, May 05, 2016

I'm Sorry, But It's Terminal

It's death watch for the oil giants - BP, Chevron, Shell, Exxon-Mobil, Total.  A report released by the prestigious British think tank, Chatham House, concludes that the 20th century business model that brought them such wealth is no longer "fit for purpose."

There is still a chance they can be saved but it depends on them going cold turkey on hydrocarbons and they've got 10-years to do it.

The business model that sustained them during the 20th century is no longer fit for purpose. As a result, they are faced with the choice of managing a gentle decline by downsizing or risking a rapid collapse by trying to carry on business as usual.

Most commentary on the IOCs’ problems has focused on the recent fall in oil prices and the growing global commitment to tackle climate change. Important though these are, the source of their predicament is not confined to such recent developments over which they have no control. Their problems are more numerous, run deeper and go back further. The prognosis for the IOCs was already grim before governments became serious about climate change and the oil price collapsed.

The oil market is going through fundamental structural changes driven by a technological revolution and geopolitical shifts. The old cycle of lower prices followed by higher prices is no longer applicable.

In this new world, the only realistic option for the IOCs lies in restructuring and realizing many of their current assets to provide cash for their shareholders. Inevitably, this means that they must shrink into the remaining areas of operation, functionally and geographically, where they can earn an acceptable return. This would require a major change in the corporate culture of the IOCs. It remains to be seen whether their senior management could handle such a fundamental shift. If they can, the IOCs will be able to slip into a gentle decline but ultimately survive on a much smaller scale.

One strategy suggested is for the international oil companies to leverage their wealth to gain prominence in green energy technologies.

Hmm, we'll see. Old habits...


rumleyfips said...

A paper by the Carbon Tracker Initiative suggest the oil giants could raise share value by abandoning high cost extraction such as deep water drilling and oil sands mining.

Production, once slowed in the tar sands, may not be ramped up again to avoid shareholder revolt.

The Mound of Sound said...

I agree, Rumley. The Tar Sands is on life support at best. If only we had a reality-based government. Just as neither Harper nor Trudeau can make bitumen float, Canada under either of them has/had no hope of meeting even our paltry carbon targets with any expansion of the Tar Sands.