The Future of Big Oil
In nature as in business, it is not the biggest or the strongest that survive, but the most adaptable. Just ask the dinosaurs. Talking of which, how many of today’s oil and gas majors will still be around in ten years’ time?
Three big changes are going to hit the sector. First, regulation — if the UK is going to be carbon neutral by 2050, then a lot of new and tighter regulation is going to oblige us to change. Like no more fossil fuels being used in cars. Maybe in as little as ten years’ time. A hundred years ago tens of thousands of people earned their living making carts and wagons to be pulled by horses. Today almost nobody does. We’re going to see equivalent change in the motor industry, only today it will all happen a lot faster. Everything does, and the pace of change is itself hotting up.
From 1st January next year the world’s merchant fleets must use low sulphur fuel. Will there actually be enough available? Well apparently yes, as a result of an unseemly scramble once it became clear that there was no appetite at the International Maritime Organisation to kick the can further down the road. In the court of public opinion there is little appetite for prevarication, and so change will be forced upon us.
Second, technology — necessity being the mother of invention, we are constantly innovating. The pre internet age was accustomed to a slower pace of change, and to some extent the oil and gas industry, with massive capital projects and long lead times, is still anchored in the past, at least at the level of the c-suite.
So imagine what happens when every motor vehicle can be electrically powered, by fast charging, very long lasting fuel cells. And as you drive along the motorway the friction of air moving over the surface of the car recharges the battery. An entire distribution chain of petrol for cars becomes irrelevant. Aviation fuel will go the same way, and so will heating oil. The oil majors as currently configured will look utterly redundant and indeed irrelevant, and entire economies built on oil wealth will find their foundations are made of, well, sand…
And finally events. Regardless of where you stand on climate change, there is an extraordinary increase in the number of human beings on the planet. Not only that, but the sheer increase in the rate of increase, along with the expectations of material well-being and resulting demand for resources, mean that we as a species are necessarily changing the nature of our world. In many places we have for years being doing what you should never do in your own back yard — and planet Earth is the only back yard we have, at least for now.
A couple of degrees of climate may not seem much but the changes it brings are huge, and not just for those living in coastal areas. If you think Europe suffers badly from migration problems now, just crank up the heat a couple of degrees and watch the refugee numbers then.
So a combination of extreme climate events along with mass population movements are going to create huge political pressures, and rather than losing office politicians will act. Possibly not wisely, but they will act. Businesses that facilitate the solutions — clean energy, new technology, crops that grow in tougher climates — will be jet propelled while any who stand in the way will disappear or be legislated into penury.
Fast and unpredictable change means investment opportunities. Short the muscle bound dinosaurs and go long of the flexible, responsive energy companies that are reinventing themselves as cleantech giants of the future. Disruption is good as long as we have a clear investment strategy and are not influenced by the sheer size of the majors. Do I want oil majors in my portfolio? Possibly not, in the long run. Allosaurus and T.Rex were impressive back in the day, but where are they now?