Climate activists are waking up to the reality that fossil fuel companies will likely NOT transform into renewable energy companies. (See blog post Why We Can't Expect O&G Companies to Become Clean Energy Producers ). An editorial in the LA Times communicates the pain of this disappointment.
“It should be obvious by now that fossil fuel companies have no real plans to change in response to the climate crisis. And that the only way forward is without them…. Too many powerful people … have clung to the fantasy that ……companies… would eventually face reality and transform on their own initiative into clean and sustainable operations.” LA Times: not enough to be frenemies
Al Gore lends his voice to this consternation in his recent TED Talk. He calls out O&G companies’ reliance on Carbon Capture technologies, that are uneconomic and unproven in his opinion, to give false hope to plans to stay in the fossil fuel business indefinitely... Al Gore ted talk
The bad news is that most O&G companies don’t have exit strategies that would make for an orderly transition, with minimal economic disruption, to a clean energy economy. Why does this matter now?
Technology gurus argue that we are at an inflection point in the energy transition. They are convinced that the transition from fossil fuels to renewables is already baked into energy economics. They cite statistics such as: rising electric vehicle sales (EV sales milestone), increases in the percentages of wind and solar as a source of energy(renewables world top electricity source), and decreasing costs of these clean energy alternatives compared to fossil fuel(renewables cheaper than fossil fuels).
They cite the “S-curve”, a bedrock theory of innovation. At the beginning of the S- curve, a new technology (like renewable energy) develops slowly, as it is expensive and buggy. During this time legacy businesses (O&G), operating on the old technology, are not affected.
As costs come down and the new technology matures, a point is reached where the innovation, now cheaper and better than the old technology, takes off. At that point it rapidly becomes the dominant solution for creating energy, or whatever, and legacy businesses either jump to the new technology or decline.
Technologists who read these tea leaves say we are at that inflection point where the energy transition will accelerate. It’s “game over for fossil fuels”, declares Assaad Razzouk. Never mind that today over 80 percent of electricity is produced with fossil fuels, the next stage of the transition will see exponential growth of green energy and exponential decline of fossil fuels. The Financial Times headlines a report by the International Energy Agency predicting that the world is at “’the beginning of the end’ of the fossil fuel era.” (Sept 12, 2023)
What activities are O&G firms undertaking in light of this inflection point in the energy transition? Looking at what they are doing --not what they are saying- I discern three emerging strategies: #1: Back to the Future; #2: A Little Bit Goes a Long Way and #3: Recycling Capital.
None of the strategies involve jumping to the new clean energy curve. The third strategy, Recycling Capital, does, however, exhibit a plan for an orderly transition out of the oil and gas business — a more ambitious and courageous course of action.
(No) Exit Strategy #1: Back to the Future: Suncor
Suncor made news when it coaxed retired CEO, Rich Kreuger, to return to the company and reorient its strategy backwards to basics, extracting oil from Canadian tar sands – one of the dirtiest way of procuring this fossil fuel.
Announcing Kreuger’s return, he was quoted saying: “Suncor has been too focused on energy transition, must get back to fundamentals” - never mind the record forest fires in Suncor’s home, Alberta, Canada, this summer. Suncor sold off some wind and solar assets it had acquired as part of a transition plan. But it continues to develop hydrogen and carbon capture technologies, more in its wheelhouse than wind and solar. suncor-too-focused-on-energy-transition
Exit Strategy #2: A Little Bit Goes a Long Way: Exxon
Exxon invested $100 million to purchase land in Arkansas that has the potential for lithium mining. They strategize that demand for lithium as an ingredient in EV batteries will be increasing. The investment is a hedge against the decline in internal combustion engines and the demand for gasoline. Cynics point out that $100 million is a tiny investment for a $471 billion company and does not signal a serious strategy to exit from oil and gas production.
Strategy #3: Recycling Capital (Saudi Arabia)
The Public Investment Fund of Saudi Arabia sold its 10.92% stake in the National Gas and Industrial Company. This act is part of a strategy to “recycle capital” by selling stakes in “mature companies” and reinvesting that money in “new and promising” businesses in the local economy. The sale is consistent with Saudi Arabia’s grand Vision 2030 that calls for diversifying its economy away from the current situation where 80% of government revenue comes from selling oil.
Awakened to the reality that O&G companies are not becoming clean energy providers, how might their tremendous capital be recycled? Could Saudi Arabia be demoing a Recycling Capital Strategy?