Why We Can't Expect O&G Companies to Become Clean Energy Producers
Spoiler Alert: It's Not because They Are So Evil
Oil Rig or Offshore Wind Platform?
“KEEP IT IN THE GROUND” is a rallying cry of climate activists. For that to happen, oil companies would have to shut down their core business which is locating underground oil and gas deposits, drilling wells, extracting the oil and gas, refining and transporting the liquid hydrocarbons through pipelines and on shipping vessels.
How might KIITG (Keep It In The Ground), as a practical matter, work?
The history of business management supports the prediction that incumbent O&G companies will fail to make it through this industrial transition. One of the most well-established themes from business studies holds that entrepreneurial companies will thrive and old, established businesses will die in such a transition.
Why? The incumbent business management may not see, or believe, the new technology will actually replace the old. (Think of Kodak persisting in film making while digital photography took over.) We see this disbelief in comments of oil company executives like, “We will continue to create value for our shareholders for many decades to come” (Exxon CEO).
Another reason incumbents tend not to survive industrial transitions is because the new technology requires a different set of assets and skills. The competencies the incumbent firms have built up over their lifetimes may not be applicable to the new technology. In management jargon, the transition is “competency destroying”. This is why entrepreneurial firms, starting from scratch to develop new skills and assets (competencies) tend to lead the way.
Is it magical thinking to see oil companies becoming part of the transformed energy scene?
It makes sense that we see O&G companies promoting clean energy technologies that do make use of their competencies. Carbon Capture and Storage (CCS), for example, involves using holes in the ground, a core O&G competency -- although stuff (captured carbon) is put into the holes rather than stuff (oil and gas) being extracted out of the holes.
Sending liquids through pipelines is another core competency of O&G companies. This explains their support for hydrogen and biofuels – liquids that can be transported through pipelines and pumped onto ships.
Another way incumbents may work around the competency problem is to buy the competencies they lack. This strategy involves conducting business as usual for the oil and gas operations, while purchasing clean energy companies. Ecopetrol, Colombia’s largely state owned oil and gas company, bought a 51.4% ownership of energy conglomerate ISA, a clean energy company. The CEO explains the strategy:
"When Ecopetrol acquired ISA, it acquired a different business to that of oil and gas," Roa said.
"That's diversifying the portfolio, that is decoupling the generation of wealth from what today is Ecopetrol's main source, gas and oil, to generate economic and profitable income options for the future," he said.
An interesting question to ask is, what capabilities of O&G companies might be useful in a clean energy economy?
Educators in at the University of Stavanger in Norway are asking this question. They were losing applicants to the petroleum engineering program until they revamped the curriculum. Courses on renewable energy technologies, like geothermal and wind, were added and some petroleum courses were eliminated.
So, a marine engineer trained to work on offshore platforms might begin a career on oil rigs, and also be trained for “the opportunity to get into new business opportunities as companies evolve over time”.