Big Oil Companies Have Already Become Dinosaurs

It’s been a tough couple of years for Big Oil. Battered by plunging prices, the oil majors have seen their profits sink and their prospects darken. BP lost $3.3 billion in 2015; Shell lost nearly $7.5 billion in the third quarter of 2015 alone, its biggest loss in a decade. Even mighty ExxonMobil saw its profit shrink by half in 2015 from the previous year. The usual oil company response to a period of shrinking profits is to rein in new drilling, cut costs, and wait for prices to rise again. And recent months have seen a modest recovery in oil prices.

But a new report from the influential U.K. think tank Chatham House says the old playbook isn’t going to work this time. The problems go way beyond rock-bottom oil prices, and they are unlikely to vanish in a hoped-for recovery. The oil majors, the report says, “cannot assume that, as in the past, all they need to survive is to wait for crude prices to resume an upward direction. The oil markets are going through fundamental structural changes driven by a technological revolution and geopolitical shifts,” and the business model that has worked for the last quarter-century is broken.

Essentially, the report argues that oil companies’ strategy has been to continually add to their reserves while minimizing costs, largely through outsourcing. Unfortunately that led to large missteps. The firms invested heavily in developing hard-to-reach, high-risk reserves that have proved increasingly untenable; Shell and ConocoPhillips both recently ended their efforts to drill in the Arctic after spending billions, for example. And by outsourcing much of their activity to smaller service companies, the oil giants lost their technological edge. That’s why they came late to the shale gas revolution in North America, the report asserts, and grossly overpaid for assets when they did arrive.

The dim prospects are further darkened by the increasing urgency to reduce carbon emissions: oil companies may have on their books billions of barrels of reserves that will never be produced as the world shifts away from fossil fuels.

The Chatham House report offers two unappealing options for today’s oil majors: “managing a gentle decline by downsizing or risking a rapid collapse by trying to carry on business as usual.”

Of course, there is another option: the oil and gas companies could become energy companies, focusing on new technologies, decentralized energy systems, and providing clean energy. Shell is gesturing in that direction by investing $1.7 billion in clean-energy projects. Considering that is about 5 percent of the $30 billion or so the company invests in oil and gas every year, it’s probably too little and too late.

(Read more: New York Times, U.S. News and World Report, The Guardian)