Oil today, not tomorrow?

The transition 

There is a growing perception that the oil and gas industry is turning its investment and focus on renewable sources like solar and wind to survive in an oil-less future. This article examines whether this perception is based on facts or not and if yes, what are the associated details with this transition. 

The necessity of the transition 

Why do companies feel a need to veer away from the product they have been selling and profiteering for decades? The answer is steeped into two words-climate change. As the disastrous impact of carbon emissions becomes more and more evident in terms of loss of health and economic productivity, there is a rising environmental consciousness dictating customer preferences and government policy. Besides, the uncertainty over the viability of the fast depleting oil reserves, policies like the carbon tax, which are explicitly aimed at reducing oil consumption and the lowering of costs of renewables due to massive investments in technology and nudges for the same like subsidies- is also giving a massive push for this transition. 

The players involved in the transition 

The oil and gas industry has a variety of companies at the international and national levels. The major players across the globe and India include the ones mentioned below. 

It would be gross simplification and wrong to assume that all of these companies have the same pathway for the transition. There are considerable differences as well as subtle nuances that deserve some attention. For example, consider the differences between, say, the US and India. In India, as in most of Asia and Africa-most of the stakeholders in oil extraction and provision are government-owned while in the US-ExxonMobil, Chevron and Shell, all private command a sizeable portion of the market. This simple yet significant difference changes the equations considerably. In general, governments face a double-sided pressure to maintain economic growth and environmental sustainability from the voters. They also have some leeway in terms of the budget, while for the private players-the considerations are mostly monetary. As a result, while the former can make a considerable transition by merely introducing the renewable energy as a side alternative and boost it with subsidies, the latter tends to adopt a more hesitant approach, which mostly boils down to ‘wait and see.’ The International Energy Agency says investment to date by oil and gas companies outside their core business areas is less than 1% of total capital spend. A concern is that the colossal multi-million dollar projects in renewables declared by the likes of Shell are more of a publicity plot than anything else. As long as they have a market that doesn’t shrink drastically, they will continue to pump and sell oil. Even among the private corporations-a difference emerges. For example, European companies like Shell face a series of regulations. They are more invested in a transition than their American counterparts like ExxonMobil due to a more decisive environmental lobby and a free market lobby in the regions, respectively. 

The strategy 

The primary objective of the corporations involved in Oil-short term and long term sustained profits rests on a twofold strategy- continue to supply the fuel that forms the bedrock of the modern economy. At the same time, make investments into the technology and introduction of alternative energy sources into what they offer. This includes identifying and increasing the market for the latter. However, this is much easier said than done. Striking the perfect balance is of utmost importance. Shareholders demand long term value as well as short term profits. A complete defocus on oil can lead to the competitors gobbling up the market, leading to losses and bankruptcy, while a no regard approach to sources like solar and wind makes the days of survival numbered. Diversification of the workforce and products will not only reduce the risk but is also a smart business strategy. 

The impact of COVID-19 

The COVID-19 pandemic has offered a new dimension to the same old problem. The lockdown and its associated slump in industry and consumer demand saw for the first time in many years-oil prices falling below zero. The hard recession approaching has put most corporations on a backfoot and surviving that is a priority much higher than the long-term goals. However, this can be seen as a hidden opportunity. It is quite likely that oil demand might never return to the pre-COVID-19 levels and what was planned to be a slow transition from one market to another might have just needed a big bang. 

Increased oil costs through government policies like carbon taxes and cap and trade 

Investment into not only research as was the main focus till now but also workforce training, market identification and sustained transition for the renewable energy Reduced oil demand on the part of industry and consumers market