In Denial, Oil Executives Start Peddling Filtered Cigarettes

Previously published on Forbes.com

There is no longer any question about whether the oil and gas industry will decline. It will. The question is, which oil companies will join the energy transition, and which will milk their cow until it dies? If oil executives wait too long, the decision will be made for them.

Many remain in denial and claim that their oil will be in demand for decades to come. They cannot face the idea of their industry becoming irrelevant on their watch.

Oil executives can still use their balance sheets to reinvent their organizations for the energy industry of the future—but only once. Any hesitation will be at their peril. Their predicament comes down to three factors: market conditions, OPEC+ geopolitics and the electrification of everything, including automobiles.

Filtered Cigarettes

In 2020, the global oil and gas sector shed more than 400,000 jobs, half of which were in the United States. Even so, ExxonMobil is doubling down. Ejected from the Dow Jones Industrial Average, Exxon promised to pump 25% more fossil fuels by 2025, only to backtrack in December after announcing $17 to $20 billion in write-downs and a waffly pledge to reduce operational carbon emissions by 20% in five years. Losing half your market value in 11 months can have that effect.

Essentially, Exxon (and Chevron) promise to add filters to their cigarettes. Their European competitors are closer to embracing clean energy—in word but not yet in practice. Shell, BP and Total toot their green horns while making relatively puny investments in clean energy—3% of BP’s capital expenditures in 2019, 4% of Shell’s and 8% of Total’s. They’re peddling e-cigarettes while still investing primarily in old-fashioned smoke.

By my count, 16 oil companies have gone belly up in North America since COVID-19 emerged; some of those were acquired. With greater scale and efficiencies, U.S. drillers managed to reduce their break-even cost by 20% on average in 2020, fueling hopes that they will manage to operate even with low oil prices. The active M&A pattern promises a tenuous survival for debt-laden shale oil producers—until geopolitics intervenes.

The Last Barrel Pumped

How and where the oil industry declines first will depend on the Saudi-Russian contest to control OPEC+. Whereas Saudi Arabia favors lower volumes and higher prices, Russia prefers higher volumes and lower prices, which throttle U.S. shale exports and thereby help Vladimir Putin’s agenda (see my earlier article on this topic). Russia can balance its budget with oil at $42 per barrel, whereas Saudi Arabia requires about double that.

Russia and Saudi Arabia hope to pump the world’s last profitable barrels of oil. Together, they can flood the markets and kill off competition, if and when they choose. Divided, though, they may fail to smother American shale completely in the next few years but almost certainly doom Albertan producers, which  are landlocked and sit high on the cost-curve.

The Biden White House just blocked the Keystone XL Pipeline, one of the only bright spots left for Albertan oil. Alberta Premier Jason Kenney urged Prime Minister Trudeau to retaliate and threatened legal action. Too little too late. Canada is warming at twice the global rate, and oil workers deserve honesty and support rather than false promises from backward-looking ministers.

What would be worse: to have overly expensive stranded oil in the ground, or to dry up the unprofitable wells subsidized by taxpayers? If I were an oil executive, I’d let Russia and Saudi Arabia find out. The sooner the energy transition happens, the sooner Western energy companies can extricate themselves from this tussle of totalitarians and prepare themselves for a new future. And the transition may be nearer than expected.

Electric Vehicle Innovation Accelerating

Ravaged by COVID-19, low prices and geopolitics, the oil industry is wobbly. The high prices and limited availability of electric vehicles (EVs) once protected it from the electric revolution. But no more. And it is not just EVs turning a corner. Climate change is driving the electrification of everything possible.

Road transportation accounts for two-thirds of global oil consumption, and sales of EVs increased in 2020 even as sales of passenger vehicles fell overall. More alarming for oil, Volkswagen and CATL brought the cost of battery packs down to $100/kWh, long considered the point where EVs can match internal combustion engine (ICE) vehicles on price.

Midsize EVs weren’t supposed to reach parity with a midsize ICE vehicle until the mid-2020s. At the bottom of a recession, however, innovation accelerates. Old value chains fertilize the soil in which new ones grow. In the case of EVs, existing highways, parking infrastructure, refill stations, safety standards, insurance models, and service centers can hasten the transition to clean—and eventually autonomous—mobility.

James Morris, editor of WhichEV, argues that a $25,000 Tesla with a 300-mile range, due within three years, means “game over” for fossil fuels. Volkswagen seems to agree. CEO Herbert Diess recently announced “Mission T,” a plan to catch up with Tesla’s technology by 2024, earning a controversial vote of confidence from his board. This is no time for fossil fuel executives to bury their heads in the (oil) sand(s).

From Filters to the Future

Until recently, pension funds divested from oil and gas for fashionable ESG reasons. Now, they divest because there’s no money to be made. Most oil and gas companies have lost half their value since the beginning of the pandemic. This year, says Goldman Sachs, investment in renewable energy will overtake oil and gas drilling for the first time.

Oil executives still have a choice. They can add filters to cigarettes, peddle e-cigs and pump until the end. Or they can transition swiftly to the nicotine patch (aka, natural gas), acquire renewable assets and prepare for clean mobility enabled by batteries, hydrogen and, hopefully, fusion energy.

Is the choice not obvious?