What’s the endgame for fossil fuel firms?

Author Tom Young

“Old endgame lost of old, play and lose and have done with losing.”

“Old endgame lost of old, play and lose and have done with losing.”

Samuel Beckett, Endgame

“… many players are able to play quite well in the opening and middle game but feel helpless when they reach the endgame.”

Expert Chess Strategies.com

It might seem a long way off, but large fossil fuel firms and those who make a living from observing and reporting on them are starting to think about the endgame.

Post-Paris these companies are coming to terms with the fact that the nations of the world are committed to largely phasing out the use of fossil fuels.

Some disputes remain over the timing and extent of this phase-out, although there are few over the fact that it will, eventually, happen.

The inevitable question which follows for firms that have built their business models on supplying these fuels is: what next?

Speaking at an FT conference on the energy transition Paul Gilding, former executive director of Greenpeace and a consultant who has worked with the likes of Ford, BHP Billiton and Anglo American, says there are two main options.

“Take the hit and say you are going to fundamentally transform your business, or extract as much value as you can now in the interest of shareholders.”

Let’s call them the adapt strategy or the harvest strategy. Each has its pros and its cons.

In favour of the adapt strategy, according to Gilding, is the fact that most of the firms in questions are staffed by “very intelligent” people with the capability to pull off such a major transition.

History tells is it is possible. Dutch firm DSM started life as a mining firm, became a chemicals specialist, and then moved into nutrition. Tiffany’s used to sell stationary.

Against the adapt strategy is the slow and circumspect nature of the industry, according to Gilding, who describes it as “culturally entangled in slow movements and cycles”.

In favour of the harvest strategy is the fact that sizeable demand for fossil fuels will remain in the near-to-medium term, and that some companies will be required to meet that demand.

Against the harvest strategy is that it might be difficult to recruit and maintain staff, and to attract investment.

The major problem is that renewables is a completely different industry to fossil fuels. Running renewable assets is increasingly becoming an IT business, as data from the demand side is used to balance supply.

One option is then to develop renewable assets rather than to run them, says Jim Long, a partner with Greentech Capital Advisors.

“What do oil companies have to offer in the renewables space? The ability to manage large-scale and technically complex engineering projects.”

Long argues that while big oil and gas firms might not be well equipped to run a retail and distribution business, they would, for example, have project management skills suited to constructing a large solar farm in Pakistan.

The problem isn’t a new one, and past attempts to solve it haven’t ended well. Around 15 years ago BP announced it was going “Beyond Petroleum”, investing heavily in a solar photovoltaic manufacturing arm.

“BP was unfortunate on timing and was unable to compete with [manufacturing firms in] China,” said Ian Simm, chief executive of Impax Asset Management.

The solar division was unable to develop economies of scale and came to be viewed as a sideshow within the firm, failing to attract investment or talent internally.

A firm that has been looking to adapt more recently is Total, which has invested in a number of clean tech start-ups, including an industrial battery business, through its Total Energy Ventures subsidiary.

Total recently became the second large oil and gas firm after Shell to release a wide-ranging report on how its operations might fit into the 2°C global warming scenario. Whether other firms follow suit will be a good indicator of which strategy they intend to follow — adapt or harvest.