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The majors: The older oil giants move into a new and troubled world

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The majors: The older oil giants move into a new and troubled world

By Ed Crooks

Published: September 15 2008 09:19 | Last updated: September 15 2008 09:19

“The race is not to the swift, nor the battle to the strong … nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all,” writes King Solomon in the book of Ecclesiastes in the Old Testament.

It is a maxim well worth remembering in business. In an energy industry undergoing rapid change, it is particularly pertinent.

The strongest energy companies in the US and Europe are the oil and gas “super-majors”: ExxonMobilRoyal Dutch ShellBPChevron and Total. Even the smallest of them, Total of France, is worth almost $140bn. All of them have more cash flowing in than ever seen before, because of oil and gas prices, and all have thousands of world-class engineers and scientists.

Yet they are moving into a troubling and uncertain future. Alongside the pressure from resource-rich countries seeking to grab a bigger slice of the hydrocarbon pie, and from newly assertive national oil companies in emerging economies, the western oil companies are increasingly threatened by a whole new range of competitors.

The use of fossil fuels will, sooner or later, be constrained by their availability and very possibly by their effect on the climate.

If the long-term future of transport fuel is biofuels and eventually hydrogen, and the long-term future of electricity generation is nuclear, wind and wave power, then being the best company in the world at finding, extracting and delivering oil and gas will no longer be much of a competitive advantage.

Under all but the most extreme scenarios, fossil fuels will continue to meet the bulk of the world’s energy needs for decades to come, and their use will continue to rise. But the transition away from oil is already under way.

As Jean-Francois Minster, Total’s scientific director, puts it: “Because of the timetable needed to shift over to new forms of energy, renewable energies in the coming decade will be an addition to fossil fuels, rather than replacing them. So the share of fossil fuels will decline, even as the amount of them continues to rise.”

Big oil companies are following that shift, moving into renewable energy sources including biofuels, wind and solar power.

As BP has explained its controversial “beyond petroleum” slogan, first coined in 2000, it wants to maintain its strength in its traditional core of oil and gas while building alternative energy businesses for the future. “Petroleum and beyond” might be better.

BP and Shell have signed a range of collaborative deals with smaller companies that specialise in technologies such as biofuels. Even Exxon, which has been heavily criticised for its past scepticism over climate change, has been stressing its research and development efforts in areas such as carbon capture and storage, to enable the emission-free use of fossil fuels. It is also a sponsor of the Global Climate and Energy Project at Stanford University, which researches solar power and other renewable energy.

The problem for these companies is that in all of these new technologies, it is hard to say exactly where their competitive advantage lies. Developing biofuels has more in common with bioscience or with agriculture than with oil extraction. Solar power demands skill in manufacturing and materials science, wind has its own particular challenges.

So at every turn the oil majors risk coming up against competitors that are more expert than they are.

Some skills are transferable. Offshore expertise, for example, may be useful for wind power, although it is apparently not valuable enough for Shell to want to stay in the London Array project, planned to be the world’s biggest offshore wind farm.

Financial strength is useful, for example for backing long-term R&D programmes. But big oil companies spend a relatively tiny proportion of their revenues on R&D compared with companies in other industries: typically two- or three-tenths of a percentage point.

Arguably those figures are misleading: oil companies do R&D of the most practical kind every time they shoot a seismic survey or drill a well. But that ever-deeper knowledge of hydrocarbon reservoirs is not much help in diversifying into other forms of energy.

Nick Butler, former vice-president for policy at BP, now chairman of the Cambridge Centre for Energy Studies and of a new energy technology company in Singapore, says other companies will have to fill the gap of developing alternative energy sources.

“There is a great opening in the market for the next generation of energy companies. If they don’t emerge soon the process of transition to a more diversified, lower-carbon economy will be delayed,” he says.

Damon Runyon adapted Ecclesiastes: “The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.”

Big oil companies may be an exception to that.

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