Musical Chairs

I’m sure you know and have played this children’s game: a group of people walk around a set of chairs until the music stops, then scramble to find a seat; the person left standing is eliminated; when the music begins again, a chair is removed and so on and so on until two (2) people are circling one chair. That is sort of what is going on in the oil and gas industry.

Oil and gas companies are faced with the dilemma of how to produce and sell their oil and gas reserves before lack of demand for them destroys their value while simultaneously transitioning the companies into viable competitors in other sectors of the economy.

The best article I have read on this subject appears in the January 27, 2020 issue of Time magazine. The article, Shell’s Crude Awakening, is written by Justin Worland. The article focuses on Royal Dutch Shell, one of the largest oil companies in the world, which is headquartered in the Netherlands.

According to the article, “Shell is charting a path that will allow it to continue to profit from oil and gas while simultaneously expanding its plastic business and diversifying into electrical power. By the 2030’s, the 112 year-old fossil-fuel giant wants to become the world’s largest power company”.

As pointed out by the article, Shell is not motivated by “benevolence”. The facts are that peak oil demand is predicted by some experts to occur by 2025 and there seems to be a consensus of expert opinion that demand will fall by the early 2030’s.

If Shell and all other major oil companies want to continue to exist, they will have to adapt, i.e., reinvent themselves.

The author of the article asked Shell’s CEO, Ben van Beurden, about climate change and what Shell knew and when. The CEO answered honestly. He said Shell publicly acknowledged climate science in the 1990’s and said the world needed to act to combat the problem.  “Yeah, we knew. Everybody knew. And somehow we all ignored it”. Even though the CEO is to be commended for his honesty and it’s good Shell has a strategy to diversify away from its fossil fuel business model, Shell’s commitment to reduce emissions by 50% by 2050 is woefully short of what is required to prevent catastrophic consequences.

The Time magazine article quotes the Intergovernmental Panel on Climate Change as saying in 2018 that countries must halve their greenhouse – gas emissions by 2030 and hit net-zero emissions by 2050.  In order to accomplish these goals and avoid catastrophic consequences, “it means keeping vast reserves of oil already discovered in the ground”.  If you are the CEO of an oil company, it would be very, very difficult to tell your shareholders their most valuable asset has a “sell by date”. 

More on this subject appeared in the Houston Chronicle’s business section on January 23, 2020.  According to the article, the largest energy companies are cutting exploration budgets and facing shareholder pressure to conduct less exploratory drilling.  Alana Tischuk of Wood MacKenzie, an energy research firm, is quoted as saying, “Some investors are questioning the need to explore at all given the vast discovered resource base yet to be developed.” 

How much sense does it really make under the present circumstances for the Trump administration to be doing everything within its power to clear the way for exploration and drilling in ecologically sensitive areas and in national parks, forests and monuments? 

 It will be interesting to see which energy companies have a seat when the music stops.

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