I worry about oil. You might say that, as someone in the renewables world, I should be happy to leave the past behind. After all, you don’t see Google engineers spending much time looking over their shoulders at the photocopying industry. One of the luxuries of the new generation is the freedom to ignore your elders.

Unfortunately, the energy sector doesn’t work quite like that. Whilst I know for sure that clean technologies will one day replace fossil fuels, much as innovation has disrupted countless markets before, the transition won’t be as smooth as others in the past. A KhW of electricity offers the same experience whether it is from coal or solar – so we can’t rely on consumers to force the change. Distortive subsidies and taxes, along with volatile wholesale price action, mean that renewables have not been consistently cheaper in a way that has sent a clear market signal. Perhaps most significantly, the world currently runs on an enormous fossil infrastructure, built up over centuries, which cannot be replaced overnight. Energy transitions happen slowly, as Vaclav Smil reminds us – despite the remarkable advances of the coal-powered industrial revolution, wood still provided 85% of global energy needs across the nineteenth century.

Most importantly, the dying oil industry has the power – and, we might wonder, the reckless intent – to irreversibly poison the world for the rest of us, on its way out. As a result, none of us working on green technology, no matter how bullish we are for our own prospects, have the luxury of ignoring legacy companies. How to ensure that oil and gas firms have a ‘good death’ is just as important as playing midwife to their replacements.

I had this in mind when I sat down to record an episode of our podcast – Conversations on Climate – with Julio Dal Poz. He is a true oil industry insider, having worked for years at Norwegian major Equinor, who now consults with legacy energy companies transitioning to net-zero. He is a bright and insightful guy, and I enjoyed our wide-ranging conversation – taking in Paris and Kodak, trilemmas and fast fashion – but what I found most helpful was his framework for understanding the transition strategies of the oil majors.

Modelling the oil major transition

Dal Poz began by breaking down the global fossil fuel sector into three rough geographies, based on their approach to decarbonisation:

1. Europe. Fossil firms here have made the most progress in transitioning towards clean energy technologies – think Orsted, Iberdrola, or Dal Poz’s old firm, Equinor. In his view, this is because ‘Europeans are obviously the ones under most pressure.’ More on that below.
2. The United States. American oil firms are most much ambivalent. Here we find the ‘slow movers,’ and those who have been repeatedly exposed for resisting climate change science, both covertly and openly – ExxonMobil and the like.
3. The rest of the world, with a particular focus on the Middle East and China. Here we find the extremes, both in terms of outright opposition to decarbonisation, and radical volte-face moves towards it.

From Geography to Strategy

This geographical division is recognisable, and useful as a way to start thinking about the problem. However, it pays to go a level deeper, and analyse the difference in strategic approaches amongst these firms. Here are Dal Poz’s four types of legacy strategy:

1. Investor-Generators: First up are those firms that understood climate change and its consequences (relatively) early, and moved quickly to put a transition plan in action. This meant cross-subsidizing new renewable divisions from the profits of their existing business. These investments ranged from clean generation assets (solar, wind, etc) to research into CCS, to attempts to create new market – e.g. a hydrogen market in Europe.

Dal Poz used Equinor as an example. ‘They were taking their legacy offshore oil and gas production, and using that expertise on offshore to invest in offshore wind, for example.’ Because they started investing earlier, here we find companies ‘at the forefront of [working out] how we decarbonise energy clusters,’ and other challenges. The overall strategy here is to position themselves as power generators into the future.

1. Expert-Adaptors. The second model Dal Poz offered was one in which companies focus on their industrial and technical expertise around chemicals, engineering and geology. ‘We already have big petrochemical businesses. We know how hydrogen works. We’ve been doing carbon capture and storage forever,’ was Dal Poz’s version of their thinking – and as a result, these firms focus on transition technologies such as hydrogen and CCUS. This is not about investing in new renewable technologies, and not really about becoming power generation firms; it is a way to adapt their legacy business of petrochemical engineering and extraction for a new world.
2. Political-Integrators. A third strategy is to try and marry the first two together – both invest in renewable power generation and maintain the oil and gas extraction business alongside it as far as possible.

However, this approach comes with a huge downside – a lack of focus. As Dal Poz put it, once the renewable generation side of the business grows large enough, shareholders get restive. A firm has to decide what it is trying to be – a mature steward of value, or a young growth innovator. ‘Because of the different profiles of the business, because of the different returns expecations, you might get question like – are you becoming a conglomerate instead?’ was how Dal Poz put it, and so Western firms trying this model are liable to be broken up.

Where this strategy does work, however, is in places where politics trumps business. In the Middle East and China, there are legacy firms very much under the influence – even the instruction – of the state. ‘Those governments will turn to the national oil company and say, we would like you to invest in [renewables]; please embed this in your strategy,’ even as they are instructed to continue pumping oil or focussing on CCUS. In which case, a firm’s strategy is not really their choice at all.

1. Double-Downers. Finally, there are those firms who are ignoring the transition completely, and instead redoubling their efforts to squeeze every last dollar from their existing reserves and return it to shareholders. Which is about all that needs to be said about this approach!

I found this analytic structure incredibly helpful in understanding the competing strategies at play in the oil industry. In part II of this article, I’ll lay out the common factors that drive these different strategies – and what we can do about it.

Written by Chris Caldwell CEO of United Renewables, originally published on Linkedin on October 11th 20222.

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