Big Oil has endured some challenging times recently, according to Professor Paul Stevens, a Fellow at Chatham House, an independent policy institute based in the UK. Professor Stevens suggests that major international oil companies (IOCs) can attempt to manage a gradual decline in their revenue by changing the way they do business, or face a rapid collapse if they persist in the status quo.
His perspective is that the pressures challenging the business model associated with the industry are mounting quickly and may soon be insurmountable. IOCs face collapsing oil prices that may never return to historic highs, increased government regulations regarding emissions and a changing public perception of the consumption of fossil fuels as a means of generating power.
The Big Oil – Big Pharma parallel
The dilemmas facing Big Oil are similar to ones Big Pharma encountered a decade or so ago. Public perception of the industry was declining, and the blockbuster model of sustaining profits in an industry with a relatively low hit rate for developing new small-molecule therapeutics was producing fewer billion-dollar drugs. Big Pharma needed to look outside itself if it was going to change the way it did business and find a way to return to profitability. Successful pharma companies were able to diversify by offering additional drug therapies beyond small molecules, as well as interacting with patients through direct marketing or non-therapeutic materials.
Most large companies struggle with making major changes to how they conduct research or move into new business areas. This can make it difficult to respond to market shifts. Big Pharma learned to work with smaller, more nimble companies to position new products so the economies of scale provided by the larger organization could be used to quickly enter new fields. This strategy helped many in Big Pharma begin moving from a reliance on small-molecule drugs to a more balanced collection of therapies that included biomolecules as well.
Tracking innovation for insight
Some of the major IOCs are now using a similar strategy to transform themselves. They are investing in small companies and/or renewable energy technologies to diversify and prepare for changes coming in the sector. The initial foray by Big Oil into developing innovations internally in renewable energy has declined due to other forms of investment within the sector. Graph 1 provides a look at the inventive output, in the form of published patent documents, for some of the major IOCs in the last few years.
While the line in Graph 1 looks somewhat erratic, there is an approximate 5 percent variance from year to year for major IOC inventions. This is reasonably consistent considering these organizations have produced nearly 10,000 inventions between the beginning of 2012 and May 2017. Graph 2 shows the analysis and individual invention trends for each.
ExxonMobil has the highest number of published inventions in this timeframe, followed by Royal Dutch Shell and then Total. For almost all of the IOCs, there is a peak in inventive output in the 2013-2014 timeframe followed by a decline, and a projected return to peak levels (for several IOCs) in 2017. This analysis suggests that the IOCs are still placing a premium on innovation; while there may have been a decline in publication during a recent economic downturn they are still investing in internal research and development.
The IOCs’ renewable-energy innovation activity can be contrasted against their overall trends in published inventions. The peak generally seen in the 2013-2014 timeframe in Graph 2 is still prominently seen in the renewable energy line chart in Graph 3, but as opposed to the overall invention-publication trend, the number of renewable inventions continues to decline. The notable exceptions to this trend are Phillips 66 and Saudi Aramco, which are both projected to have more renewable inventions published in 2017 than they did in 2016.
A drive to diversify
Almost all of the major IOCs have publicly stated they are diversifying their energy portfolios and continuing to develop their renewable programs. However, their published inventions don’t seem to support these assertions. In many cases, it looks as if the IOCs have decided to follow the Pharma path by investing in smaller companies to build their renewable capabilities. Considering the number of different approaches being explored for generating energy from renewable sources, it shouldn’t be a surprise to see Big Oil placing bets on several techniques. This allows them to increase their future impact by making a number of small bets compared to focusing on one or two major internal programs.
The top implementer of a diversification strategy is Total, the French oil major that made headlines in 2011 when it bought solar company SunPower for US$1.38 billion. SunPower is included in the renewable inventions represented in Graph 3 since Total owns a majority stake in the company, but even so, its combined invention activity in this area has been declining since 2014. Nevertheless, Total’s energy ventures unit has several recent investments on the partnership front.
- In 2014, Total/SunPower purchased SolarBridge Technologies, a provider of solar micro-inverters and solar inverters for photovoltaic arrays.
- Total invested in Diamond Energy, an electricity retailer supporting renewable generation derived from Australia’s natural resources.
- On May 9, 2016, Total agreed to purchase French battery maker Saft Groupe S.A. for 1.1 billion euros. Batteries are a key enabling technology for continued development of solar resources.
- In 2016, Total also invested in United Wind, a company offering small-scale wind turbine leases that make wind power possible for millions of Americans.
- In 2017, Total made an investment in PitPoint, an organization that provides clean fuels such as compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen fuel and infrastructure for electric charging.
Total is also an investor in Amyris, a company that uses its industrial synthetic biology platform to convert plant sugars into a variety of hydrocarbon molecules,including biofuel.
Total went on the record regarding its commitment to renewable energy by putting on its website: “For Total, contributing to the development of renewable energies is as much a strategic choice as an industrial responsibility. We are doing our part to diversify the global energy mix by investing in renewables, with a strategic focus on solar energy and bioenergies.” While internal patenting may have declined, Shell’s commitment to a diversified approach to energy generation can clearly be seen in its overall investment in renewable energy sources.
In May 2016, Royal Dutch Shell made headlines by announcing it had established a separate New Energies division to invest in renewable and low-carbon power. The new division was established to consolidate Shell’s existing hydrogen, biofuels and solar activities. It also announced it was adding wind power to its renewable energy sources that the division manages, including wind farms off the Dutch coast. This activity complements the six wind projects Shell is operating in the United States.
In addition to its internal efforts, Shell most recently announced the acquisition of MP2 Energy, a U.S. player in the electricity space. MP2 is a truly diversified energy company managing 1.7 gigawatts of power, including 30 megawatts of landfill gas, 30 megawatts of large-scale solar and 550 megawatts of wind, as well as 70 megawatts of natural-gas-fired peaker plants. In addition, MP2 has approximately 40 megawatts of distributed solar through a partnership with SolarCity, the renewables company led by Elon Musk.
Shell also expressed interest in sugar-based biofuels and has a partnership with Virent, Inc., a company that converts soluble biomass-derived sugars into products molecularly identical to those made with petroleum, including gasoline, diesel, jet fuel and chemicals used for plastics and fibers.
BP, while perhaps not quite as diversified in its approach as Total and Shell, is also a significant producer of renewable energy. BP’s renewable energy efforts tend to focus on biofuels and wind energy as opposed to solar. In the case of wind, the company is considered to be among the top producers in the U.S. with 14 operating farms across eight states and an interest in an additional facility in Hawaii.
When it comes to biofuels, BP has made several external investments over the past few years:
- In September 2014, BP invested in Pure Biofuels of Peru, a company that produces bio-diesel and provides marketing and storage services for clean liquid fuels.
- In April 2017, BP announced that its Butamax Advanced Biofuels LLC investment, a 50/50 joint venture between DuPont and BP, had acquired Nesika Energy, an organization combining expertise in fuels with industrial biotechnology.
- BP also manages Hydrogen Energy International Limited, a group that designs plants that produce low-carbon hydrogen from fossil fuel feedstock for electricity generation.
- BP continues to develop biofuels in Brazil with its investment in Tropical BioEnergia SA, which produces biofuels from sugarcane.
ExxonMobil is also interested in biofuels, as witnessed by its research agreement with Synthetic Genomics, the synthetic biology company founded by Craig Venter. The companies have collaborated since 2009. This partnership appears to have borne fruit recently when the two companies announced they developed an algae strain that enhances oil content from 20 to 40 percent.
What lies ahead
Whether changes in energy production come from renewable sources, cleaner burning alternatives like natural gas or an increased interest in carbon capture technologies, it is clear that Big Oil has heard the message loud and clear about changing the way it does business. The path forward may be a rocky one, but by taking advantage of investments in small, nimble organizations, the IOCs will stand a better chance of competing more effectively in the long run.
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