The energy transition is forcing great change upon the oil and gas industry, but many aspects of the low-carbon future that some oil giants are starting to embrace contain strong echoes of the past. Most obviously, there is the need for risk-taking. The oil industry is at heart a gambler's game, built on the willingness of wildcatters to drill one more well in the hope of that elusive discovery. The gamble now is less dramatic, but equally defining.
How energy will evolve is uncertain, but major oil firms are having to start laying bets on different technologies and different strategies. There will be failures — the low-carbon cousins of the dreaded dry hole — but the majors hope to gain a foothold in new businesses that will generate real long-term profitability.
There are other parallels with the past, some of which those oil firms leading the industry's energy transition response are keen to play up. Energy markets are, and will remain, complex, and solving complex energy problems is the lifeblood of oil and gas companies, as BP chief executive Bernard Looney told last month's Argus Crude Live conference. And some of the development that the transition will need plays even more directly to the industry's strengths.
Seasoned offshore oil operators are eagerly espousing their credentials for offshore wind projects, which require the installation and operation of large-scale marine infrastructure. BP made its first move into offshore wind last year, farming into a US venture led by Norway's state-controlled Equinor. It was also among the winners — as was French rival Total — in this month's UK offshore wind tender. "While we might be new to offshore wind, we're not new to offshore," Looney told his Instagram followers. "We have spent more than 50 years working on complex, demanding projects out to sea. It's what we do."
Not all the majors are taking this path. Shell's new energy transition strategy, unveiled this week, is still a gamble, but puts notably less emphasis on owning low-carbon production assets than on being able to source, trade and optimise delivery of different kinds of energy.
Ill winds
But the majors' offshore wind forays nonetheless contain a wider warning of how repeating the past may not be so desirable. BP's success in the UK auction did not come cheap. It will pay sizeable option fees that have triggered complaints from incumbents over rising prices for developers and consumers. Cost inflation of this kind also erodes value, and makes it harder to deliver the competitive returns that the majors insist they can achieve from their low-carbon businesses.
Eroding value, like working offshore, is also something that many oil firms are "not new to", and "do" rather too often for investors' liking. The past two decades offer numerous examples of budget overruns, overpayment for assets and lax capital discipline. Amid the current dash for green assets, shale perhaps offers the best lesson, as a new resource opened up by smaller, specialist players, and poorly understood by the majors, whose reward in many cases was crippling underperformance and multi-billion dollar write-downs. The rush to do low-carbon deals, and show that net-zero targets are genuine, risks a similar outcome — surely a part of the past that the industry needs to learn from, rather than repeat.
