With developments in renewables and battery technology, Big Oil companies have a huge problem on their hands
Big Oil has maintained a pivotal role in the global economy, but the oil crisis is starting to taking an increasingly heavy toll, especially with Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Chevron Corporation (NYSE:CVX), and Exxon Mobil Corporation (NYSE:XOM).
If the oil price decline continues for a decade, big oil companies may have to reconsider their strategies and review operations.
Robin West of the Center for Strategic and International Studies, told the Financial Times, that he views big oil group as “mature organizations that are delivering multibillion-dollar projects, so there are reasons w they are the way they are, but they need to become more agile, and they need to get their costs down.”Many big oil companies have taken measures to deal with low oil prices, which have decreased about 70% since mid-2014, peaking at $100 per barrel at the time. Most oil giants have announced job layoffs and capital expenditure cuts. Shell announced it will cut 10,000 jobs and BP announced plans to slash 7000 jobs in the 2015 to 2016 period. Likewise, Chevron trimmed its headcount by 3200 last year. If oil prices stay below $30 per barrel, it is highly likely that big oil will be forced to decide whether to abandon commitments to dividends, or further slash investments.
Big oil companies not only supplied fuels for transport, but also had access to the crude oil used to make those fuels. However, both of these competitive advantages by are at risk.
In terms of demand, the assurances by governments at the Paris climate talks to curb carbon dioxide emissions would hinder growth of fossil fuels. On the supply side, big oil companies no longer enjoy top notch positions as crude oil producers. After the U.S shale boom, small businesses have become more agile than oil giants. The shale reserves of midsized companies are more competitive against projects owned by big oil.
With US crude nearing 12-year lows, many oil projects are getting delayed. This includes the Gorgon project owned by Chevron, Exxon and Shell. This also brings into question, whether the business models of the oil giants are flawed.
Whether big oil would fund new projects it requires to keep it from fading, remains to be seen. One way to deal with this is to take advantage of the climate policy. These companies are also gas producers, and they can trim carbon dioxide emissions by shifting from coal to gas. Big oil may also consider investing in renewable energy.
Apart from this, big oil could become shale producers. Exxon and Chevron are already the largest drillers in the Permian basin in West Texas.
Given the West Texas intermediate stands at $32.64 per barrel, and Brent crude at $35.29 per barrel, in order to survive, big oil companies would have to slash wasteful spending, and reinvent themselves.