Business Model of Big Oil “Fundamentally Flawed”

Written anywhere but the Financial Times, an article on the future of the oil industry might just pass you by.

But do not underestimate the significance of one of the world’s leading business papers quoting an energy analyst saying that “nightfall is coming” for Big Oil, and then asking the question that many environmentalists have been making for years: is the business model of big oil “fundamentally flawed.”

And it is not just the FT that is asking such painful questions – it is coming from inside the bastions of Big Oil itself.

The article, co-written by respected energy journalist Ed Crooks, points out that hugely expensive projects, such as the $54 billion Gorgon liquefied natural gas project off the North West Coast of Australia, which comes with a huge price tag, that may be a “monument to a fading era, the last hurrah of Big Oil.”

You can argue that Big Oil’s business model is fundamentally flawed on a number of levels:

It is currently spending billions of dollars searching for oil that can never be burnt if we are going to keep climate change to below 2 degrees warming. Many would argue that this is business insanity. But the industry has ignored the risks of climate change for decades and still tries to ignore the risk it poses to its very survival.

The model is also flawed as Big Oil is increasingly searching for hard to find expensive oil, and trying to compete with renewables which are becoming ever cheaper.

And the model is flawed due to the oil price, a result of over supply and shrinking demand. As the FT points out: “After the plunge in crude prices, however, such ambitious investments in LNG, deepwater exploration and Canada’s oil sands are becoming increasingly scarce.”

The low oil price is killing expensive industry investments on a daily basis, with Morgan Stanley predicting that a paltry nine large projects, out of more than 230 awaiting a green light worldwide, are “realistic candidates” for approval this year. A whopping $400 billion of oil investment has been delayed or cancelled.

As the oil price plunged last year, the oil industry predicted that the price would pick up this year, but exactly the opposite has happened.

There are now dire warnings coming from the industry about the prospects for the price recovery.

Indeed, the boss of one of the world’s largest oil traders, Vitol, which trades some 5 million barrels of oil a day, now predicts that oil will struggle to break above the $50 per barrel mark and “that there is a possibility that you will not necessarily go back above $100, you know, ever.”

Sentiments like this would have been unthinkable eighteen months ago.

He argues that he can see a $40 – $60 a barrel “band lasting for five to ten years.” At this price many shale plays and tar sands plays are uneconomic.

They could have survived a year of low prices but not a decade.

And in the short-term the price may even go lower. The Vitol boss, Ian Taylor says: “It’s very difficult to say that it has bottomed out, for sure, we’re in the situation where we have too much supply. There’s a feeling in the financial community that perhaps we’re getting towards the bottom, but I wouldn’t say that we can say for sure that the price has bottomed out.”

A decade of low oil prices; increasing action on climate change and cheaper renewables, means that “nightfall is coming” for Big Oil argues Philip Verleger, an energy economist, who believes that the “lumbering dinosaurs of big oil are doomed”.