From Oil to Electrons

I read an interesting article in The Economist magazine recently that described how some oil companies are “cross-dressing”, in other words, making them look like the opposite to what they are.

It is clear that today, Governments and the mainstream media are in love with electric cars. This means that the oil companies are seen as the enemy and although Governments get massive amounts of revenue from sales and export of their products, the future is electrons not hydrocarbons.

Royal Dutch Shell and Total, two of Europe’s biggest oil producers have been busy with other energy generation methods. Both have bought small gas and electricity supply companies and they are researching natural gas power stations to create more electricity. In effect their petrol delivery networks are now complemented with supply networks for the other power sources. They have also been busy adding more electric car charging points throughout their petrol outlets.

I have written about how the car manufacturers are at an evolutionary branch within the industry and it looks like the oil companies are also at the same point, which makes sense – if the majority of vehicles produced in the future are not powered by petrol or diesel, then the oil companies will have to change before they become extinct. These companies have to diversify to survive and provide several different styles of power and to also generate power from different sources. Some years ago BP briefly changed the “B” from “British” to “Beyond”. At the time it failed and was changed back – perhaps they were twenty years too early in that change, because they will have to be thinking beyond petroleum products very soon.

The article I read stated that the big oil companies typically get a return on their capital of around 15% yet renewable energy systems return half that and electricity providers half that again. So moving away from oil initially means lower profits until the business can grow sufficiently to provide enough revenues to allow the oil based sales to drop off. With that in mind, it seems clear that the oil companies must act now to ensure that as oil revenue declines, they have other revenue sources growing to counter it.

If you map the oil industry against a model such as the BCG Matrix, you can see that most companies are Cash Cows. With the push to electric cars or even biofuels, the oil companies will turn into Dogs: declining market share and minimal market growth. What Royal Dutch Shell and Total are doing is to find the Question Marks that can be turned into future Stars.

When you think about it, how many industries have been able to milk a Cash Cow for over a hundred years? It is critical for any company – and more so now – for the oil companies to find the high market share/growth products. We are going to have an interesting 10 years coming up with more infrastructure purchases by the oil companies as they morph into new businesses. It is doubtful that whatever direction they go in, they will have another century of milking the same cow.