By John D. Stoll
You're forgiven if Saudi Aramco's plans for a December IPO make you wonder whether the anxiety over Big Oil's demise is premature. Aramco earns more than Amazon.com Inc., Apple Inc. and Microsoft Corp. combined; its market value is expected in the $1.5 trillion to $2 trillion range.
But not everyone can throw off cash like a Saudi Aramco, which can get oil out of the ground more cheaply than just about any big oil company. Most of the world's big oil companies face real challenges trying to convince investors that oil isn't in danger of becoming the next coal, even if such concerns may be wildly premature.
Oil majors like ExxonMobil Corp. represent a shrinking share of the S&P 500's value. Naysayers look at electric cars and anti-carbon legislation and predict oil's best days are behind it.
Many oil executives say they've heard their critics, and one way to respond is to fund a greener world.
Royal Dutch Shell PLC and Total SA have each committed as much as $2 billion annually to renewable technologies. BP PLC on Wednesday said it is investing 10 million euro in Whim, a Finnish transportation app designed to reduce private car ownership.
And clean energy was an underlying theme at CERAWeek, the annual IHS energy conference held earlier this year in Houston. Electric cars and the Green New Deal were as prominent as oil rigs and shale wells.
All this talk doesn't mean oil companies are poised to underwrite a carbon-free future. History and research suggest big business is built for a different kind of green. Sustainability ambitions will go unfulfilled until wind turbines and solar fields deliver the level of profit oil assets do.
Oil companies aren't wagering much on that happening anytime soon.
A report by CDP, a U.K. nonprofit working with companies on environmental-impact disclosure, found the world's top 24 publicly listed oil-and-gas companies spent 1.3% of $260 billion in total capital expenditures on low-carbon solutions last year. Energy consultant Wood Mackenzie estimates spending on clean-energy-related mergers and acquisitions was a measly $6 billion over the past four years.
Mark Mills, a partner with Cottonwood Venture Partners, said oil executives "have to genuflect in the direction of what's going on in climate-change circles." Governments are pressing us to reduce our carbon footprint; investor appetite for all-things-sustainable is growing; no one wants to be labeled a climate-change denier. But executives realize they've got more immediate headaches.
Mr. Mills, also a research fellow with the Manhattan Institute, a conservative think tank, said executives "got way over their skis" on costs when oil prices were high. Now, with those prices consistently low, these companies struggle to persuade Wall Street they can continue to deliver for investors accustomed to cashing in via dividends and buybacks.
Profits fell 31% at large oil companies in the most recent quarter. In late October, Shell executives were interrogated by analysts after reducing a $25 billion share buyback commitment for 2020, and BP shares were hammered after executives said a dividend increase may not be in the cards.
Money problems are only part of the equation. Mr. Mills said the "epic-low valuations of these companies is being partially driven by the fact they are on the wrong side of the climate discussion."
Some think Big Oil is like the buggy industry in 1900, or flip-phone makers at the dawn of Apple's iPhone. The question for oil executives looking at those transformations is, "will you matter when there is a windmill on every corner and a solar panel on every roof?"
This is a simplistic way of thinking about a complex energy puzzle. No one really knows, for instance, when global demand for oil will begin to decline. Even with all the talk of a greener future, the world's thirst for oil grows every year. Some think that point of peak oil demand could come in the next 20 years. Others say it could be much longer.
"People don't just reboot," Chevron Corp. Chief Executive Officer Mike Wirth said during an interview at CERAWeek. Big changes, he said, often require big capital outlays that are planned years in advance. A manufacturer like Whirlpool Corp. may want to shift more facilities to wind power, or a ship operator like A.P. Moller Maersk A/S may want to transition to zero-emission vessels. But those commitments require big dollars and long timetables to achieve.
Mega corporations won't be the ones to deliver all the answers. As Stanford Graduate School of Business lecturer Maxwell Wessel said, "big companies are really bad at innovation because they're designed to be bad at innovation."
Mr. Wessel is also chief innovation officer at German software giant SAP SE and an evangelist of the " Industrialist's Dilemma." The theory holds that the very things that helped make the industrial era's most-profitable businesses are thwarting them as software remakes the world. He says job No.1 for established companies is achieving operational efficiency, not reinvention.
Remember BP's "Beyond Petroleum" effort? It came with billions of dollars of investments in renewables. When executives scrapped the effort earlier this decade, it choked off those initiatives. BP's 2011 exit from a 40-year attempt at building a solar business came with the admission "we tried and struggled to make money."
Shell is currently chasing the reinvention dream -- but it will be costly. It aims to be No.1 in electric power by the early 2030s. That business could potentially deliver equity returns of between 8% and 12% -- handsome, but lower than the 12% to 15% target for traditional oil-and-gas businesses.
Mr. Wirth, the Chevron CEO, said the conversation about Big Oil's place in addressing climate change is too polarized and one-dimensional. "This idea of an energy transition is not a new idea. People will talk about this as if it just came up."
He said Chevron itself has demonstrated its ability to pivot in the past.
"Our company's been around for 140 years," he said. "When our company started we were not producing petroleum to fill vehicles because Henry Ford had not invented the car yet, and the Wright Brothers were decades away from their first flight. So we began producing kerosene to replace whale oil for light."
Mr. Wirth says new forms of energy have since "come on top" of older sources, not in place of them. Under this logic the future will have far more sources of energy, not fewer.
Anyone thinking Mr. Wirth is out of step should take a look at the revealing interview Ben van Beurden did with Reuters a few weeks back. The Shell CEO warned against demonizing oil and gas and "unjustified" worries about the business model.
"It's entirely legitimate to invest in oil and gas because the world demands it," Mr. van Beurden said.
As true as that is, it's important to remember that some were saying the same thing about buggy whips until the Model T came along.