Big Oil In Decline May Fund Energy Transition Better Than High-Flying Renewables

Loren Steffy, UH Energy Scholar

One of the principal architects of modern Big Oil now wants to dismantle it.

In a recent essay for Time, John Browne, former chief executive of BP, argues that oil and gas companies should split their low- and zero-carbon initiatives from their fossil fuel businesses from their low- and zero-carbon initiatives.

“The former is rapidly growing, less capital intensive and valued at a premium by investors, whereas the business of hydrocarbons is capital intensive, unloved by the market and in decline,” he wrote. “But if companies take steps to separate these very different types of activity into two corporate entities, investors can allocate their capital more efficiently and the true value of the low-carbon businesses embedded within large hydrocarbon producers will become clearer.”

That’s true, but so will the true value of the hydrocarbon business. What will happen to companies that concentrate on those capital-intensive, unloved and declining assets?

We already have an idea. The energy industry has a long history of packaging up declining operations, spinning them off, and watching them descend into bankruptcy.

Coal, a fossil fuel even more unloved than oil, provides some examples. About half of all U.S. coal was mined by companies that have gone bankrupt in recent years. Bankruptcy laws are designed to give priority to environmental liabilities, but an April 2019 Stanford Law Review study found that bankrupt coal companies used the reorganization process to shed $5.2 billion worth of environmental liabilities, transferring them to underfunded subsidiaries that they spun off and which later failed.

The oil industry, too, has embraced such tactics. One of 2020s biggest Oil Patch bankruptcies, California Resources Corp., was spun off from Houston-based Occidental Petroleum in 2014. CRC borrowed $6 billion, most of which it paid to its former parent. That left CRC with almost $5 billion worth of debt by the time it filed bankruptcy, and the company had burned through about $283 million in free cash. The spinoff allowed Oxy to not only shed the debt, but to also get rid of the liability for the 18,000 wells that CRC owns in California—some 6,000 of which are idle. Idle wells owned by bankrupt producers are a growing environmental concern because many of the companies can’t afford to plug them or clean up the wellsite, leaving the responsibility to taxpayers.

These days, of course, Browne isn’t worried about such things. He runs a venture fund, BeyondNetZero (or “BnZ” is the squeezed together name isn’t hip enough for you), which that focuses on “high-growth companies that are investing in innovative climate solutions,” so it’s not surprising he favors breaking up Big Oil. When he ran BP, Browne wanted to assemble an empire that rivaled Exxon Mobil. Now, as venture guy, he’s all about unlocking value by keeping things small.

His rationale is that the energy markets have changed. Oil and gas are in their twilight, while renewables are all about growth and promise. It’s not clear that’s the case. Short-sellers are increasingly betting that the flood of money into renewables is funding a bubble that can’t justify companies’ weak earnings.

Meanwhile, Browne’s successor, Bernard Looney, believes it’s Big Oil, with its deep pockets and broad financial resources, that have the best chance of leading the energy transition.

“It’s an enormous business opportunity for us, because trillions of dollars are going to get spent rewiring and replacing the Earth’s energy system,” he told Time in early December. “We have to lean into the transition. We must give society what it wants and needs, and that is clean, reliable, affordable energy, and to do that, we have to change. And of course, we want to change, and we want to change because our employees are part of society too. They have children, they have neighbors, they have friends. They want to make a difference in the world. And we also believe in this.”

Looney argues that hydrocarbons remain the fuel, if you will, to finance the energy transition. Big corporations like BP, using their strong balance sheets, can lead in a way that smaller companies, with fewer financial resources, can’t. That argument sounds a lot like the 1990s Browne, who pushed BP’s fanciful “beyond petroleum” PR campaign even as he bought up other major oil companies like Amoco and Arco.

A key piece of the transition that Looney didn’t mention, though, is personnel.

Executing the energy transition is going to require legions of new engineers, environmental experts and green energy technicians. Many of them are going to be hired straight out of school. But joining an oil company today is viewed by many recent graduates as akin to working for a tobacco company or an opioid manufacturer.

At the same time, many longtime oil company employees, especially engineers, are retiring, and companies are struggling to replace them. 

Even with the best of intentions, Big Oil may find itself starved for talent that would prefer to work for more nimble rivals — in other words, companies they see as having cleaner hands, rather than tainted by climate change.

Without the right people, oil’s decline may accelerate, making so-called green energy more appealing.

The bigger issue, of course, is the definition of value. Spinning off renewable assets may enhance their short-term value, but will they have the financial sustainability to continue generating value in the long term? Likewise, the ongoing need for fossil fuel, in some form, for the next several decades means there’s intrinsic value in those operations.

It’s possible, of course, that both Browne and Looney are right. Some of the biggest oil companies today won’t make the shift to renewables. They will double-down on oil and gas production, which, as Browne notes, we will need until we don’t — probably decades after today’s CEOs are safely nestled in retirement. Others will use their financial resources to fund a change, whether it’s directly investing in wind and solar projects or acquiring companies that are on the cutting edge of new energy technology.

Markets change, and businesses have to adapt their strategies. But too much of the energy transition talk is focused on shareholder value. While that’s important, we also need companies with the means to pull off the switch. That doesn’t mean just funding the hot new growth prospects, but also shouldering the potential cost of the assets left behind.

Loren Steffy is a writer-at-large for Texas Monthly, an executive producer for Rational Middle Media and a managing director for 30 Point Strategies, where he heads the 30 Point Press publishing imprint. He is the author of five nonfiction books: “Deconstructed: An Insider’s View of Illegal Immigration and the Building Trades” (with Stan Marek), “The Last Trial of T. Boone Pickens” (with Chrysta Castañeda), “George P. Mitchell: Fracking, Sustainability, and an Unorthodox Quest to Save the Planet, The Man Who Thought Like a Ship,” and “Drowning in Oil: BP and the Reckless Pursuit of of Profit.” His first novel, “The Big Empty,” was published in May 2021. 

Steffy is the former business columnist for the Houston Chronicle and previously was the Dallas (and Houston) bureau chief and a senior writer for Bloomberg News. His award-winning writing has been published in newspapers and other publications worldwide. He has a bachelor’s degree in journalism from Texas A&M University.