Corporate environmental managers may be eyeing this report with skepticism. But they are reading it closely, nonetheless. As You Sow is reporting that the oil industry’s fundamentals are weakening, which could cut into its future market share and future profitability.
Precisely what dynamics does the shareholder advocacy group say are at work? Higher extraction costs, international supply competition, falling profit margins, mounting debt, shrinking cash, competing technologies, rising regulatory risks and concerns over climate change. Bottom line: business as usual won’t cut it.
“History is replete with companies that failed to recognize the inevitability of change in their markets,” says Danielle Fugere, president and author of the report said. “While acknowledging the importance oil has played in the successful economic development … over the past century, it is incumbent on investors, markets, and the oil companies themselves, to recognize the growing markers of change that will affect their future.”
The organization says not to look askance at its document, pointing out that once dominant industry players have fallen by the wayside. While it does not point to the once powerful brick-and-mortar institutions that have been replaced by the omni-present internet giants of today, it does look directly at the coal industry — once considered King Coal. It says that the future is not “set in stone” for oil companies. Their longevity will depend on their ability to adapt to changing ways.
And how is this relevant to todays environmental and energy managers. As our publications have reported, companies are replacing their oil-driven fleets with alternatively-fueled vehicles. Meantime, the global community has entered into climate change treaties that will require reductions in greenhouse gases. Companies are watching closely. Many are being proactive.
But Big Oil is acting: It is investing in natural gas, which it sees at the dominant fuel going forward. It is also investing in renewable projects. Exxon, for example, is teaming up to get into the energy storage business. It has also released its blueprint for how the United States should price carbon.
Some may be say it is not enough. But groups such as As You Sow will admit that it was not so long ago that these companies never admitted climate change was man-made and thus stood in the way of change.
“When prices collapsed, the inherent risks in these initiatives were exposed,” says Tom Sanzillo, director of finance for the Institute for Energy Economic and Financial Analysis and the former first deputy comptroller of New York State. “The prolonged outlook now for low oil prices throws into question the ability of oil companies to achieve return targets, replenish reserves, pay down debt, build cash reserves and maintain dividend commitments. The coal parallels here are not precise, but they are cause for concern nonetheless.”
That is a view echoed by Lou Allstadt, former executive vice president of Mobil Oil.
How so? The report says that cash reserves have fallen over 14 years, as a result of high debt, increased spending and the maintenance of dividends. It points to Exxon, CononcoPhilips and Chevron, whose cash positions have eroded. All that has been compounded the relatively recent nosedive in oil prices.