Some major oil companies will thrive in the emerging low-carbon economy; some will not. Even the most profitable will face tough choices between a varied array of complicated transition pathways: some will remain large, global, and centralized; others will function more like associations of smaller businesses; the least innovative will eventually cease operations. The difference between thriving and obsolescence will be business model innovation.
Business model innovation is not about learning the vocabulary necessary to sell something new to a similar or expanded clientele; it does not mean an oil company replaces the petroleum line items on its balance sheet with solar energy line items. Business model innovation means learning to exist as an entirely different kind of enterprise, with a distinct and more agile corporate structure, operating across a new and evolving terrain, defined by very different assumptions of business value, offering a distinct kind of service to increasingly demanding clients.
After the Paris Agreement, major investors can now read a clear signal as to the evolution of market value. That signal points to a clear need to unburden their portfolios of carbon-intensive business models.
Centralization has been a useful business strategy for major oil companies for a number of reasons: price volatility in oil futures markets puts smaller entities in a vulnerable position; the high costs the industry has externalized have always required major public support, and big national companies tend to win that support; the need to access the latest discovery of a finite resource gives businesses with global reach a clear advantage; size and centralization help to influence the policy-making process. Because low-carbon alternatives don’t require the same access to a specific and vanishing resource, and because the cost of energy in those sectors is not determined by speculation on commodity futures, high-carbon businesses will have to undergo major structural and strategic change, if they are to thrive in the new economy.
In 2013, the CERES investor coalition sent an open letter to major carbon fuel companies, asking them to lay out their respective strategies for existing in a low-carbon economy. Some major carbon fuel companies have started to look seriously at low-carbon business practices, technologies that can eliminate climate-forcing emissions, or even at “life after oil”.
We now see the opening of a new era of carbon delta analysis—an assessment of the discernible added risk for any investment overburdened by dependence on carbon assets. Intergovernmental agencies are starting to judge the fiscal solvency of nations in part by looking at subsidies for carbon fuel businesses. 21st century investors will be asking, when they take a close look at oil stocks, energy portfolios, and new markets for investment: How much agility, intelligence and creativity inform their efforts at business model change? Those with a culture that rewards creativity, decentralization, and measurably higher end-user value, will be valued more highly; those with a culture that depends too heavily on obsolete ways of thinking about energy, market strategy, corporate asset value, and consumer experience, will see their fortunes fade.
It is no longer accurate to say the pressure for business model innovation flows only from the question of whether climate policy will impose forbidding costs. Alternative forms of energy production are now becoming competitive, exploration and extraction of new resources is becoming more costly, major public assistance is likely to go away, and inaction on climate has already become unaffordable.
Dynamic portfolio analysis shows investment strategies with lower dependence on carbon fuels perform better over the long term. Business model innovation apt to the scale and scope of the transition challenge will require: climate knowledge, technological and operational creativity, and a focus on efficiently expanding consumer value. The earlier a business starts, the more agile it will be, and that will make all the difference.
[ The Note for January 2016 ]