“…the list of leading companies that failed when confronted with disruptive changes in technology and market structure is a long one.” – Clayton H. Christensen
Well-managed, profitable corporations fail all the time because new technologies disrupt their business model, according to Christensen, former Harvard Business School professor and author of the 1997 classic, “The Disruptor’s Dilemma.” Why should oil companies be any different? They’re not special. Yet, oil CEOs, including all the Canadian ones, insist that their product will be the “last barrel standing.”
On Thursday, three oil sands CEOs – Rich Kreuger, Suncor; Brad Corson, Imperial Oil; Jon McKenzie, Cenovus – tried to convince a Parliamentary committee that oil has a long life ahead of it.
“It also means keeping our industry strong and globally competitive for decades so that we can continue to make outsized contributions to Canada’s prosperity,” said McKenzie
“Every credible study shows that we will continue to need all forms of energy, including oil, to help meet the world’s growing energy demand,” said Corson. “And that oil should come from Canada.”
The executives repeated a common Alberta refrain: instead of peak oil demand by 2030 and declining consumption shortly afterward, as forecast by the International Energy Agency, humankind is headed for the Golden Age of Oil and Gas.
They are wrong. The giant companies that made Canada the fourth largest oil producer and the fifth largest gas producer are likely to be failing or bankrupt within a decade.
Here’s why.
Clayton H. Christensen and disruptive innovations
Oil sands companies’ current incredible profitability, thanks to OPEC and high oil prices, won’t save them from their forthcoming failure. Neither will any amount of cost-cutting or government subsidies, though either might slow their inevitable death.
Let’s acknowledge off the top, however, that Canadian oil companies are, for the most part, very well run. Their engineers are as smart and capable as any in the world. Their management is top flight.
But, as Christen says of the businesses he studied, “the decisions that led to failure were made when the leaders in question were widely regarded as among the best companies in the world…neither the pace nor the difficulty of technological change lay at the root of the leading firms’ failures.”
The root of those failures is the types of innovation they faced.
“Sustaining innovation” makes a company better. For example, oil and gas engineers are especially clever at thinking up ways to solve oil and gas problems. They innovate very well inside the box.
“Disruptive innovation” creates new markets by introducing novel products or services. For example, at its most basic, an electric vehicle is a car (or a bus, truck, delivery van, and so on) that uses a different fuel – electricity. Automakers can pivot to produce electric cars.
Oil companies can’t pivot to produce electricity. Nor do they want to. Without a pivot, though, they are finished. At least they are finished as the drivers of the investment, exports, and jobs that Canadians have enjoyed for decades.
They are incumbents whose time has come.
The Incumbent’s Dilemma
When faced with a disruptive innovation like electric transportation, Imperial Oil, Cenovus, and Suncor and the rest of the Canadian oil patch are faced with three choices.
One, pivot to an entirely new business model, like Danish Oil and Gas becoming Ørsted, now the world’s biggest wind energy company. Two, re-engineer the existing business model. Suncor started down this road, but under Kreuger’s leadership abandoned it last year to focus on the company’s core business. Three, double down on the status quo.
The entire Canadian oil sector has chosen the third option. As the CEOs’ House of Commons committee comments demonstrate, they believe that oil has a bright future ahead.
This view is delusional.
When Imperial Oil’s Corson says that “every credible study” shows a long life for oil, he’s echoing Alberta’s dominant narrative. Premier Danielle Smith uses it all the time. The problem is that no one ever answers the question, “Which credible study?”
There are plenty of studies from the likes of the IEA, BloombergNEF, and S&P Global that show global oil demand peaking around 2030. The only one that models growing demand is OPEC’s suspect World Oil Outlook 2045, which is based on spurious assumptions, like China’s oil consumption increasing by four million barrels per day over the next two decades.
In the face of intense disruption, Canadian oil companies have retreated to their strength, “sustainable innovation” (innovating inside the box). That strategy leaves companies unable to respond to “disruptive innovation” (disruption from outside the box). According to Christensen, “innovations of the second sort disrupted or redefined performance trajectories—and consistently resulted in the failure of the industry’s leading firms.”
Without a business model pivot, the only question now is when Canadian oil companies will fail. That timing will be determined by the global electrification of transportation.
Failure in 5 to 10 years
I’m reading Christensen’s book at the same time as the startling news broke last week that a small number of US EVs are now cheaper to buy than their gasoline-powered counterparts. And that’s before the $7,500 American government incentive. EVs are especially lower in the leasing market, sometimes over a third below their competitors.
CEO Carlos Tavares of Stellantis NV, maker of the popular Jeep brand, says that competition within the automotive industry has become “Darwinian.”
“It’s not ‘Watch out, there is a storm coming,’” Tavares said. “We are in the storm, and this storm is going to last a few years. It’s going to put a number of companies in trouble.”
If legacy automakers are already in trouble because of the transition to electric transportation, does it make sense that oil companies will somehow be spared the pain?
Oil is the feedstock for gasoline and diesel, the fuel that powers cars, trucks, buses, delivery vans, and long-haul freight trucks. Manufacturers of those vehicles are switching to electric models much quicker than expected. China is already exporting large numbers of EVs to the Global South, the very markets OPEC thinks will sustain future oil growth.
Bloomberg forecasts that road transport fuel demand, about 44 per cent of total global demand, will peak around 2027 and begin to significantly decline after 2030. If that isn’t a catastrophic market disruption, I don’t know what is.
In the Energi Talks interview below, veteran American oil economist Phil Verlager argues that the entire oil sector is now a sunset industry. Alberta producers are further handicapped with only middle-of-the-pack production costs, very high greenhouse gas emissions-intensity (which increasingly will be priced in the market), and long distances from markets. There is a very good chance that Alberta oil sands producers’ advantages (low production decline rates, minimal requirements for sustaining capital) will be overwhelmed by the disadvantages.
I give Canadian oil companies five to 10 years. They have nowhere to pivot and have bought in wholesale to the fantasy that emerging economies will be their salvation.
There is no salvation. They are doomed. Sooner or later, but probably sooner.
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