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 / Summer 2011 / Issue 63(originally published by Booz & Company)


Will Your Next Electric Company Be a Global Oil Enterprise?

As the energy markets evolve, oil and gas majors should consider diversifying into power generation.

In the past, major oil and gas companies have refrained from playing a significant role in the electric power sector. They have typically owned and operated power-generation plants primarily to supply energy to their own refineries and production facilities. In some cases, these oil companies could have taken advantage of their investment capital, infrastructure, and expertise to offer other forms of non-hydrocarbon-related energy. But, except for a period in the late 1990s when some of the oil majors made limited investments in power generation — most of which were unwound in the early 2000s — they have generally stuck to their core business, producing oil and gas and selling refined products.

All that may be about to change. Several developments have put oil and gas companies in a position in which they should consider redefining their businesses as “super-energy majors,” by diversifying their strategies and adding electric power generation to their traditional activities in oil, oil products, and gas. One development is the gradual shift to electric vehicles, which may break the hegemony of fossil fuels over the next few decades; another is the rising importance of electric power in energy consumption, due to concerns about climate change. Many of the major oil and gas companies are in a position to take advantage of this situation, given their strong position in natural gas, a much cleaner fuel in power generation than coal or oil.

Except for Eni SpA of Italy, no major oil company has committed to this path so far. But the logic, for those that are able to make the transition, may turn out to be compelling. Such a move would allow the oil companies to escape some of the pressures that are building in their current business models. For example, it would add a diversified source of revenue and profits at a time when traditional exploration and production activities are increasingly costly and difficult, in part because state-owned companies now control the most accessible oil fields. It would also make the most use of the kinds of infrastructure that oil majors have developed: not just pipelines and refineries, but all the downstream infrastructure involved in wholesaling and retailing fuel, including links with gasoline stations that service vehicles. Such stations could be expanded to serve electric vehicle users as well.

The potential for a radical shift in the marketplace suggests a series of questions for senior leaders in oil and gas companies: Is it time to assume a broader role as a supplier of energy, rather than just a supplier of hydrocarbon fuels, by moving into power generation? What profitable revenue streams in the power sector are open to you? And should you move in partnership with existing power utility companies, in competition with them, or in game-changing ways that seek to reinvent the fundamentals of the industry?

The New Dynamics of Demand

Investment in power generation is not an entirely new idea in the oil sector. In the second half of the 1990s, several major oil companies, including BP, Eni, ExxonMobil, and Shell, took strategic positions in power generation, often through joint ventures. Their objectives varied but included wanting to be seen first as “energy companies” rather than mere oil companies; gaining better control of the profitability of their natural gas activities at a time when liberalization and deregulation were occurring in that market; and fulfilling “green” ambitions by becoming involved in wind power generation.

By the mid-2000s, however, the majors’ interest in electric power was waning. For one thing, the financial community discouraged it; investors asked for more focus on capital investments in the upstream part of the business. BP and Shell divested most of their investments, keeping only selected power-generation assets, while ExxonMobil maintained most of its positions. Only Eni continued its growth in the power sector, using its gas-fired assets as a profitable captive source of demand and as a way of creating flexibility; it could sell in either power or gas markets as opportunities arose.

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