Turn this ship around

She don’t corner so good, does she?

On Friday, January 13th, the cruise ship Costa Concordia struck a rock and capsized off the shores of Italy, at the tragic cost of 16 lives. A modern cruise ship is an impressive technological accomplishment. It takes huge numbers of tourists on voyages to beautiful parts of the world and makes a lot of money in doing so. But it doesn’t turn on a dime.

The large oil companies are similar. Since their rise to economic prominence in the late nineteenth century, they have accomplished some amazing feats of engineering. In 1862 the Shaw Gusher of Oil Springs, Ontario produced a flow of 3,000 barrels of oil per day from a reservoir only 60 metres (200 feet) below the surface. Today, oil is extracted in the harsh arctic conditions of the Beaufort Sea and Sakhalin Island, and using offshore structures such as Shell Oil’s Perdido platform which operates in a water depth of 2,438 metres (7999 feet) in the Gulf of Mexico.

But for all its mastery of modern technology, the oil industry cannot escape two facts. The first is that oil supplies are finite and shrinking – we are using up petroleum faster than we can discover more (see peak oil). The second is that the burning of fossil fuels is causing global climate change – an ecological catastrophe which could endanger the survival of most species, including our own.

The writing is on the wall. Sooner or later, the oil will run out. Though their stock may be trading at all-time highs (except for that of BP, which has foundered since the Deepwater Horizon disaster), in the long run, every oil company is doomed.

The various players in the industry have a stark choice: Reinvent or die.

What of the second option? Why not stick to the core business, ride the oil wave into the ground, extract every last drop of petroleum from every last reservoir, and then close up shop?

Companies are made up of people, and people facing oblivion are immune to logic. They are well aware of the proud history of the edifice their forefathers built. The idea that such a legacy could disintegrate on their own watch is unbearable. As the end nears, and the field narrows following a long string of mergers and acquisitions, the surviving players will create an exit strategy rather than letting their respective ships sink. They will not go gentle into that good night.

Reinvention can be done. IBM did it in the 1990s, recognizing that its future as a blue chip, Fortune 500 player depended on letting go of its self-image as a hardware company and embracing a new future as a services company. As of this writing, its stock is trading at a ten-year high.

The trouble with reinvention is that it isn’t always easy to see the next wave. It’s even harder to know whether the next wave is one that you’re equipped to ride. If you don’t have anything to offer, your best course of action is to hand as much cash as possible back to shareholders, and let them invest it as they see fit while you explore retirement options.

In the global market for energy, the next wave is clear. There are only two ways forward in the post-oil era. The first is nuclear energy. The second is renewable energy such as wind, solar, biomass, hydroelectric (including wave and tidal energy), and geothermal. This is not a dichotomy – both forms of energy can and will coexist, it’s just a question of how much of each. My money is not on nuclear, but I’ll save that for a future post.

The oil companies that choose reinvention can pick either nuclear or renewables. Nuclear is a non-starter – the oil business has nothing to offer other than capital, and as I mentioned above, it is more economically efficient to distribute that capital back to shareholders through dividends and share buy-backs. As for renewable energy, oil companies don’t appear to offer any synergy at first glance. BP got it wrong by investing in solar, as I wrote in last month’s post The Law of Conservation of Bad Ideas.  Wind, waves, and biomass look similarly alien to the petroleum business. Does this mean that there are no opportunities left, and that big oil will go the same way as the Costa Concordia?

Perhaps not.

One of the core competencies of the oil sector is drilling deep wells into the Earth’s crust. Another is the use of hydraulic fracturing, or “fracking”, to free natural gas from shale rock. The know-how associated with these technologies happens to be directly applicable to one of the most promising renewable energy options – geothermal.

Geothermal energy, through the technology of ground source heat pumps, has been gaining popularity for heating and cooling of buildings.  These systems simply use the mass of the earth as a heat source or sink. However, geothermal energy can also be extracted directly from the planet’s hot interior to generate electricity, through technologies such as flash steam, dry steam, or binary cycle plants.

Perhaps the most attractive aspect of geothermal plants is that they provide a  constant flow of power. As such, their power generation profile is very much like nuclear plants, and hence they present a credible competitor and alternative to nuclear power. Wind, solar, and even to some extent hydroelectric cannot provide so-called “base load” power without development of energy storage technologies. Geothermal is free of this limitation. The Geysers, a complex of 22 geothermal power plants in California, has provided the state with base load power since 1960.

Geothermal energy is most readily harvested along the fault lines where tectonic plates rub together and produce such geological features as geysers, hot springs, and volcanoes (not to mention earthquakes).  People living in these areas can console themselves that their dangerous environment also offers a plentiful source of energy. Geothermal plants provide over 10,000 MW of electricity worldwide.

Not everyone lives near a fault line. However, even far from tectonically active areas, the Earth’s crust still gets 1°C warmer for every 45 metres of depth (1°F per 70 feet). Deep drilling and fracking can be used to extend the regions that can be served by geothermal energy.

Fracking has its critics. It has been blamed for groundwater contamination, release of greenhouse gases, and even tremors. However, the most serious of these issues only occur when fracking in a fossil fuel reservoir. Take oil and natural gas out of the equation, and you remove most of the environmental issues associated with the technology. You also, as it happens, remove one of the primary motivations of environmentalists for resisting the technology – that it extends and expands the available reserves of fossil fuels, prolonging their impact on global climate. Fracking for geothermal energy production will never provoke the same ire as fracking for oil and natural gas extraction.

The petroleum industry has produced many impressive accomplishments over the last 150 years. Long after the oil is gone, that technology and expertise will still be needed. The sooner the oil companies start taking advantage of that, the sooner they can move beyond their past, turn their ship around, and chart a future for all of us.