Jennifer Granholm’s Tone Deaf Advice For The Oil And Gas Industry

On a Zoom call Monday, Energy Secretary Jennifer Granholm essentially warned oil and gas company executives that their industry is dying, advising them to diversify their business portfolios or risk becoming like Blockbuster or Kodak, two former corporate behemoths that famously failed to adopt to rapid shifts in their markets. "The bottom line is you have got to move," Granholm said, as quoted by Argus. "You cannot hang on and be the Kodak or the Blockbuster Video of the energy world. You have got to diversify."

Apparently referring to announced plans by major, integrated companies like BP and Shell for diversification over the coming decades, as well as ExxonMobil’s XOM proposal last week to turn the Houston/Gulf of Mexico region into an enterprise zone for carbon capture projects, Granholm went on to note that "Some of the oil companies have decided they are going to diversify and become diversified energy companies," she said. "The proof will be in the pudding. You do not want to just assume that somebody is greenwashing."

While Granholm’s advice seems relevant to those particular industry giants and a handful of others, it betrays a lack of real understanding of the nature of the overall U.S. oil and gas industry, and the diversity already present in it. This is not an industry, like the camera/photography and video rental industries of the 1990s, that consists of a handful of big players who possess essentially similar business structures and corporate goals. Rather, it is an industry that consist of three distinctly separate business segments - upstream, midstream and downstream - and thousands of players of diverse shapes, sizes and business plans.

The upstream segment is especially diverse, consisting as it does of thousands of both corporate and privately-held players of all shapes and sizes, and financed and managed by investors and leadership teams with widely varying short-term and long-term business goals. There are only a handful of companies that are active in all three of these business segments, including ExxonMobil, BP, Shell, Chevron CVX and Oxy. A number of other upstream companies are also active in the midstream business.

But the overwhelming majority of upstream companies are focused on a singular company objective: To search for, find and produce oil and natural gas to meet public demand for those products and the thousands of products we derive from them. That is, in reality, the only reason why these thousands of industry players exist to begin with. These companies not only have no internal expertise that would enable them to diversify and somehow become able to manage a windfarm or sell home solar panels, they also have no desire to ever obtain that sort of expertise.

Granholm also apparently fails to grasp that an increasingly large number of these companies are, in the modern world, funded by and large by a handful of big private equity groups whose goals are to quickly see these companies sold to a bigger company for a big profit. These companies are essentially in business in order to go out of business, as quickly and profitably as possible. They not only have no long-term plans to diversify into, say, carbon capture projects or manufacturing batteries for electric vehicles, their management teams in fact have no real long-term plans at all.

There are exceptions to this among the larger corporate independent producers, of course, and they are pretty easy to spot: They are typically on the acquiring end of big buy-out transactions rather than on the selling side of them. But even those big independents who plan to be going concerns for the foreseeable future do very little real long-term planning. Their management teams tend to be focused mostly on how to meet their production and earnings goals for the coming quarter, or how to adjust their company’s drilling budget for second half of the year.

Most have marketing departments that try to gauge where prices might be going a year or two into the future as they evaluate their hedging strategies, but other than that, you’d be at great pains to find anyone in any of these companies doing any real thinking about diversifying for an “energy transition” future that might - might - see a significant drop in global demand for oil and natural gas at some point during the 2030s or 2040s. When you don’t plan for your company to be around five years from now, you don’t waste much time evaluating anything beyond that. Nor should you.

Furthermore, Oil and gas executives function in an industry that has been assured by politicians that it was dying and bound to cease to exist in every decade going back to the 1850s. They’ve heard this sort of thing before, and know they will likely hear it again 10 and 20 and 30 years from now.

The likely response by most of these men and women after reading Sec. Granholm’s stern admonition would have been to chuckle and ask their VP of Marketing if she had had any success in hedging 80% of the company’s natural gas production through the end of this year, and then ask the VP of Investor Relations if the date and time of the next earnings call had been set. By noon, it most likely was forgotten, because, after all, these people have a real business to run.