The conventional wisdom of business school text books is that companies should stick to what they know and not branch out too far, even when their markets are changing.
Some commentators extend this theory to argue that oil and gas companies such as Shell and Exxon cannot possibly reinvent themselves as renewables businesses producing power from wind and solar.
I think the judgment is too sweeping and underestimates the ability of the oil majors, in particular, to adapt. If you have lived through a century characterised by war, expropriation and the rise and fall of particular nations and empires you do know something about adaptation. But the current energy transition to a low carbon world is materially different from any previous change and will need a radical approach.
The case against the old companies moving into renewables is easily stated. The skills required are quite different. A lifetime spent drilling wells and building pipelines is poor preparation for the intricacies of the electricity market — the focal point of competition in the low carbon world.
The “old” industry is all about access to resources. Oil and gas are producer led businesses. Solar and wind come free — the challenge is fitting them into an electricity market which is increasing led by consumers. To put it crudely, the difference is between being a farmer and the manager of a supermarket.
Perhaps most difficult of all is the challenge of allocating capital between entities that are at different stages of development and have very different profiles of investment and cash generation. How can a new large-scale wind farm in the North Sea or the Nevada desert be judged against a new oilfield with substantial proved reserves in a way which is fair to both?
Daughters require investment, and the chance to develop skills of their own. Initially they need support, but with time they build a life of their own
To a driller, investments in wind will always look like a sop to the green agenda, particularly if they offer lower returns than the next oil development. To those generating power from wind turbines, investment in the oilfield will always look like resistance to change. The risk is that both become demoralised because every investment decision is the focus of conflict.
The challenge is to allow the two to live alongside one another — something that is also necessary at the aggregate level for the next several decades. Oil and gas will still be essential sources of supply but renewables in many forms will grow and will progressively take a greater market share, with the pace of the shift varying from one country to another.
How then can businesses in the sector make the best of both worlds? The answer is to distinguish clearly between the two different strands of activity. The best metaphor is that of parent and daughter.
Daughters require investment, and the chance to develop skills of their own, and patience. Initially they need support, but with time they build a life of their own.
The creation of daughter companies in the sector does not mean that the existing parent businesses lose all control. Nurture will involve appointing management, establishing the initial strategy and cross funding until the new business is self-sufficient. There will be some shared services where it makes sense. But some degree of separation is necessary and useful.
Renewables businesses need specialists — scientists and engineers who can keep pace with the wave of change which is occurring across the world but also individuals with a commercial, legal and political understanding of key markets. Above all, the two entities will need separate capital allocation methods that are able to test and judge project proposals in each specific area.
Daughter companies can begin life as wholly owned subsidiaries but over time there is a case for bringing in external capital to create businesses of the scale necessary to take on a global market.
Just as the energy market is in transition, so too are the organisational structures of the energy businesses. In these circumstances, rigidity is the enemy of progress. Companies are organic entities — always changing in one way or another. Over time, of course, parents and daughters grow apart — but that is absolutely natural and not a cause for regret.
For the next two decades, as we move through the transition phase, there is no reason why both the old and the new cannot both thrive. We can have Shell, running its traditional oil and gas operations, and “Shell Green” creating the business of tomorrow.