The decline of the family-owned oil company

Since the first US oil well was drilled in 1859, countless families have made a name for themselves in the industry. There were many private, family-owned oil and gas firms across the US. America's first billionaire, John D. Rockefeller, built his fortune from the founding of Standard Oil in 1870. This dynasty exists in various forms even to this day. But what happened the scores of others?

The answer to the question isn't simple. Part of the decline in the family oil business stems from difficulties in succession planning. While for others, issues arise from politics and the general state of the industry. The coronavirus pandemic has wiped out almost a third of global demand through lockdown and travel bans, meaning this problem could be set to worsen still.

Succession planning

The succession process is one of the biggest challenges facing family firms. Most companies fail to remain a family business past the second generation. However, entrepreneur Andrew Nisbet advises against the route of going public, “As [they] continue to develop an appetite for going public, I would encourage ambitious founders to seriously consider this alternative: keep your company within the family. Not only will you benefit, the country and our local communities will too.”

However, Fraser Tennant, editor of Financier Worldwide, claims that “succession planning among the oil and gas giants appears to be a somewhat hit and miss affair”. Which is where the problem lies, especially for family businesses. Keeping it in the family means you might not always have the perfect candidate for the role, but rather need to mould members of the family into the right shape for executive positions and eventual ownership.

Political risks

It's no secret that the oil and gas industry has been an increasingly important aspect of diplomacy in the last century. However, this can be a tricky business for families to get tangled up in. Many privately owned companies see the risks associated with petroleum politics and decide to steer clear in favour of a safer route.

However, Hunter Hunt of Dallas-based Hunt Consolidated credits his firm's willingness to take political risks as key to its survival. The company has extensive operations in Peru's largest gas fields, as well as in other locations generally not looked upon favourably by Wall Street such as in Yemen and in Iraqi Kurdistan.

For families willing to get involved in geographical areas with some unrest, it might just pay off. But the risks aren't only financial. In the modern day, families associated with oil and gas often face negative criticism from climate change activists, as well as the public more generally. Putting your family in the spotlight opens you up to backlash, but a well-managed family oil business can take some comfort in the public trusting them more than floated firms.

Industry woes

The industry as a whole is changing rapidly, as I discussed in my previous article many firms will need to carve out a new identity for themselves in the wake of the coronavirus pandemic. And giants like BP are already preparing themselves for a future with less oil.

Not only do families need to prepare for who will lead their company in the future, they must also consider what they want their company to look like 10, 15 and 25 years down the road. While the current state of the industry looks dire, Dan Brouillette, deputy secretary of energy nominee for Donald Trump predicts a robust future for oil demand. But this may not be the case in the longer term.

Pre-COVID forecasting from OurEnergyPolicy predicted peak demand for oil and gas sometime around 2022, with a steady decline from that point up until 2050. If family owned firms struggled before, they will find themselves in even more trouble past that point.

Therefore, the primary reasons for the decline of family, privately-owned businesses in the oil and gas industry are threefold. Similar to publicly operating companies with multiple shareholders, family-owned oil firms have difficulty with succession planning. Likewise, many families are hesitant to get involved in regions which have tumultuous political situations, as well as the risks they bring about domestically and for a family's reputation.

Lastly, a general decline in demand which is set to continue, which has been worsened still by the onset of the coronavirus crisis, to the point where some are predicting a terminal decline. Family businesses in an industry that was built on the backs of families are now few and far between. But just like it was before, there's always room for family-owned oil firms that heed the warnings and find workarounds to these problems.

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