How F1 is becoming embroiled in an oil war

Although oil is thought to have been first discovered 3000 years ago in what is today's Iran, it was only with the birth and rise of the internal combustion engine in the 1800s and 1900s respectively that the commodity took on a strategic importance, so much so that the combustible liquefied organic substance became known as 'black gold'.

So vital is this fossilised material to modern living - whether for transportation, heating, energy generation or synthetic materials - that global and regional powers have fought wars over the commodity, with much of the unrest in the Middle East being traced back, whether directly or not, to oil's strategic importance.

The Organization of the Petroleum Exporting Countries (OPEC) members and those oil-producing countries outside the cartel are currently at loggerheads over supply and demand, and the barrel price has consequently plummeted over the past three years - providing welcome relief for motorists at the pumps, but causing major upset in boardrooms of oil producers across the world.

To put the turmoil in perspective, consider that in 2014 Brent (the benchmark barrel price) averaged over $100 per barrel; in Q2 2015 it was $63, versus $47 during the corresponding 2016 period - with the differences coming straight off the bottom lines of the major brands, most of whom are in Formula 1.

The battlefield has therefore shifted to the paddock. The first salvo was earlier this year when it became known that Shell had turned down its options on title rights to the Belgian Grand Prix and its 'bridge and board' signage deals with Formula One Management. Instead, the oil company increased its commitment to Ferrari, but at an estimated overall annual saving to Shell of around $40million.

At the time FOM CEO Bernie Ecclestone played down the decision, telling Autosport "The reason [for the shift] is because we could not agree terms. I am happy that they allocated the budget they had to Ferrari. Their commitment is still with the F1 family."

All well and good, except Shell's decision suggested that F1 as a marketing tool had lost its cost-effectiveness, for the company could still have allocated what budget it had to FOM, but chose instead to concentrate predominantly on its technical partnership with Ferrari, with only a marginal increase in brand visibility on the red cars and kit.

Saliently Shell's decision to drop FOM went almost unnoticed - an indictment of F1's marketing pull if ever there was one, while about the only publicity the brand's sponsorship of the Belgian GP was in the wake of Greenpeace's attempted hijacking of the event in 2013. Shell had clearly read the economic tealeaves, and, in common with its peers, cut back on non-critical spend - with FOM being the first casualty.

Crucially, though, the company did not can its title sponsorship of the Malaysian MotoGP round, which, again, raises questions about F1's marketing cost-effectiveness. Those questions were underscored by Total's decision in July to sponsor the CAF African Cup of Nations (the continent's UEFA) football tournament for eight years (1500 matches) - with the casualty again being F1, in the shape of Renault F1 and Red Bull Racing.

"Through this commitment we hope to strengthen ties to our stakeholders and customers through exciting, celebratory events that are always popular, including within our own teams," president and chief executive officer of Total Patrick Pouyanne, a qualified engineer, said as he fired the next salvo in F1's oil war.

The Frenchman's profession has been specified because it informs Total's preference to remain in F1 as a technical partner to Renault, but not to continue with the team as a marketing partner. The long and short of it is, though, that Renault and RBR each stand to lose £12m, with the brand's F1 hospitality spend likely to be significantly lower.

Renault could still reverse Total's decision by playing its 'first-fill' and 'recommended lubricant' cards - oil and fuel supplied to every new car coming off Renault's production lines globally, and through its service workshops - but Red Bull Racing does not have that leverage for obvious reasons.

Still, a Renault executive, speaking on the subject in Mexico, was downbeat about retaining Total in any shape or form: "While Renault is a French company we have many international alliance partners," he said speaking on condition of anonymity but clearly referring to Nissan/Infiniti/Lada/Dacia.

"Sure, we would like to retain Total, but we need to see which brand is best for the alliance."

The long and short of Total's decision to go with football as a marketing platform is that RBR team boss Christian Horner has gone oil sponsorship hunting, for any shortfall in the team's budget eventually needs to be plugged by its ultimate owner, energy drink magnate Dietrich Mateschitz. $15m (£12m) is a large hole to fill annually, even for billionaires.

By most accounts Horner found a willing partner in ExxonMobil, purveyor of money and lubricants to McLaren for two decades, although the team is no longer the winning force it once was. As an insider said at Austin, where news of the possible Mobil/Red Bull marriage broke: "Images of smoking [McLaren] Hondas do Mobil no favours..."

Things have moved on apace since then: during the Brazilian GP a party close to Red Bull and Mobil stressed that nothing was official (yet), then whispered that an announcement could be expected "sooner rather than later". Pressed further, the spokesperson said "Maybe during or even before the Abu Dhabi Grand Prix." A major Red Bull media event is planned for the Wednesday before the race...

Whatever, the consequences for Renault on the engine side are significant regardless of whether the team retains Total as a partner in whatever capacity, for a change of oil supplier demands comprehensive validation and engine re-mapping programmes, the costs of which potentially run to millions in any currency. If Renault's engines are run on two brands - Total and Mobil, say - such disruption will be considerable.

Theoretically Red Bull could continue running Total in its engines but brand its cars with whatever label - such arrangements are not unknown in F1, the World Rally Championship or World Endurance Championship. But Mobil is likely to insist on it own oils in the tanks (and Esso in the cells) if its logos are on a car.

Also affected by these developments is Toro Rosso, for Red Bull's junior team has inked a deal with Renault for 2017, having used the French engines in 2014/5 before switching to '15-specification Ferrari power this year. Previously the Italian team used Total products in its Renaults, without commercial support given the team's Spanish CEPSA backing, and the understanding was the deal would continue.

Honda, too, would need to jump through the same validation hoops, and while the timeframe for such programmes is estimated to run to a month or so - assuming no major glitches rear their heads - these disruptions could not come at a worse time, for engine suppliers are currently working intensively on new engines and upgrades for 2017, when development is freed up. Now consider the impact of revalidation...

Total would not be the first partner Horner has taken off McLaren, either: the team snared TAG Heuer as its engine badging partner from 2016 in virtually a carbon copy of the original TAG deal struck in the 1980s, when the Saudi Arabian conglomerate funded McLaren's Porsche-built engine, but it leaves the Woking team with another space to fill. True, McLaren has replaced each lost partner with another brand, but, 'tis said, at lower rates.

All this has led McLaren to BP, which was last in F1 via its Castrol brand with Williams and BMW in the mid-noughties, and, as a fuel brand, with Leyton House in the early nineties. There is, of course, a strong British connection, while Castrol has been a loyal partner (albeit among other brands at varying times) to the Honda World Touring Car, MotoGP and World Superbike teams, but these are, as outlined, uncertain times for oil brands.

Although Shell posted better-than-expected 2016 Q3 results after a dismal Q2, its CEO Ben van Beurden cautioned that "lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain profits". BP's, though, were half those for the equivalent period last year despite slicing a billion (US) bucks off expenses.

This, then, is hardly the time to enter into long-term deals, particularly as BP warned in a statement that "industry refining margins will continue to be under pressure in the fourth quarter".

McLaren's current upheaval - Group chairman/CEO and 25% shareholder Ron Dennis has been placed on 'gardening leave' (a genteel term for effective suspension) after long-running disagreements with remaining shareholders, Bahrain's sovereign wealth fund Mumtalakat (50%) and (Mansour) Ojjeh family interests (25%) - which can hardly instills confidence within BP.

We wait with bated breath, for it would be catastrophic for F1 were a major team, ironically 75% controlled by Bahraini and Saudi interests, to field two cars powered by an iconic engine supplier without the support, technical and/or commercial, of an oil partner.

The next oil brand to exit F1 is Petrobras, off-and-on sponsor of Williams over the years. Cynics suggest that the brand's withdrawal is linked to Felipe Massa, but team insiders are adamant the two are separate issues, that the team had "low expectations that Petrobras would extend" given the company is engulfed in a bribery scandal.

Whatever, the amount involved is small beer given the deal had no technical element save for non-engine lubes, for Williams, as Mercedes' customer, uses that team's official fuels and lubricants where specified - with the annual revenue loss to Williams estimated at well under $5m, or less than 3% of its budget.

Which brings us neatly to Petronas, title sponsor of the dominant Mercedes team, and trumpeter of the technical challenges posed by F1's exquisite hybrid engines that operate at thermal efficiency levels that engineers could only dream of a decade ago.

The Malaysian government-owned oil company, structured so as to pay dividends to the state in order to fund national infrastructure projects, has hit challenging times due to the oil price and the $3.5bn 1MDB scandal in which the country's prime minister Najib Razak is allegedly implicated.

Declining energy prices dragged Petronas' revenues down by 25% last year, and dividends this year are likely to be cut by 40%. Add in 1MBD's failure to meet loan payments, and questions must be asked about the company's (and country's) vanity projects such as F1, particularly as Petronas has laid off staff, with a major liquefied natural gas project under threat.

Already the talk is of withdrawing its sponsorship of the Malaysian Grand Prix - which this year attracted just 83,000 punters over three days versus 160,000 for the Shell-backed MotoGP race at the track - while sport minister Khairy Jamaluddin publicly agreed with the circuit's recent suggestion that it should take "a break from F1".

"I think we should stop hosting the F1. At least for a while. Cost too high, returns limited," he tweeted. "When we first hosted the F1 it was a big deal. First in Asia outside Japan. Now so many venues. No first mover advantage. Not a novelty."

He added that ticket sales had declined, TV viewerships were down and foreign visitor numbers had decreased due to "competition from races in Singapore, China and the Middle East". So "returns are not as big."

Asked about the Petronas situation, Mercedes Motorsport director Toto Wolff said "I haven't heard", but by all other accounts the situation seems dire, and is likely to have financial implications for the team, and certainly the race going forward, while all Mercedes engine users could be hit technically.

All of which proves that much as F1 believes it can exist in a bubble of its own making, it is part of a very real world, and when real problems hit that real world, upheaval results, even in the F1 paddock.

The question the championship should be asking itself, though, is why it no longer seems attractive to oil companies as a cost-effective marketing platform. That is a question to which FOM can provide answers.