Sparks

Oil majors invest into renewable energy

 By Mike Scott

As oil prices nudge back up to $70, the industry is waking up and flexing its financial muscles again…

But it is not just investing in new oilfields, it is also putting increasing amounts of money into clean energy, a strategy that at first glance seems counter-intuitive. However, closer examination suggests that the strategy makes good sense for oil and gas companies.
Climate change, the rise of renewable energies and the prospect of a peak in oil demand are already knocking dents into the long-term investment outlook for the oil sector, according to Platts.
The Carbon Tracker Initiative has starkly highlighted the risks of stranded assets for fossil fuel producers in recent years — that is, projects that could cost billions of dollars to develop but may have to close because of lack of demand or the introduction of tighter regulations. A 2017 report, for example, found that “across the oil and gas industry $2.3 trillion of upstream projects – roughly a third of business as usual projects to 2025 – are inconsistent with global commitments to limit climate change to a maximum 2˚C and rapid advances in clean technologies.”
As a result of this inconsistency, a new threat is emerging – the prospect that multilateral lenders, sovereign wealth funds and private investors may step back from investing in the sector. There are already signs that this is happening.
Norway’s sovereign wealth fund, the world’s largest, said in November that it plans to drop oil and gas stocks from its $1 trillion fund – whose assets are funded by the country’s own oil and gas industry – to cut its exposure to the sector. A month later, the World Bank said it will cease to finance upstream oil and gas after 2019, citing a target to bring its lending in line with Paris climate agreement goals.
These institutions are at the top of the investment food chain – if they are making these decisions, it seems likely others will follow. A smaller move, by Ireland, illustrates the trend. The country has no significant oil reserves but it does have some gas. Its Parliament voted earlier this year not only to dump fossil fuel investments from its €8 billion sovereign wealth fund but also to ban new fossil fuel exploration. It is not government policy, but it is an indication of how policy can change.
And in the wake of initiatives such as the Taskforce on Climate-related Financial Disclosures, pressure from private investors is increasing, too. The Wall Street Journal reported in February that investors had so far submitted 66 shareholder resolutions calling for greater disclosure of climate change risks following the success of similar proposals at Exxon Mobil, Occidental and PPL in 2016, which “were the first to garner majority votes on resolutions for annual disclosure of the impact on business from global efforts to limit the average rise in temperatures.”

Consequences

In response to these pressures, the oil majors have started to act. Analysts Bernstein say that “Big Oil has invested over $3 billion on renewables acquisitions over the past five years,” according to Reuters, and the pace of their investment has picked up in recent months, with clean energy mergers and acquisitions averaging 13 percent of total energy M&A activity.
Shell has pledged to invest $2 billion a year into renewables and e-mobility, and has bought stakes in offshore wind projects in the Netherlands, solar project developer Silicon Ranch and EV charging station developer NewMotion. It has also bought UK power provider First Utility for around $200 million.
Norway’s Statoil, in partnership with the UAE’s sustainability powerhouse Masdar, is the driving force behind Hywind, the floating wind turbine project that could drastically cut the cost and footprint of offshore wind. Statoil and Masdar are optimistic that they can reduce the costs of energy from Hywind to €40-€60/MWh by 2030, making it cost competitive with other renewable energy sources.

The worlds first floating wind farm

Total, majority owner of solar company SunPower, has bought into everything from batteries (Saft) to energy efficiency (Greenflex), while Eni CEO Claudio Descalzi said recently that renewable sources and gas were the fuels of the future.
Eni, which created its New Energies division in 2015, is investing €550 million to install 463MW of solar power by 2020 in Italy, Pakistan, Tunisia, Egypt and Ghana, where it recently signed an agreement to develop a floating solar project on the Volta Lake. It has also been working on solar projects with Algerian energy group Sonatrach and has a focus on biofuels and green chemicals made from biomass.
Meanwhile, six years after exiting solar, BP has bought back into the sector with a $200m investment in Lightsource Energy and says it is in the market for more clean energy producers with a $500-million-a-year warchest. It has also said that it will set carbon targets for its operations.
And while its annual BP’s Energy Outlook “seems to deliver much the same message to energy industry observers: oil and gas demand will continue to grow, energy use will rise around the world, and renewables will go from strength-to-strength – but not quite fast enough to change the world,” in a “familiar set of projections, one which reaffirms the solidity of BP’s core business model and implies that the world is on course for catastrophic levels of global warming,” according to clean energy publication BusinessGreen, the company’s revised projections illustrate how the growth of clean energy and electric vehicles have progressed faster than oil and gas companies expected and taken them by surprise.
“It’s easy to get lost in the details of the Outlook,” writes BusinessGreen reporter Madeleine Cuff, “but taking a step back to compare how things have changed reveals a rapid shift in thinking from the oil giant. It’s clear that over the last 12 months hopes for coal have dimmed, renewables have gained more influence, and EVs are accelerating much faster than BP ever really imagined.”
BP expects oil and gas to account for more than half of energy demand in 2040 and that carbon emissions will continue to rise until at least that date. This suggests there is what Carbon Tracker calls “a yawning gap between company expectations and the 2°C climate target set by the world’s leaders in Paris in 2015.” However, the change in expectations may well continue to accelerate, leading energy groups to speed up their move into renewables.
Even Saudi Arabia, the world’s largest oil producer, has pledged to have 10 percent renewables in its energy mix within five years, up from virtually nothing a year ago. There is less activity from U.S. companies, although ExxonMobil has been active in biofuels for many years. But even in the U.S., there is an increasing focus on using gas, in particular at the expense of coal.

Still a long way to reach the goal

Adnan Amin, head of the International Renewable Energy Agency, said in January that peak oil could come as early as 2020.
According to the research group Wood MacKenzie, for these oil companies to keep a renewable market share similar to that they currently have in oil and gas (12 percent), big oil will have to invest around $350 billion into a number of vital industries.
“The Majors have taken the first steps to move beyond the core oil and gas business into wind and solar power, as well as energy storage. But most are still weighing up the options and have yet to make telling strategic moves in renewables,” the oil and gas industry analyst group says. With production by big oil set to decline in coming decades, and the possibility of tighter regulations and a higher carbon price, wind and solar power “could step in to the breach if discovered resource commercialization, M&A and exploration fail to deliver, or economics weigh against continued development” it adds.
As a result, “investment in renewables presents a substantial opportunity and renewables could account for over one fifth of total capital allocation for the most active players post-2030. Wind and solar will be increasingly important strategic growth themes that cannot afford to be ignored as the Majors plan to 2035 and beyond,” the firm continues.
Andrew Logan, director of oil and gas at sustainable investor network Ceres, says that change has arrived much more quickly than the oil majors thought it would, in part because the advance of renewables has been driven by technological advances rather than government policies. “There is no certainty that the oil companies will survive the transition in their current size and form,” he adds.
A recent report from Trucost said that “following commitments under the Paris Agreement to limit global warming to 2° Celsius, governments are increasingly imposing a price on carbon.” Risk exposure could be amplified if a company’s products and services are carbon intensive, the report added, so there is a strong incentive for companies to diversify away from their core business.
“This is a sector where the big oil companies have been around in basically the same form for about 100 years. It’s very unusual,” Logan points out. However, it seems clear that the status quo will not continue.
The sector faces challenges from new technologies and new “clean energy majors” such as Siemens Gamesa, Vestas and Trina Solar, as well as the rapid roll-out of electric vehicles.
Some traditional energy companies, at least, have started to plan for the end of oil. The ones that fail to do so may find themselves stuck with a bucket-load of stranded assets if they don’t act fast.

about the author
Mike Scott
Journalist. Environment, Sustainability, Climate Change, Investing, Energy, Supply Chain, Transport, Circular Economy, Stranded Assets, ESG, Smart Cities, Wealth Management, Family Offices, Asset Management, EU.