Oil & gas companies have been gradually ratcheting up their investments in renewables in recent years, apparently coming round to the reality — and unavoidable financial imperatives — of a clean-energy future. But how significant is this push into green power? Are the deep-pocketed oil majors about to become major players in renewables?

Of course, this is not the first time Big Oil has shown an interest in clean energy. Around a decade ago, majors such as Shell, Total and BP — which memorably rebranded as Beyond Petroleum — dipped their toes into wind and solar, only to exit after a few years, citing low returns.

This time around, their interest looks to be more than a passing fad. Now oil & gas companies are buying into everything from offshore and onshore wind to solar energy and battery storage around the world. And with the intention of staying in, it would seem.

“[Oil & gas] companies have become much more proactive in the past two years,” says Jake Leslie Melville, a senior partner at the Boston Consulting Group.

“I think it’s been a mix of increased public perception, government pressure, and just the realities that we are approaching a moment of ‘peak oil’.”

Another contributing factor is the current economics of the renewables business, which have “fundamentally changed in the last ten years”, he adds.

“Many renewable technologies are at par with conventional technologies now,” Leslie Melville stresses. “We are in a different time and a different place than where we were ten years ago.”

The fast-growing wind and solar industries are “contributing to the start of the decline in fossil fuels”, says Henning Wuester, director of the knowledge, policy and finance centre at the International Renewable Energy Agency. “That will dramatically affect the companies that are only active in fossil fuels. So, this has changed the way these companies look at the sector.”

Wuester says analysts are increasingly warning investors that fossil-fuel projects will very rapidly lose value once the financial market recognises these are on track to become stranded assets.

The most noticeable shift in the oil & gas industry has been among the European majors, which have taken big strides organisationally to diversify their business.

Anglo-Dutch player Shell has set up a “new energy” division and has vowed to invest $1bn-2bn a year until 2020 in renewables — mainly in offshore and onshore wind and solar projects in North America and Europe.

BP had an onshore wind capacity of 1.4GW at the end of last year thanks to its US fleet of wind farms. And in 2017, it bought a 43% stake in the UK’s largest solar developer, Lightsource — promptly renamed Lightsource BP — and promised to invest $200m in the business over three years. BP is now investing around $500m annually in low-carbon technologies such as wind, solar, biofuels and battery storage, and this year bought the UK’s biggest fast-charging electric-vehicle (EV) network operator, Chargemaster.

Italy’s Eni, which has a portfolio of just over 60MW of wind and solar projects, has pledged to invest €1.2bn ($1.4bn) to develop 1GW worth of additional renewables by 2021, and another €5bn in 2021-25, including in wind, concentrating solar power, waste-to-energy, storage and hybrid solutions.

France’s Total — which owns compatriot battery maker Saft and a controlling stake in US PV manufacturer and developer SunPower — is investing heavily in bioenergy and fast-charging networks for EVs. It is also promising to have close to “20% low-carbon businesses in 20 years” (although their definition of “low-carbon” includes natural gas and carbon capture, utilisation and storage).

Norway’s Statoil — which this year rebranded as Equinor as part of plans to become an “energy” player instead of just an oil & gas company — is the world’s leading floating wind player, a major developer of bottom-fixed offshore wind, and is increasingly influential in the battery and solar sectors.

“The energy transition of the oil & gas companies is still at a very embryonic stage, but there are some companies that have made more advanced moves in the renewable energy industry,” says Valentina Kretzschmar, director of corporate research at consultancy Wood Mackenzie.

As a result, she says, a number of different strategies have emerged.

“At one end of the spectrum, we have seen total transition, like with Dong Energy becoming Orsted, and with GDF Suez becoming Engie. Then, we have the strategic direction change, where companies have decided to label themselves not as oil & gas companies, but as energy providers,” says Kretzschmar.

Some analysts are bullish about long-term Big Oil investments in renewables despite the “lower returns” that once deterred their interest.

“There is a realism around the fact that the renewables business may not have the same returns as the conventional oil business. So, companies need to be really smart in the way they shape their emerging businesses,” says Leslie Melville.

Wuester says some oil companies have been cautious about investing in renewables projects as they are not as profitable as drilling for oil & gas — despite recently volatile oil prices.

But Kretzchmar says that oil majors need to look beyond the megabucks projects they are used to.

“If you look at both types of projects, oil & gas and renewables, respectively, on the same bases, then renewables are not high-yield projects,” she explains. “But renewables projects have a lot lower risk implied, and when you look at the actual spread between the weighted average cost of capital and the returns, you can see relatively reasonable comparable returns.

“The problem is, if they were to divert capital from the oil & gas projects, which have much higher yields than renewables, they would be leaving value on the table and they would not actually be returning to shareholders what they should be returning.

“It’s a big dilemma. They know it’s a growth area, they know it’s the future, but for now, they are making more money in oil and gas.”

Wuester argues that the oil majors need to look beyond short-term profits.

“The shift of assets and capital from fossil fuels into renewables is very slow, but is an opportunity [for them],” he says. “We have a short time frame to shift trillions of dollars of assets from fossil fuels to renewables, because transition does not wait. They need to put more money into renewables.

“Investing in fossil-fuel infrastructure now and expecting it to remain in operation for 40-50 years creates a huge risk. We can expect these assets to start losing value in 10-15 years, and then it will accelerate very quickly.”

With the exceptions of Ørsted and Engie, oil & gas remains the core business for these companies and looks set to be for many years to come.

Oil majors currently spend less than 3% of their upstream capital expenditure on renewables, Kretzschmar points out. “When you look at these companies you can see the capacity they could have on the global wind and solar markets, but currently they occupy around 2% of it,” she explains.

Kretzschmar believes that, aside from the lower yields involved, their reluctance to invest more deeply in renewables may be down to a lack of confidence.

“The renewables market is a completely new sector they need to understand and get involved in, and then get to know their new competitors. They are not spending much, as they are still at the exploratory stage.”

International Energy Agency (IEA) figures show that demand for oil is still growing year on year, albeit at a shrinking rate — another reason why Big Oil is wary of killing its golden goose.

“There is a question about where oil demand will be in the long term,” says Michael Waldron, a senior analyst at the IEA. “In the IEA annual World Energy Outlook scenarios, we still have a sizeable need for oil, much less than current levels, but still necessary.”

The IEA’s most ambitious outlook, the “sustainable development scenario”, assumes CO2 emissions from power and industrial processes peaking before 2020 and then declining sharply through to 2040.

However, its most prominent and widely used pathway — the “new policy scenario” — still expects total global upstream oil & gas investments between 2018 and 2040 of $15.4trn.

Waldron says the energy transition raises uncertainties for the oil companies, as it is difficult to predict future oil demand and necessary investments, and, as a result, decide on strategies.

“Perhaps this ongoing diversification can represent a case of good business practices in the face of such uncertainty, while their core business is still profitable,” he suggests.

So where does the future lie for oil majors and renewables?

“Big Oil will likely remain committed to renewables in the long term, and as they commit capital we should expect to see many different asset types [ie, types of renewables projects] being proposed. Cost cuts will continue to be accelerated, thus making many of these projects even less expensive than they are today,” says Leslie Melville.

“For example, Shell has a [total] capital budget of somewhere between $20-25bn a year, and has committed to roughly $2bn a year being budgeted for renewables. That’s real commitment towards a lot of projects.”

So will this increasing focus from oil & gas players alter the face of the renewables sector?

“Competition between large oil companies and traditionally renewables companies is somewhat inevitable, but there are also synergies between the two sides,” says Leslie Melville.

“Small renewables companies tend to be low-cost to operate and very knowledgeable in specific areas. Oil companies often have a long-term strategic view, good operational capability and access to capital. The combination is powerful.

“I don’t think oil companies will swamp small renewables companies, but you will see some acquisitions and JV [joint-venture] partnerships, as has been happening, for example, in fast-charging networks.”

Kretzschmar believes this lack of experience in the renewables sector means that partnerships, mergers and acquisitions may well be the way forward for Big Oil.

“Growth through M&A has very much been a dominant theme for the majors, and since 2015 the key vehicle for growth in the renewable side has been through acquisitions.”

Meanwhile, Richard Taylor, an oil & gas analyst at BMI Research, points to some of the dangers oil majors face if they fail to make significant steps towards diversifying their business.

“There is certainly a risk for oil & gas companies that are late movers or laggards in the energy transition, although over a medium-term horizon — five to ten years — this risk is small, albeit nuanced, with reputational risk likely to be prominent,” he warns.

“That being said, companies who are recognising threats to their conventional business model and taking steps to diversify their product offering and asset base are likely to be better positioned in the future, particularly in the case of a significant technological breakthrough that may accelerate oil-demand destruction or risk stranding assets.” 

Transition

Is Big Oil finally going green?