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Abu Dhabi, UAEFriday 16 November 2018

Oil majors get serious on 'new energy' investments

Questions remain over whether traditional energy companies can incorporate renewables into their DNA

Total has been a leader in the most recent investment by energy majors in renewables, with the French firm participating in Abu Dhabi's Shams 1 solar plant. Christopher Pike / The National
Total has been a leader in the most recent investment by energy majors in renewables, with the French firm participating in Abu Dhabi's Shams 1 solar plant. Christopher Pike / The National

In the late 1990s, international oil companies all wanted to be like Enron. The flashy Texas firm had shaken up the staid energy world with its ventures into gas and electricity trading, broadband, solar power, and the US’s then largest wind turbine developer. That desire faded somewhat after Enron’s ignominious 2001 collapse. But almost two decades later, new energy is again on the agenda for the world’s oil supermajors.

The context of the investments of the late 1990s into new energies is in some ways similar to what’s happening today, but different in others. A decade of low prices had left the major oil companies searching for elusive profit growth. After a false start in the 1970s, European and American governments had begun backing green energy with enthusiasm. The growing power and influence of environmentalist movements put oil companies under pressure following the 1989 Exxon Valdez oil spill in Alaska, Shell’s plans in 1995 to sink the disused Brent Spar oil platform in the North Atlantic, and its record on human rights and land degradation in Nigeria.

In 2000, BP, under the PR-savvy leadership of John Browne, rebranded itself as “Beyond Petroleum” and changed its logo to a sunflower, derided by some as “Big Petunia”. It bought out Enron, its partner in a solar power venture, and became involved in wind and hydrogen power. Chevron invested in geothermal, Shell in wind, biofuels and solar, with Total committing to nuclear power.

But as oil prices recovered, the super-majors increasingly came to see renewables as a small, low-return business dependent on government subsidies, and were slow to innovate. The rise of China-made solar panels made manufacturing highly competitive, and Shell sold off its solar interests in 2006. BP Solar, meanwhile, was wound up in 2011.

Fast forward to the present day, and a new spell of low oil prices, combined with environmental policy pressure, has again driven a search for other businesses. But things seem different this time around.

BP’s latest Energy Outlook, released late last month, showed that oil companies are increasingly willing to contemplate a peak in oil demand, though the estimated date ranges from the mid-2020s to the 2040s or beyond. Renewables meanwhile are a much larger and more competitive industry than a decade ago.

Total has been an early mover in the latest renewables surge; just as BP was getting out of solar, the French firm got in, buying 60 per cent of US-based SunPower in 2011. It is also a partner in Abu Dhabi’s Shams 1 solar thermal power plant.

The sums being committed to new energies now are larger than in the early 2000s: $1 billion annually for Shell by 2020, equivalent to 3-4 per cent of its total capital spending, while Total paid $1bn for French battery maker Saft in 2016. Over the past five years, large oil companies have spent more than $3bn on solar acquisitions.

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Oxford University professor Dieter Helm has questioned whether most renewable energy really fits within oil companies’ business models. Such firms have traditionally been built to brave high levels of geological and political risk to find or acquire resources in remote areas, and then deploy vast amounts of capital over several years to build complicated infrastructure to bring them to market.

Such business models did not fit well with small-scale renewable manufacturing ventures in the early 2000s. But today’s strategy seems better thought-out and more integrated with the super-majors’ legacy businesses, moving from gas to electricity and powering battery vehicles. Some deals for example have concentrated on securing outlets for gas, a relatively clean fuel on which all the oil companies are increasingly betting.

Biofuels have been part of the core business of supplying transport fuels for years now, as they are mandatorily blended into petrol and diesel. Hydrogen, which might eventually be a fuel for ships, planes, home heating, small-scale power, and industry, is typically made from gas and seems like a natural fit. Carbon capture and storage relies on skills in chemical engineering, pipelines and understanding geology and fluids underground, all core competencies. Statoil has been developing floating wind turbines, an outstep of its skills in offshore structures in harsh northern seas.

The question for European majors is whether they will ever incorporate non-hydrocarbon technologies into their DNA, and find a way to generate synergies between them and their traditional businesses. If not, they might as well return capital to shareholders, who can then redeploy it into renewables.

This is the philosophy of the American super-majors, ExxonMobil and Chevron, which have stayed firmly wedded to fossil fuels. Their stance reflects less political pressure over the environment in the Trump era than a decision to concentrate on shale oil and gas resources, and their philosophy of staying close to their core business.

The big national oil companies –Saudi Aramco, Adnoc, Rosneft, China National Petroleum Corporation – have likewise concentrated on hydrocarbons. Their main areas for growth and diversification are gas, refining and petrochemicals, while the rise of renewable energy in the Middle East has been led by utilities and specialist units such as Masdar. But the large state-owned firms have at least to think about the impact on their businesses of electrified mobility, competition to sign up gas end-users, and the synergy or struggle between renewables and gas power.

And the Middle East countries need to keep a close eye on the strategies of Shell, Statoil, Total and BP. If their ventures into new energies are successful, it will be a valuable pointer to how to diversify today’s oil-dependent economies. Failure, though, will be an early-warning signal of the challenges of the great energy transformation.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis