The world is moving towards a cleaner energy future amid rising investments in renewable energy, which over the long term, will replace the demand for coal and have the potential to impact the global demand for oil. Such phenomenon influences the mid- to long-term strategy and vision of Oil & Gas Majors, due to – including but not limited to – the following elements:
- Pressure from shareholders, investors, governments and other stakeholders;
- New emissions regulations and energy policies such as Paris climate accord;
- Tackling energy security concerns in the context of sustainable development;
- Talent attraction and retainment, giving the willingness of the younger generation to work for more environmentally friendly companies with longer-term growth potentials;
- Evolution of urban mobility and rise of fuel-efficient electric vehicles (EVs).
To address these external elements and be aligned with the energy market trends, Oil & Gas Majors have started to increase their exposure to cleaner sources of energy. They have also launched diversification strategies to go beyond their traditional oil and gas businesses.
TOTAL is probably the most active Major in diversification towards clean energies. Low-carbon businesses will account for 20% of TOTAL’s activities by 2035. An important step for TOTAL to reach this goal is to develop 10 GW of solar energy in 10 years.
In 2010, the company entered the biofuels production market after funding “Amyris”. TOTAL also benefits from the expertise in solar power through its majority share in “SunPower”, a US solar company. In 2016, TOTAL acquired “Lampiris” and “Saft”, providers of energy storage solutions, and a year later, they have created TOTAL Solar to further develop their solar business. They also invested partially in solar and wind energy producer “EREN RE” and energy efficiency firm “GreenFlex”. Furthermore, in April 2018, TOTAL purchased “Direct Energie”, a French utility, to accelerate its presence in gas and electricity generation and distribution. In September 2018, the company also made the move into EV charging market, by acquiring France’s “G2mobility”.
Today, TOTAL runs a $6 billion renewables business. They have invested €150 million in 20+ renewable energy start-ups since 2008 and allocated $900 million to R&D projects related to low-carbon technologies in 2017.
The Norwegian oil company, Statoil, has recently dropped “oil” from its name and rebranded itself as “Equinor” to illustrate its beyond oil and gas vision. The company is currently managing a $2.3 billion offshore wind business and is developing carbon capture and storage (CCS) projects. Equinor has also plans to enlarge its renewable footprint through expansion into onshore wind, energy storage, smart grids and energy efficiency.
Equinor is even a stakeholder in solar assets in Argentina and Brazil. Additionally, in February 2016, the Major created a venture capital fund to invest up to $200 million in renewable energy companies over the next 4 to 7 years. The company states that by 2020, 25% of its R&D budget is expected to go into renewables, compared to 17% ($52 million) today. Equinor also aims to invest 15-20% of its capital investment in renewables by 2030, compared to the current 5-10% ($500-750 million).
Royal Dutch Shell has created a “New Energies” division in early 2016 to bring together its existing hydrogen, biofuels and electrical activities. But the company is also using this new organization as a base for a new drive into solar and wind power business. In fact, Shell intends to invest $1-2 billion in the New Energies division each year up to 2020. In 2018, for $217 million, the Major became a shareholder of Silicon Ranch Corporation, a US solar company, 12 years after exiting the sector as one of the latest moves to grow beyond its core oil and gas business. Yet, it is worth mentioning that the “New Energies” spending remains only a small portion of Shell’s total investment program.
BP was the first Oil & Gas Major to diversify into renewables in early 2000s, when it was rebranded as “Beyond Petroleum”. Today, the company’s focus is on biofuels, biopower and wind energy. In late 2017, BP also returned to the solar business, 6 years after it quit the sector. The company acquired stake in the biggest solar developer in the UK, “Lightsource”, and committed to even bigger solar investments. Moreover, in June 2018, BP purchased “Chargemaster”, UK’s largest EV charging company. It is worth noting that BP’s investment plan aims at spending $500 million a year on low-carbon energy.
It is worth mentioning that BP does not have the same cash flexibility as other Majors, due to their 2010 Macundo accident – oil spill in the Gulf of Mexico – which created significant financial commitments. Therefore, their investment and acquisitions in renewables is rather limited compared to others.
Unlike their European rivals, US-based Majors, Chevron and ExxonMobil, have not yet made large-scale investments in solar, wind, electric cars or energy storage. They have pursued a more cautious approach to new energies, and they are still capitalizing on domestic shale gas production to reduce their carbon footprint.
Chevron has a limited expertise in solar, wind, geothermal and biofuels. The company is taking practical and cost-effective actions to address potential climate change issues. That includes investing about $1.1 billion in CCS projects in Australia and Canada, as well as launching a $100 million “Future Energy Fund” to invest in breakthrough technologies. Additionally, Chevron partners with universities to understand and evaluate the economic viability of different green energy sources.
ExxonMobil though, defends its stance on renewables by partnering with leading universities and developers. The company invested more than $9 billion into lower-carbon technologies since 2000, including CCS. Exxon’s research over the past years was dedicated to algae biofuels, which led to technological breakthroughs achieved by applying advanced cell engineering.
On another level, Chevron and ExxonMobil have recently become the first US Majors participating in the Oil and Gas Climate Initiative (OGCI) group, aiming to reduce “manmade greenhouse gas emissions”. Launched in 2014, the OGCI is now made up of 13 members: BP, Chevron, CNPC, ENI, Equinor, ExxonMobil, Occidental Petroleum, Pemex, Petrobras, Repsol, Saudi Aramco, Shell and TOTAL.
European vs. American Majors
European Majors are ahead of their American counterparts in diversification to renewables. It could be explained by the difference in the mindset and priorities of their societies, governments, shareholders and top management. European society on average is more concerned about sustainable development, which will consequently put more pressure on their governments, investors and energy companies.
On the other hand, the American social acceptance towards oil and gas business is much higher than the European, decreasing the pressure to diversify. Additionally, US Majors’ top managers believe that by improving the currently employed technology, increasing share of gas as a transition bridge and investing in carbon capture and storage, they can improve their carbon footprint and be a responsible energy producer, while remaining an oil and gas company. Lower return of investment in renewable markets could be another element preventing American oil companies to go green.
There is no doubt that corporate sustainability and growing attractiveness of renewables are pushing Oil & Gas Majors to invest in clean energy solutions. They now dedicate budgets for alternative energy sources, energy efficiency and clean mobility projects. Having said that, it should also be noted that only 4-5% of some Majors’ total annual capital expenditures is allocated to clean energies. Oil and gas activities will remain their core business for years to come, even as they diversify to renewables.
Further, although we are at an early stage of a major energy transition, its pace remains uncertain. In fact, the International Energy Agency believes that 70% of the spending in new energy supply to 2040 will be driven by governments. It simply brings two conclusions: first, transition pace lies with state energy policies and not the Oil & Gas Majors. Second, state energy policies and priorities could switch over time, changing the transition pace.
Finally, even as renewables’ share in the energy mix grows continuously, oil and gas will not be materially displaced. Therefore, investment made in new energies by Majors is to complement their existing value chains and not to substitute their oil and gas businesses. In fact, it is to build an integrated portfolio, one which consists of both oil and gas, and renewable sources.
To conclude, we should keep in mind that diversification from oil and gas activities will require patience from investors and shareholders, as it is a long-term journey. The good news is that some of the world’s largest oil and gas producers are already investing billions in clean energies, from offshore wind farms to solar energy and energy storage solutions.