My first blog of 2018 is a continuation of the blog series on mega trends affecting the oil and gas sector. I’m going to take a look at the role of renewable energies today. Over the past decade – and before – there has been a great deal of speculation about when the major oil and gas companies will begin a serious push into clean energy.
Ten years later and there’s still seems to be far more wind than light. In fact, recent events suggest that Big Oil is perhaps becoming even more cautious in its approach. So, what’s holding back a business diversification process that pretty much every oil and gas companies knows it will need to make?
November saw the 7th Annual Infrastructure Investors Forum in Energy & Renewables where one of the hot topics was how much appetite the major oil and gas companies had for the sector.
The views could best be described as mixed! While one keynote address suggested that ‘an end to the age of fossil fuels’ was just three years away, another thought that the tipping point for fossil fuels was ‘seventy years from now‘. One thing that most people agreed on was the fact that the majors were very cautious and slow to reinvent themselves. This is slightly surprising since most speakers and delegates agreed it would be new players that would prevail and the incumbents wouldn’t make it.
No clear picture
Earlier this year, industry consultancy Wood Mackenzie gained a great deal of publicity when it stated that as much as one fifth of investment by the largest oil and gas companies could be in wind and solar power in just over a decade. According to the analysts, the major energy companies would need to spend more than $350bn (£275bn) on wind and solar power by 2035 to take a market share similar to the 12% they currently have in oil and gas.
Part of the reason for the major’s interest is the rapid growth of renewables compared with oil. Wood Mackenzie suggests annual growth rates of 6% for wind and 11% for solar, compared with 0.5% for oil demand. While these figures are impressive, it has to be remembered that renewables are starting from a low base. Currently, they account for 1% of global production. The analysts believe that, by 2035, wind and solar will have captured 8% and 5% of the global power supply.
This implies that peak oil demand is more than three years away. This is confirmed by forecasts from International Energy Agency showing a 10% rise in oil demand through 2040. In fact, Reuters found that the earliest prediction that any oil company would give of peak oil demand was the end of the next decade.
This seems to have resulted in the majors believing they have breathing space. Reuters suggest that they are putting off uncertain, volatile investments in renewable companies to concentrate on sweating existing assets. Reuters say: “BP, Chevron, Exxon Mobil, Royal Dutch Shell and Total are instead milking their drilling and processing assets to finance investor pay-outs now and bolster balance sheets for the future. They believe they can enter new energy sectors later by acquiring companies or technologies if and when others prove them profitable”.
Which begs a question – are things working?
It would be too easy to say that major oil and gas companies are still in a state of denial – or the investments they have made have been of the ‘dipping the top’ variety or dressed-up PR exercises.
A decade ago, perhaps a case could be made but not today. With the notable exception of ExxonMobil, all the major companies have made significant renewables investments. Total seems to be in the vanguard with it’s investments in companies like SunPower and Saft. (I’ll come back to SunPower later).
But the answer to the question would appear to be negative – or, at least, not wholly positive. It is difficult to get an accurate picture as the oil companies tend not to publish detail on how their renewable investments are performing. However, there have been enough high profile failures to make the caution of major oil companies understandable.
One example should suffice here: When Wood Mackenzie delivered it’s forecasts, the firm spoke of Shell’s investment in offshore wind farms in the Netherlands as an example of the majors taking renewables seriously. In December 2016, Shell announced that, with partners, they won the tender to build farms in the Borssele III and IV wind areas. By October 2017, the company had put its stake in the scheme up for sale.
So, the next question is why major oil companies are struggling to realize benefits within some for their renewable investments?
Big oil and renewables: an unreconcilable culture clash?
It’s time to return to SunPower. A very insightful article from Motley Fool used the relationship between Total and SunPower as a means to demonstrate that extremely different cultures exist between traditional oil companies and the new breed of renewable players. Motley Fool said of Total: “when it bought its majority stake in SunPower, it asked the company for a 10-year plan — something that’s standard in the fossil fuel industry, where businesses chart their investments many years in advance. But SunPower had never crafted such a plan, because if they did, it would be obsolete in a matter of months”.
Business diversification can be relatively simple where the two markets and companies involved have similar dynamics. This is not the case here. With the Total and SunPower example, a full merger between the two is likely to deny SunPower the agility in needs to succeed in a rapidly evolving marketplace. At the same time, changing Total to embrace a new business model is not something that was ever going to happen over night.
However, there is one escapable fact. Fossil fuel demand will peak – whether through depletion or government legislation – and the major oil and gas companies need to prepare for this. Perhaps there is some breathing space at the moment but that should be seen as an opportunity to prepare for the inevitable changes ahead.
I believe that Motley Fool is right. Major oil and gas companies are going to have to align their business processes to the needs of fast moving markets if they are to take full advantage of their move to renewables. In this context, the majors could do much worse that re-assess the Digital Transformation initiatives currently underway to ensure that they are aimed at future business directions as much as improving current operational performance.
The renewable revolution is coming – it’s just not quite here yet – the companies who prepare their business process and technical capabilities will be able to seize the opportunity when the time is right.