How Big Oil is Transitioning to Clean Energy
Shifting consumer preferences, cheaper alternative energy resources, and shareholder pressure in the wake of slacking investments across non-renewable sectors are increasingly driving change. Put simply, the shifting economic landscape of the next 50 years does not support business-as-usual inertia. Low-carbon alternatives are forecast to capture progressively larger shares of the global energy market in the near future, with many commentators predicting fossil fuel demands to plateau within the next 15 years.
As the investment climate changes, Big Oil companies are faced with two options: stay defiant and reject increasingly sacrosanct scientific research; or ride the wave of change by investing in, financing, and developing clean energy initiatives. Slowly, it seems Big Oil is committing to the latter option. Following the oil-price crash of 2014, leading oil companies have been diversifying their investment portfolios, looking at a broad horizon of possible emerging energy markets. This year, that translates to over 70 deals in a multitude of sectors, with deals spread almost evenly between biofuels, carbon capture, transport, wind, solar, and hydrogen.
In general, European majors are way ahead of their US counterparts, and a small pack of companies are way ahead of the general curve. Three quarters of all deals in emerging clean energy markets have been carried out by seven companies, five of which are European, and only one an American major: Chevron. Larger divestments from pollutant industries might catalyse further investor pressure and resultant industry transformation. In March, Norway’s $1 trillion government-owned investment fund shook the oil and gas industries when it announced it would divest of 124 oil and gas developers. The need to reduce exposure to permanent oil price decline was listed as justification.
The direction of travel is clear: if oil and gas majors are to remain competitive, both the pace and the scope of change need to advance. Given the turbulent, competitive nature of the renewable energy industry, Wood McKenzie advises against large-scale monetary investments in favour of mergers, acquisitions and small-scale spread bets that will pull Big Oil closer to the emerging industries.Here, Big Oil can leverage its engineering capabilities, project management expertise and financial muscle to rapidly outperform smaller, younger incumbents in renewable energies, while coaching more profitable newcomers.
Across the Big Oil playing field, majors are beginning to do just that. Earlier this year, Royal Dutch Shell (Shell) acquired the electric vehicle (EV) charging firm Greenlots as a first-wave colonisation of the emerging industry of EV Infrastructure. The acquisition has proved the attractiveness of energy markets further down the supply chain for leading oil and gas companies. Shell intends for its subsidiary to become the foundation of its sustainable mobility business in North America. In its wake, other majors will gradually leave the harbours of primary energy and capture other elements of the future’s global energy market.
At the same time, Big Oil is increasingly diverting its venture wings to invest in early-stage clean energy and low-carbon start-ups. BP is at the forefront of this initiative, and will have invested $500 million in venture-stage, low-carbon projects by the end of this decade. An example of this is the New Jersey-based start-up Solidia Technologies, which focuses on reducing the CO2 emissions of cement production—responsible for roughly 7% of emissions worldwide. Earlier this year, the BP’s venture wing invested $20 million in the nascent product. Other 2019 examples include the $30 million investment in Calysta, which recycles natural gas for protein in animal feed. Overall percentage of capital invested remains low, but as Big Oil backers and disruptive low-carbon start-ups work together, mutualism—and resultant explosive growth—is increasingly assured.
Despite a general, slow transition into clean alternatives, large-scale investment amongst oil and gas majors is still untenable and ROI remains minimal. In order to reduce emissions while the emerging markets solidify, several majors are developing carbon capture technologies, tech that will still be in demand long after fossil fuel demands have plateaued. Most emphatic of these is Chevron’s Gorgon carbon capture and storage project, which went live earlier this year. The project, based in Australia, aims to capture more than three quarters of emissions from a submerged gas field, totalling some 100 million tonnes over its five-year lifetime.
In sum, Big Oil is moving, albeit sluggishly, towards a more diverse energy portfolio more suitable for the needs of the mid-century consumer. As investor pressure mounts, consumer preferences further shift, and new tech is discovered, larger proportions of its overall capital will be reinvested in clean energy alternatives. While the Big Oil companies of the future will likely be different in structure, product, and service, from their present-day iterations, the steps today’s majors are taking now will ensure they maintain their market lead over the approaching horizon.
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