Oil majors and the green economy have been seen for decades as fundamentally incompatible — but this is no longer the case. In recent years, Big Oil has begun to sense new business opportunities, and many high-profile companies are ramping up investments in renewable energy, from the development of flying wind turbines to solar parks, carbon capture and electric cars.
Admittedly, the total amount of money that oil majors are putting into renewable energy projects remains relatively small — the question is how far, and how fast, the level of investment can rise in the future.
“The need for investments in renewables to meet the Paris goals is massive,” says financial analyst Kathy Hipple, a founding partner of Noosphere Marketing and the finance professor at Bard’s MBA for Sustainability.
“But the oil majors' capital expenditure budgets allocated toward renewables is trifling compared to what they're spending on upstream.”
However modestly, oil companies are increasingly interested in alternative fuels. According to BloombergNEF, the number of clean-energy deals done by major oil companies was the highest ever in 2019, significantly outstripping the year before.
Recent developments have included BP taking a majority stake in solar developer Lightsource in December; Chevron’s announcement in mid-2019 that it will install electric chargers at its petrol stations in California; and Royal Dutch Shell’s partnership with Google-owned Makani, which tested flying wind turbines off the shore of Norway in early fall. Finland’s Neste Oil operates some of the biggest second-generation biodiesel refineries in the world.
“Shareholder pressure, evolving new technologies and rapidly changing consumer preferences have forced oil and gas companies to re-evaluate,” BloombergNEF analyst David Doherty says in a September report.
In total, the world’s 24 biggest oil companies invested USD 22 billion in renewable energy between 2010 and 2018, according to environmental disclosure non-profit CDP Global. One of the world’s biggest oil producers, Statoil, even re-named itself as ‘Equinor’, reflecting its desire to be seen as a full-spectrum energy company, rather than a simple oil producer.
Beyond the headlines, many experts point out that investments in renewable energy are actually tiny when compared to the amounts that oil majors are pumping into more traditional operations, particularly when measured against capital expenditure (Capex).
“Overall, most of the oil majors (ExxonMobil, Chevron, Shell, Total, and BP) are investing very small percentages of their Capex on green energy initiatives. My view is that Capex is a better indicator of a company's future plans than its ads or PR,” says Hipple.
To translate that into figures, CDP calculates that spending on low-carbon assets in 2018 by the top 24 oil companies amounted to just 1.3 percent of their total Capex.
And Norwegian consultancy Rystad Energy has pointed out that Europe’s five largest oil companies have to-date committed a total of USD 5.5 billion on renewable energy — compared to their combined budgets of USD 90 billion in 2019 alone.
Moreover, the trend toward investment in renewables is not spread evenly across the sector. CDP calculates that European majors Equinor, Total, Shell and Eni lead the way in the transition, while the worst performers are Russia’s Rosneft and the China National Offshore Oil Corporation. U.S. majors come somewhere in the middle.
In certain areas, European firms are way ahead. For example, European oil companies closed seven times more deals with renewable-electricity and storage companies than their U.S. counterparts in the first 7 months of 2019, according to BloombergNEF.
“The conventional wisdom is that Shell and Total and BP are moving rapidly, while the U.S. companies are not,” says Hipple. “This may be true, but largely because Exxon and Chevron are such laggards, not because Shell, Total, and BP have allocated so much capital.”
There is no doubt that oil majors are aware of the unfolding energy transition, and the potentially significant impact of Power-to-X technologies, including synthetic, carbon neutral fuels generated by renewable energy (also called e-fuels). According to BP's 2018 Energy Outlook, renewable energy use will increase five-fold by 2040 when it will provide about 14 percent of the primary energy consumed across the globe.
“Power-to-X has a specific role because it offers a way to use the existing infrastructure as it is,” says Tommi Rintamäki, Senior Manager, Power-to-X, Wärtsilä Energy Business. “The technology is ready, it just needs to be scaled up and used. Companies in Europe are making their first investments in Power-to-X today, and Wärtsilä is one of the first ones to drive this change and talk about the opportunities.”
But the speed with which oil majors increase their investment in alternative fuels depends on a number of factors — from investor pressure, laws to de-carbonise the world economy and problems of scale. Perhaps the most important factor today is economics — do traditional oil companies see renewables as a commercial prospect? Many experts think the tipping point for a shift toward renewables will only come amid a supply crisis, or when resource commercialisation, M&A and exploration fail to deliver expected results.
Hipple is sceptical about the chances of radical change but admits it is possible. “If revenues, profits and cash flows from their legacy businesses continue to come under pressure, the oil companies may allocate more toward green energy,” she says.