Big Oil’s shift to renewables will result in a veritable windfall for their shareholders, Norway’s energy consultancy Rystad has said, as quoted by Bloomberg.
The reason is easier access to debt finance: Rystad’s founder Jarand Rystad said at the company’s annual meeting in Singapore that wind and solar projects have access to a debt market that can provide up to 95 percent of the costs associated with their development.
That’s different from the core business financing model of companies including Chevron, Exxon, and other Big Oil majors, which have had to rely on their own means to finance new projects.
“Shareholders will be drowned in capital paid back by energy majors in the next 20 years,” Bloomberg quoted Rystad as saying. “Basically the whole energy sector needs to decapitalize and to increase leverage.”
According to Rystad, returns from solar and wind projects were guaranteed thanks to their nature: power-purchase agreements are how money is made from such projects and while returns from them are lower than returns from new oil and gas projects, they begin flowing much sooner. Renewable projects are also a lot less risky than upstream ones, even if financing them would require a lot higher leverage.
“Clearly Chevron and Exxon and everybody have ambitions to be an energy major 30 or 40 or 50 years from now,” Rystad told Bloomberg. “Current energy majors are only 15% debt, but the future energy majors will be 85% debt. That’s why it will change the capital structure of the industry.”
There is one added benefit for Big Oil shareholders: large institutional investors such as pension funds and banks would be much happier with renewable investments. Just recently, Norway’s sovereign wealth fund said it would divest $6 billion worth of interests in oil companies. Although the fund’s reason for the decision was to reduce exposure to the volatility of the oil industry, other large investors are also pulling out—or planning to pull out—from oil and move to more sustainable industries.
By Irina Slav for Oilprice.com
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Even Bill Gates, one of the world’s leading philanthropist, a hugely successful business man and a billionaire to boot was advising would-be-investors who want to do something about climate change to focus their attention on coming up with solutions rather than merely boycotting investment in anything to do with fossil fuel production or use or divesting their holdings in fossil fuel companies.
Therefore, the global fossil fuel divestment movement should heed his words. It should also heed four pivotal energy principles. The first is that there will be no post-oil era throughout the 21st century and probably far beyond. Oil will continue to reign supreme all through.
The second principle is that there will be no peak oil demand either. While an increasing number of electric vehicles (EVs) on the roads coupled with government environmental legislation could decelerate the demand for oil, EVs could never replace oil in global transport throughout the 21st century and far beyond.
A third principle is that with global oil consumption exceeding 100 million barrels a day (mbd), the notion of imminent energy transition looks like an illusion. In fact, the percentage of fossil fuels in the world’s energy mix—coal, oil and natural gas—is still lingering well above 80%, a figure that has changed little in 30 years. That remains so despite being challenged by serious environmental policies and despite a global expenditure of $ 3.0 trillion on renewable energy during the last decade. This is a hefty price to pay just to gain only a percentage point of market share from coal.
The fourth principle is business opportunities. Global investment in renewable energy pales in size when compared with that in oil and gas exploration and production, refining and petrochemicals. The slower pace toward renewable energy is due to two key reasons. First, oil and gas will continue to be needed well into the foreseeable future. And second and probably much more important, is that financial returns from renewables are nothing compared to those from fossil fuels particularly oil and natural gas.
Norway’s sovereignty fund the world’s largest with $100 trillion assets was two years ago considering divesting of all its holdings of oil and gas shares under an erroneous environmental advice it was receiving. But it has recently seen the light (probably by listening to sound economic advice) and decided to divest of on only $6 bn of oil and gas holdings in small oil and gas companies leaving more than $30 bn of oil and gas holdings intact.
Rather than wasting their time on exerting pressure on investors to divest from fossil fuels, Rystad Energy and the divestment movement should adopt a more positive approach and encourage investments in innovative clean energy.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London