Oil and gas companies have frequently been pilloried for trying to burnish their green credentials with half-hearted attempts at clean energy investments. The recrimination appears well deserved, considering the sector currently dedicates less than one percent of its capital spending to renewable energy despite its operations being responsible for 15% of greenhouse emissions.
Oil traders, however, seem to be doing a better job at putting their money where their mouths are.
The world’s largest oil traders are pumping hundreds of millions of dollars into climate-friendly projects as they also face growing pressure from investors, financiers, governments and activists to shift to a lower carbon future.
And they are embracing clean energy like a duck takes to water, with some already deriving the majority of their revenues from renewables.
Existential Crisis
Unlike fossil fuel companies, which make money from drilling, storage, transportation and distribution of oil and gas products, oil traders make a living by exploiting niche opportunities in the energy sector that other companies either fail to recognize or consider too risky.
But with their profit margins under serious pressure due to increased regulatory scrutiny, the need for more transparency and growing competition, finding a sustainable business model has become an existential crisis for these companies--hence, the rapid shift to renewables.
Giant trading firms such as Vitol, Trafigura, Gunvor and Glencore have sunk money into solar, wind farms, hydrogen, biofuels, biomethane, EV technology, cow manure plants and blue hydrogen as potential replacements for oil and gas, traditionally their biggest profit drivers.
Mercuria Energy Group, however, stands out for its sheer commitment to renewable energy with gas, power and emissions investments accounting for two thirds of its traded volume in 2018.
Unfortunately, profitable niches in the clean energy sector are proving hard to come by.
Jean-Francois Lambert of consultancy Lambert Commodities has told Reuters that renewables are still a loss leader for the sector with nobody having figured how to make money from them.
Still, energy traders have little choice but to go green, especially with big banks beginning a serious freeze out on fossil fuels.
In September, French bank Natixis introduced internal financial penalties on deals that are not environmentally friendly while Goldman Sachs followed suit in December after announcing that it would no longer finance Arctic drilling or thermal coal mines anywhere. Related: The New ‘Must-Have’ For Energy Hedge Funds
In a recent article, we highlighted how European Central Bank (ECB) and the Bank of Italy are spearheading the ESG drive by rewarding companies that are taking action on climate change and playing hardball with the laggards.
Energy Transition Companies?
Maybe giant E&P companies need to borrow a leaf from oil traders.
Although the oil majors are roundly lambasted for their lack of clear commitment to clean energy, some are more guilty than others. Notably, European energy leaders Shell and Total appear more committed while their U.S. brethren ExxonMobil and Chevron still appear to be hand-wringing.
A few years ago, Royal Dutch Shell CEO Ben van Beurden told investors that the company was no longer an oil and gas company; rather, an energy transition company. Shell has been vocal about the shift to renewables, frequently issuing the clarion call for the industry to switch to cleaner energy sources. In 2016, Shell set an ambitious goal to invest $4bn to $6bn in clean energy projects by 2020 though the Guardian recently reported that it was unlikely to meet that target.
Actually, BP was the clear leader in the space before the Deep Water Horizon oil spill forced it to close most of its green energy investments valued at about $8bn to $10bn.
Source: The Guardian
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Still, that’s more than you can say for Exxon, which has only invested in carbon capture technology but lacks a budget or time-scale planned for future projects, or Chevron, which has launched a Future Energy Fund but set aside only $100m to invest in ‘breakthrough technologies that will lower carbon emissions.’ Related: Europe's Largest Economy Is Betting Big On Hydrogen
But becoming successful energy transition companies such as Shell aspires to is not going to be a walk in the park for these lumbering giants.
Oil and gas firms are still grappling with the best way to presently use dwindling cash flows; in effect, they are still weighing whether it’s worthwhile to at least partially reinvent themselves as renewables businesses.
Most renewable ventures, like solar and wind projects tend to churn out cash flows akin to annuities for several decades after initial up-front capital expenditure with generally low price risk as opposed to their current models with faster payback but high oil price risk. With the need to generate quick shareholder returns, some have actually been scaling back their clean energy investments.
But soon enough, that option might be taken out of their hands.
By Alex Kimani for Oilprice.com
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