Squeezed between peak oil demand forecasts and investor demand for increasingly environmentally conscious investments, the world’s largest oil companies have started to venture into clean energy and new technologies in recent years.
Some oil supermajors have been investing billions of U.S. dollars in their ‘new energy’ divisions, some have started to bind carbon emissions goals with executive pays, many have been pitching natural gas as a cleaner-burning fuel and the ‘natural bridge fuel’ between oil and renewables.
Yet, Big Oil is not rushing into renewable energy and electric power production with all the capital might they have—their investments in clean energy may be huge by some standards, but they are a drop in the ocean for a company investing dozens of billions of U.S. dollars every year in oil and gas exploration and production, refining, and chemicals.
The slower pace of oil majors toward alternative energies is due to two key reasons. First, they all say that oil and gas will be needed in the world in the foreseeable future. And second, and probably much more important, is that although renewables could offer steady returns over time, they are nothing compared to the huge bonanzas oil firms are accustomed to rake in when oil prices are high at the peaks of an oil price cycle, Bloomberg Opinion columnist Liam Denning argues.
While the oil price cycles are of the boom-or-bust type and majors have had to do painful cost cuts and restructuring during the latest downturn, the world’s largest oil companies are just not sure how much profits and returns a renewables-dominated operations portfolio would generate.
Shell’s Downstream Director John Abbott told Denning and Bloomberg NEF’s summit on the future of mobility last week that “The reality is, in some of these value chains that we’ve been talking about, we don’t know exactly where the rent will sit.”
To be sure, Big Oil does invest in clean energy solutions and has accelerated such investments in recent years, but the general mood, at least for now, is as Shell put it last year—we’ll move away from oil “when this makes commercial sense.”
Shell is not ‘going soft’ on oil and gas, despite recent investments in cleaner energy and energy solutions—Shell’s core business is and will continue to be oil and gas for the foreseeable future, the supermajor’s chief executive Ben van Beurden said last fall. Van Beurden pointed to recent headlines about Shell’s investments in hydrogen, moves into electric vehicles (EVs) charging infrastructure, or an acquisition into the UK power sector, adding this note of caution: “But even headlines that are true can be misleading. They might even make people think we have gone soft on the future of oil and gas. If they did think that, they would be wrong.”
Shell’s spending on new energy solutions may be huge by some standards, at US$1 billion to US$2 billion. But this is compared to total annual capital spending of around US$25 billion, the chief executive noted.
Norway’s Statoil went a step further in ‘embracing the energy transition’. Last year, Statoil rebranded as Equinor, dropping ‘oil’ from its name and pitching itself as an ‘energy company’ rather than an ‘oil and gas company’. Equinor plans to boost its renewables portfolio. Yet, it expects to invest 15-20 percent of total capex in new energy solutions by 2030, while the rest will still be in oil and gas.
France’s Total says its ambition is to have close to “20% low-carbon businesses in 20 years' time,”—these businesses being midstream and downstream gas, renewable energies, energy storage and energy efficiency as well as clean fuels and carbon capture, utilization and storage technology.
Some majors have also responded to investor pressure by proposing to tie executive pays with carbon emission reduction targets.
At the end of last year, Shell said that it plans to set short-term emission reduction targets and link these targets with executive pay, yielding to growing investor pressure about establishing short-term emission goals.
Earlier this month, Chevron said that its board “established greenhouse gas emissions performance measures that will be a factor in determining compensation for executives and nearly all other employees beginning in 2019.”
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“In response to discussions with investors and other stakeholders, Chevron is providing more insight on climate change governance,” the U.S. supermajor said.
Big Oil is increasingly hearing investors and building alternative energy portfolios, but oil and gas will very much be their core focus of operations over the coming decades, or at least until returns on clean energy start making commercial sense.
By Tsvetana Paraskova for Oiplrice.com
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If energy is a business, the content of the business cannot be a religion. At some point the realities of demand and social surety force a shift just by mass. Companies that shift early will be in a much stronger position.
It's very clear the direction things will go. The practice of management is to ensure the continuation of the company regardless of the content of the product.
The second principle is that there will be no peak oil demand either. Global oil demand will continue to grow well into the 22nd century. While the penetration of increasing numbers of electric vehicles (EVs) into global oil market coupled with government environmental legislations could decelerate the demand for oil, EVs could never replace oil in global transport throughout the 21st century and far beyond
The third principle is business opportunities. While Big Oil is investing huge amounts in renewables, such investment pales in size when compared with that in oil and gas exploration and production, refining and petrochemicals. The reason is that although renewables could offer steady returns over time, they are nothing compared to the huge revenues that oil and gas could generate. While renewables accounted in 2018 for 3.7% of global primary energy demand, oil and natural gas accounted for 58%. For oil supermajors, their core business is and will continue to be oil and gas for the foreseeable future.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
The second admirable thing they're doing is rebranding to embrace clean energy. They seem to take "Beyond Oil" seriously and are setting targets for how much of their business needs to "go clean" by specified milestone target years.
Unfortunately, most Big Oil companies are still comfortable with the idea that consumer demand dictates AND justifies what they do.
If a consumer product is "all good," a business model based entirely on furthering the product is justified. If a product has obvious downsides, like tobacco, business must think twice about how it promotes and commits to its product. A product that has 50% upside and 50% downside and hidden cost is not a worthwhile net-benefit product. Something has to give.
Petroleum, as a product, lies somewhere between "all good"/necessary, and undesirable. It's in between on the social and health benefit scale. Wise use of a valuable, finite resource like petroleum is what we should double-down on. The worth of petroleum is somewhere between the extreme positions in the debate.
I feel that Equinor has one of the more balanced, reasonable approaches. Admit that Petroleum has got some downsides that hard to correct; start taking action to transition over to clean energy. Be a good corporate and world citizen while we burn up the rest of the resource.