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As wind and solar power are expected to upend the global energy market over the next few decades, clean energy is not only a threat to legacy oil and gas operations--it is an opportunity for oil majors to diversify and future-proof their portfolios after 2030, energy consultancy Wood Mackenzie said in an analysis on Monday.
Oil and gas demand growth is expected to slow by the middle of next decade, while renewables—now a niche market—are seen growing much bigger, according to WoodMac.
Although some oil majors have tentatively taken baby steps beyond their core oil and gas businesses, most have yet to make strategic decisions. However, the “case for the Majors to build a renewables position is increasingly compelling,” Wood Mackenzie said, adding that “the value proposition is also competitive versus some upstream investments, with long-life cash flow a key attraction.”
Renewables will be the fastest-growing primary energy source globally over the next 20 years. Currently, non-hydro renewables account for 1 percent of the world’s total energy needs, as compared to 55 percent of the needs met by oil and gas, WoodMac’s analysis shows.
“A potential tipping point for the shift into wind and solar could be an anticipated decline in the Majors’ hydrocarbon production. With new resources needed to sustain volumes beyond 2025, wind and solar could step in to the breach if discovered resource commercialisation, M&A and exploration fail to deliver, or economics weigh against continued development,” the consultancy said.
Even though investing in renewables would not alter significantly the portfolios of the oil majors for decades, such investment is an opportunity for them, according to WoodMac.
In order to have the same market share in renewables as they have in oil and gas—12 percent—oil majors would need to invest US$350 billion in wind and solar by 2035, WoodMac said, but judged this “an unlikely scenario”. Still, renewables could represent more than one-fifth of total capital allocation for the most active majors after 2030, the analysts reckon.
Related: Expert Analysis: Bullish Sentiment Is Fading Fast
“They [the oil companies] are recognising it is a megatrend; it’s not a fad, it’s not going away. There is definitely a risk to their core business,” UK daily The Guardian quoted Wood Mackenzie’s Valentina Kretzschmar, director of research, as saying.
“But wind and solar will be increasingly important strategic growth themes that cannot afford to be ignored as the Majors plan to 2035 and beyond,” WoodMac noted in its analysis.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.