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Prudence in a changing climate

Big oil is starting to invest in renewable energy before it is too late

In the 15 months since 195 nations created the Paris Agreement on climate change, a marked change in the way the oil and gas sector approaches the challenge of cutting carbon emissions has taken root.

This shift has been encouraged not just by a steady improvement in the economics of low-carbon energy, but also by a switch in policy towards favouring renewable-energy sources. Momentum has been building in the past year in particular.

The threat to established energy producers, posed by non-fossil fuel sources, is not an existential one. Low carbon energy has already changed the outlook for oil and gas demand, and will continue to do so.

"Climate change is a profound challenge to the fossil fuel industry, and companies that focus purely on traditional aspects with large investments and long recovery times, face quite a risk they could lose out," an International Energy Agency (IEA) official, speaking on condition of anonymity, told Petroleum Economist recently.

"That's not to say there's no way they can survive," the official added. "At (the) very minimum you'd expect companies to stress test business model and strategies. Under the IEA's 450 scenario the transition to a low carbon system is well signposted, people are aware it's happening and companies need to take that on board. There's no reason why they have to incur massive losses and stranded assets."

Most forecasts see fossil fuels continuing to play a large role in meeting energy demand up to the middle of this century, particularly in developing and emerging economies such as China and India.

"I don't think oil demand is going to go away anytime soon," Paul McConnell, research director at Wood Mackenzie, told Petroleum Economist. "There's always going to be a very significant share of the global energy sphere that will be satisfied by oil; we're talking 25-30% depending on exactly which forecast you use for the foreseeable future."

Despite the comforting analysis, many oil and gas companies, and indeed oil and gas producing nations, are beginning to diversify their activities to protect their bottom line and stake out a share of the growing market in alternative energy.

McConnell identified three broad strategies that fossil fuel-producing companies are adopting.

"In the first, companies are continuing to exploit legacy resources, but they are trying to do so in a way that reduces the carbon footprint," he said. "They do this by investing in things such as carbon capture, or improving general efficiency within the value chain. Companies like ExxonMobil and Chevron fit into this bracket."

Many oil companies have highlighted the sheer cost of the investment that will be required to get to net-zero emissions by the second half of the century, and for some, this means that public support will have to be given to ambitious technologies like carbon capture and storage (CCS).

Look at Saudi Arabia; the whole country is now looking at shifting away from fossil energy

"We have to continue to call for governments to introduce effective carbon-pricing mechanisms, and to push for the development and the deployment of CCS. Staying within the 2⁰ scenario is going to be extremely challenging and costly without CCS," Shell chief executive Ben van Beuren said recently. He was referring to the scientific consensus that says a 2⁰ rise in temperature is the maximum that can be allowed before catastrophic climate change occurs.

Shell itself launched a New Energies division in 2016, which van Beuren said will likely focus on investing in technology rather than in production.

"Over time I expect our portfolio to evolve," he said. "We will start investing more in New Energies, and investing less in carbon-intensive projects. But we must be realistic about the long-term timeframe for this evolution."

The second strategy involves companies leveraging their technical expertise, such as upstream marine engineering capabilities, to develop renewable resources, McConnell said.

"Companies like Statoil know how to operate in a marine environment, for example, but instead of building platforms, they're building floating wind. That's an interesting technology because you can build very big turbines—6-8 megawatts—and you can position them in deep water, which allows you to access a much different wind resource."

McConnell pointed out that deep-water wind installations are well-placed to serve large populations which are near the sea but not near shallow waters, such as California or Japan.

Changing tact

The third strategy is growing a renewable-energy business, but doing it in a different way, he said. "Total is the best example here. They've invested in [solar-producer] Sunpower, bought [battery-manufacturer] Saft, and they have a stated ambition to put 20% of investment into low carbon by 2020-25.

"That's a quite aggressive move away from what they're good at, and there's no certainty that an oil company moving into this new world is a good thing," he added.

Total is unusual in that it has adopted the IEA's most ambitious forecast, the 2⁰ scenario, as its guide for future planning.

"Our ambition is to be the responsible energy major, which means for us producing, processing and providing energy and making it clean, affordable and reliable for our clients, while at the same time acting responsibly towards our stakeholders and the environment and decreasing the carbon intensity of our business," Anastasia Zhivulina, head of international media relations, told Petroleum Economist.

"Practically, this means for us embedding the 2⁰ roadmap into our strategy. [That scenario] was agreed by 195 countries during the COP 21 in 2015. We listen to our stakeholders and so we suit our actions to our words."

Total quit the coal industry in 2016, the company is a vocal supporter of carbon-pricing mechanisms, and has built its natural gas business up to the point where it represents half of its total business.

"We see the growth of renewables not as a threat but as a new market opportunity, and we want to position ourselves in markets with growth," Zhivulina added. "That's why we made moves into solar, power storage and developing an integrated gas portfolio."

$1bn—amount Total wants to generate from renewable-energy business by 2020

She stressed, however, that Total will still be an oil and gas major in 20 years' time. "The renewable business is not profitable nowadays; we currently use the results from our oil and gas to finance our moves in renewables," she said." But we set ourselves an ambition of building a profitable business in fast-growing renewables, with an objective for this business to generate $1bn by 2020."

Wood Mackenzie's McConnell noted that while oil and gas companies are moving into the low carbon energy sector, there remains a lack of consensus on the direction in which innovation and deployment of future energy supply will go.

"These three strands represent an acknowledgement that the world could be changing, but not agreement on exactly what the world will look like in 20 years' time," he said.

"You'll have a very strong legacy business—oil—for a long time, but costs will always be contained and prices may never recover to where they were, if demand doesn't grow that quickly. The business continues to be very valuable but it's not the rapid growth business it was."

Oil and gas companies will continue to invest in new reserves as existing resources naturally decline, but as new technologies achieve scale, the demand growth for legacy fuels may come under sustained pressure, he added.

"The worst-case scenario might be that demand is weak and investment starts to fizzle out and then prices rocket. But what if there's a competing technology at that point to take the place of some demand? That could be uncomfortable."

Transport slowdown

And this steady advance of new technology may begin to eat into the forecast demand for transport fuels, the bedrock of the oil industry's business, McConnell said.

"Part of the reason electric vehicles will succeed is that we have electricity everywhere: there's no problem getting hold of it. Once you have technology available, it's a matter of the charging point, and that's a small part of the pie."

Elena Giannakopoulou, an analyst at Bloomberg New Energy Finance, also highlighted the steps that oil-producing nations have taken in recent months to exploit the potential of low carbon energy.

"Look at Saudi Arabia; the whole country is now looking at shifting" away from fossil energy, she told Petroleum Economist. The country's energy minister, Khalid al-Falih, announced a $50bn plan to achieve 70% of its power generation from gas and the remainder from renewables and nuclear by 2030.

Giannakopoulou also pointed to the Oil and Gas Climate Initiative, which gathers private and state-owned oil and gas majors including Repsol, Reliance, Pemex and Saudi Aramco, which in turn announced a $1bn investment plan over the next decade in low-emission technologies.

"These countries are not diversified economies: they're very exposed, more so than anywhere else," Wood Mackenzie's McConnell said. "If you take a view that demand growth is weak, then it makes sense to capitalise on revenue now and invest it. The value of resources will only decline over time, so it makes sense."

Low and zero carbon technologies appear to be on the cusp of a period of rapid growth. But while they are expanding quickly, they are starting from a very low base. Nonetheless, oil and gas companies are becoming increasingly aware of competition from low carbon energy sources and they are starting to act.

"At the moment, we have a fairly pragmatic view of these technologies. We are obviously aware that they are making a lot of noise, but at the moment these volumes are very small and it's going to take a long time for them to become material," McConnell said.

This article is part of a report series on Renewables. Next article: Reaching net-zero carbon

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