INTERVIEW - Big Oil accelerating decarbonisation.. a road to Damascus

Björn Broda.

March 6 (Renewables Now) - Strategic realignment of the core business, growing investments in renewable energies, expansion into the power sector – more and more major oil companies are responding to pressure by investors, NGOs and politicians and announcing the decarbonisation of their activities. Nevertheless, investments in oil and gas exploration still account for the lion’s share of their long-term investment budgets. How does that fit? Will everything remain unchanged or are the largest emitters of CO2 now becoming eco-friendly companies? Here is what Björn Broda, Head of Corporate Strategy, Communications & Public Affairs within renewables developer juwi Group has to say about the competitive environment in the wind and solar sector and the effects of the decarbonisation announcements on project developers, energy suppliers and financial investors.

Why are oil companies, of all the unlikely organisations, investing in renewable energies?

Primarily, this is certainly the result of the public pressure to which Shell and the others are exposed. Rightly, the oil companies are expected to make an appropriate contribution to achieving the agreed Paris climate goals. After all, oil companies are among the largest emitters of greenhouse gases, a fact that is confirmed by a study recently published by the US Climate Accountability Institute. According to the scientists’ analysis, the five oil groups ExxonMobil, Chevron, BP, Shell and Total, have accounted for more than 10% of global CO2 emissions since 1965. In addition, major funds and institutional investors such as the Norwegian sovereign wealth fund, Blackrock or the Church of England increasingly require the oil sector to adopt a more sustainable business model. Even if the world beyond power generation will remain dependent on hydrocarbons for longer than it had been hoped, concerns about the risk of stranded investments are growing.

And the oil companies themselves…?

… have in some cases spent large advertising budgets on playing down climate change and defending their established business models for many years. The British think tank InfluenceMap estimates that the Big Five already mentioned have invested billions on lobbying activities of this type since the Paris agreement in 2015. Nevertheless, this has been to no avail: following the triumph of renewable energies in power generation, they are now faced by the impending loss of their market shares thanks to alternative drive systems in the transport sector and bans on plastic in the petrochemical sector. This is why the oil industry is now recognising that customers’ wishes are changing and that especially wind and solar power generation has become competitive. They want to participate in the steady growth of renewable energies, to avoid the loss of their 'social license to operate' and to diversify their business model. Perhaps the erosion of the business model for conventional power generation has served as a cautionary example.

Is that the way all the oil majors see it?

In the past, the Big Five shared the same view on energy markets for many years. Now, we can see a clear two-way split. On the one hand, we have the major integrated groups of European origin such as Total, Shell, BP, or the Norwegian Equinor, who have initiated a transition from being pure oil and gas players to becoming broader-based energy companies. This can be seen from the ambitious strategic target expressed by Shell to become the world’s largest power supplier by 2030.

On the other hand, the US oil industry, exemplified by ExxonMobil or Chevron, has access to significantly higher reserves and at least to date has continued to focus on its traditional core business. The shale oil boom has given a boost to these competitors in the short term but will also make them vulnerable in the long term. These companies are threatened by the fate of the tobacco industry, which will mean a long, managed decline – although they will still operate profitably and at a high level.

What is the main emphasis on investments by Total, Shell etc.?

Apart from the shift from oil to gas, investments in CO2 capture and storage or biofuels, the main focus is now clearly on the power sector. Investments are spread to varying extents along the whole value chain with the exception of the regulated grid business. Companies enter the sector almost entirely via mergers and acquisitions and not organically, frequently via internal venture departments and also in the form of minority holdings. Bloomberg recorded more than 70 transactions of the oil majors in 2019 alone.

Can you give us some specific examples of such M&A transactions?

Total, for example is extremely active in the solar sector, with its participation in SunPower, a 30% stake in international project developer IPP Total Eren, and a 50% holding in the Indian solar activities of conglomerate Adani. The company is currently entering the Spanish market via pipeline deals for two gigawatts with the project developers Powertis and Solarbay. Shell is also on a shopping trip, with a 44% participation in US solar project developer Silicon Ranch, the acquisition of First Utility in the UK, ERM Power in Australia and Bavarian battery start-up sonnen as well as a minority stake of 49% in Australian developer Esco Pacific. At BP, the main activities have been the participation in LightsourceBP, which has now been boosted to 50%, and the acquisition of charging infrastructure supplier Chargemaster. 

As a general point, it seems that Big Oil is still looking for the right business model but these activities are generating significant competition for the major international utilities like Iberdrola, Enel, Engie or RWE. A suitable energy supplier could soon become a candidate for acquisition.

Should this attack on the utilities be taken seriously?

At least in the target systems and remuneration schemes, decarbonisation has already become established. The announcement by Repsol of Spain that the company wanted to become carbon-neutral by 2050 attracted some attention. The new CEO of BP, Bernard Looney, has also made such a statement; more specific strategies and measures are to be announced in September. At the moment, the share of renewable energies in total capex spending of the European oil majors is only between 5 and a maximum of 10%. Even this figure is significantly above industry average. As regards assets, the main focus of investments is on capital-intensive scalable activities in the offshore wind sector or very large onshore wind and solar farms, in some cases located in high-risk emerging markets. The portfolios of these late entrants to the market still lag far behind the major utilities.

Do investments in renewables only have an alibi function?

Not necessarily. If the oil and gas companies force the pace of transformation, their massive financial power, trading skills, international experience and political contacts will also bring benefits in difficult markets. The technical skills of the oil majors, for example in the offshore field, should also be taken into consideration.

Are there any other activities?

Apart from investments, there is a growing trend on the part of the oil companies’ trading departments to sign long-term green power purchase agreements (PPAs) for carbon-neutral power supplies to their own operations and also to third parties. In the long term, the topic of green hydrogen could also become increasingly important for the decarbonisation of refinery production processes and safeguarding the oil companies’ own infrastructure against rising CO2 prices or other restrictions.

Why are the oil companies still struggling with renewables today?

One of the main reasons in the past has certainly been the fact that the decentralised energy transition has led to beginnings which were very small and fragmented in comparison with the oil industry itself. Even a relatively small company like Dong of Denmark needed more than a decade in order to evolve into the largest offshore wind project developer Ørsted. In the meantime, what was a pioneering market has now become a global phenomenon with appropriate investment opportunities, even for the largest companies in the industry. The second reason has been the moderate return on capital as a result of regulated feed-in tariffs; this meant that the business has rather been attractive for utilities and financial investors in the past. The return on capital is additionally leveraged via financial instruments such as Green Bonds or partial asset rotation. However, even then, returns remain below the historic expectations for oil and gas exploration. Furthermore, Big Oil must make sure that it does not reduce returns too severely by the sheer size of its own funds.

Will the oil majors now need to rethink?

The oil industry faces a dilemma when making investments. On the one hand, investors call for a sustainable business model. On the other hand, oil shares are expected to meet stringent return and capital cost requirements. As a result, the oil industry needs to stabilise its cash cow of oil and gas exploration with high investments at the same time as paying attractive dividends and expanding its activities in the renewable sector. Historically, the oil majors have worked with high equity ratios in view of volatile oil prices and the very long-term investments in high-risk countries. To date, this has been an obstacle to the expansion of the business model of wind and solar which has been based to date on stable project financing, with its fragmented, highly competitive market and comparatively low margins. However, the comparison is not appropriate as the profitability experience of the oil industry is the result of a long-term process of concentration and cannot be continued in precisely the same way as a result of the global energy transition. For example, the growing area of gas is currently facing strong pressure on prices as a result of the more sluggish economic situation and the expansion of photovoltaics, which had been underestimated for some time.

Is the situation in project development different?

Indeed it is. We are keeping a close eye on the recent tendency of oil companies to acquire direct participations in project developers. The higher risk profile of project development fits very well with Big Oil. With capital increases, the companies concerned such as LightsourceBP or the Equinor affiliate Scatec will have additional growth capital for big projects and international expansion. To date, cooperation has mainly taken the form of minority holdings, which relieves the burden of appropriate governance requirements on project developers. In addition, they can obtain low-cost debt capital more easily via these platforms. The global trend away from fixed feed-in tariffs to PPAs or even merchant projects is also in line with the operations of the financially powerful oil majors with their trading and marketing capacities. The growing volatility of power prices boosts the margin potential. Investment in wind and solar would then be less attractive for financial investors.

Do project developers like juwi need to be concerned?

No one needs to be concerned. The demand for investments to implement the energy transition is enormous and the transformation of the oil industry will create even more demand for wind and solar projects. For example, juwi recently sold the largest solar project in southeast Europe, of 204 MW, to Greek company Hellenic Petroleum. In addition, the financial power of the oil companies will allow more PPAs to be signed and more projects to be financed in an era when there are no subsidies. Despite the cooperation models with the project development companies mentioned above, there will still need to be greenfield developers and many decentralised projects will be simply too small to be interesting for Big Oil. In project development, the key factors will still be speed and local proximity. These are not exactly the key characteristics of the asset-intensive oil industry.

Are there any challenges and risks?

Of course, project developers associated with the oil majors benefit from capital increases, for example for the purchase of project rights. In addition, the capital-intensive development of a company’s own asset portfolio within a developer IPP model allows for stronger standardisation in operations and maintenance (O&M) and stabilises the business in volatile market phases. Cooperation with the oil majors in the PPA area is more problematical. Especially in markets where power customers have lower creditworthiness, this can influence the distribution of margins along the value chain or even exclude the project developers. It is often forgotten that the predecessor of the Big Five, Rockefeller’s Standard Oil, grew to a vast size not through oil production but through its dominant position in the refinery market.


About the author

Björn Broda works passionately on strategic questions, new business models and international energy markets. Following various management positions in finance, strategy and M&A in the energy industry, he joined juwi in 2016. Since 2018, he has been Head of Corporate Strategy, Communications & Public Affairs.

Join Renewables Now's free daily newsletter now!

More stories to explore
Share this story
About the author

Björn Broda serves as juwi's Head of Corporate Strategy, Communications & Public Affairs. He has held various management positions in finance, strategy and M&A in the energy industry.

More articles by the author
5 / 5 free articles left this month
Get 5 more for free Sign up for Basic subscription
Get full access Sign up for Premium subscription