European oil companies have started to address what they worry may one day be an existential threat to their business – the end of a century of oil demand growth in a low-carbon world.
The emergence of the electric vehicle and demand among investors and consumers for cleaner energy to limit climate change has pushed the European side of Big Oil to take baby steps toward refocusing from oil production and refining to electricity via natural gas and renewables.
Funding for oil exploration dwarfs any alternatives, but the companies are buying up power generation and retail utilities to integrate with their long-standing natural gas and emerging renewables ventures.
Relatively small investments in electricity aim to help them ride the energy transition by offering households and businesses cleaner power than coal can provide and giving their gasoline stations a greener edge with EV charging.
Testing an electrification route also helps meet demands from shareholders that they “future proof” their businesses. The International Energy Agency predicts regulatory changes to curb carbon emissions will mean demand for electricity will grow much faster than that for oil as Asia’s power-hungry middle class expands. The industry sees oil demand peaking any time from 2020 to 2040.
Diversification is not new to the oil and gas business and has a patchy record at best. Oil majors have bought stakes in coal, household cleaning, pet food, nutrition, shrimp trading, diapers, hotels and steel, with limited success. Critics say power will not deliver the profits the oil and gas companies need to sustain the large dividends their investors are used to.
BP PLC lost billions in its first foray into renewables 20 years ago when it rebranded itself “Beyond Petroleum.” It closed its solar-equipment manufacturing division in 2011 and tried to get rid of its wind farms but says it now has a more successful model.
“Most of the things we do today are linked to our core capabilities,” said Dev Sanyal, head of BP’s alternative-energy division. “If you can start combining molecules and electrons in an integrated offer you start creating something of greater interest.”
Profit is the first challenge when joining the dots between renewables, gas-fired plants and utilities facing growing competition in markets that are fragmenting fast. None of the companies break down their results from renewables or power.
BP returned to solar in 2017 with a US$200-million investment in British solar generator Lightsource and dipped a toe into the U.K. electricity retail the same year by buying a 25-per-cent stake in Pure Planet, a small challenger brand supplying some 100,000 customers with renewable electricity.
“The renewables business last year was free-cash-flow generative … we’ve been moving in a positive trajectory over the past three years,” Mr. Sanyal said. “Today we have industrial customers and, over time, there could be retail customers.”
He said BP plans to expand its alternative-energy capacity – the biggest among the majors, according to CDP, a climate-focused research provider that works with major institutional investors. Gazprom’s large hydroelectric power interests put it in second place ahead of Total SA and then Royal Dutch Shell PLC, CDP calculations show.
On retail, the French and Italians are ahead.
French giant Total‘s purchase of Direct Énergie last year gave it a portfolio of gas-fired and renewable-energy power plants and a platform to challenge state-controlled utility EDF.
It is targeting seven million customers in France and Belgium by 2022 and said in a recent investor presentation it aims to make low-carbon electricity 15 to 20 per cent of its total offering by 2040.
Eni SpA says it is now Italy’s second-largest electricity producer with six power plants, a large electricity-trading business and two million customers.
Shell says it wants to become the biggest electricity provider and over the past year has made a number of investments including in a Brazilian gas-fired power plant and a British utility.
Last week it renamed that utility Shell Energy and switched all 710,000 customers to 100-per-cent renewable electricity, offering them discounts on gasoline and electric-car charging at its roadside stations.
Mark Gainsborough, head of the Anglo-Dutch company’s new energy division, said it aims to expand its retail customer base in Britain. Shell looked into acquiring the retail division of rival SSE in recent months but discussions made little progress because of concerns over the government’s decision to cap most domestic energy prices, industry sources said, an example of the risks facing power markets around the world. Shell and SSE declined to comment.
In a sign of the growing competition among the majors for power assets, Total is considering a rival bid to Shell for Dutch energy company Eneco, according to sources close to the matter. Total declined to comment.
Eneco is valued at around €3-billion ($4.5-billion) and has 2.2 million customers and Shell’s Mr. Gainsborough said it could provide a template for a power business model.
“The model aspiration is to find an integrated mode with positions in trading and supply and having customer books,” Mr. Gainsborough said.
Former BP chief executive John Browne, who drove the London-based company’s first push into renewables, said much lower production costs for wind and solar projects and a greater understanding about the future growth of power markets had changed the picture dramatically since then.
“The question is whether you have the skills, the people and the determination to make this work and are you happy that in reality the returns you make are better than the returns you make in your other business,” Mr. Browne said.
Returns on solar and wind projects are typically around 5 per cent to 10 per cent, according to climate-research provider CDP, half of those from many oil and gas projects.
So far the oil majors have committed a small fraction of their annual investment to low-carbon technologies as they balance shareholder demands for returns and innovation.
Shell and Equinor plan to put between 5 per cent and 6 per cent of their capital-expenditure investments into clean energy technologies, while Eni is targeting around 4 per cent and Total and BP plan about 3 per cent each, CDP research showed.
Those numbers rise with investments in gas-fired power generation but are still small enough to swallow if rivals make things difficult, particularly at the retail end, where they include supermarkets, fintech startups and Amazon.
“If, at the end of the day, it doesn’t work these companies have deep pockets and would be able to spin off power divisions,” said Munir Hassan, head of clean energy at law firm CMS in Britain.
The differential in returns from power versus oil and gas had not changed much, he said, but there was a new impetus because perceptions among shareholders and their children had.
“Some of the oil companies will succeed,” Mr. Hassan said. “But I wonder whether they will find it more painful than they expected.”