The green turnaround for Big Oil?

The green turnaround for Big Oil?

Nicolo Sartori
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All Oil & Gas majors expect an increase in investments in the renewable energy sector, although precautions and prudence are being practiced thoroughly, especially with regards to the timing of this revolution. Meanwhile, gas arisesas the main transition fuel option

In recent months, international oil companies have launched ambitious industrial plans and have promoted various initiatives in favor of sustainable energies, which will diversify and complete their corporate profile, which has traditionally focused on the production of hydrocarbons. A global trend strengthened, above all, in preparation for the COP 21 held last December, and confirmed by acknowledging the inevitability of the decarburization process sanctioned in the Paris agreement. The trend has driven a large group of energy companies to embrace a new industrial strategy based on the integration of natural gas and low-carbon technologies.

Full steam ahead!

The debate prior to the COP 21 summit saw the major international energy players, which are particularly active and attentive to the issue of energy sustainability and protection of the global climate balance. Particularly significant is the initiative of the members of the Oil and Gas Climate Initiative (OGCI) which, through a joint letter to the governments about to meet in Paris, encouraged a strong global agreement capable of facilitating the transition to a low-CO2 emissions energy system. However commendable, the environmental emphasis of the proposal made by the OGCI was also determined by much more pragmatic factors. First of all, the group’s interest in promoting the role of natural gas - to the disadvantage of more polluting coal - as a transition fuel to be used alongside renewable energy sources, whose unstoppable growth is now considered an established fact. A media (and political) drive in favor of natural gas which, although fully justified by its lower polluting impact, has not come to terms with the negative situation on the gas market, afflicted by a risky situation of oversupply and historically low prices.

The legacy of Paris

This situation of uncertainty on the gas market also involves the acceleration of certain major international oil companies with regard to renewables and low-carbon technologies. Besides Eni, top-level players such as Total – probably the most progressive of oil companies in terms of renewables - Statoil, Engie, Shell and even Exxon have announced and made investments in the new energy sector. Moreover, if the attention to biofuels and the "green" conversion of refineries is one of the first steps in the new energy sector, the rapid electrification process in progress worldwide has stimulated the entry of energy giants in the sectors involving the generation from renewables and electrical storage. The strategy announced by Total, for example, provides for annual investments of approximately €500 million in sustainable energy, to which targeted acquisitions are added, as in the recent case of French company Saft, which specializes in the production of nickel and lithium-ion batteries for numerous applications in the industrial and transport industries, amounting to €950 million. Control over Saft will consolidate Total’s positioning in the electricity sector, where the company operates through SunPower, the Californian-based company purchased for $1.3 billion in 2011, during the first round of investments from oil players in the renewable energy industry. A similar approach has been taken by Engie, which entered the solar power sector in 2015 due to the acquisition of Solairedirect, followed in 2016 by an investment for 80% control of Green Charge Networks, a company active in the electrical storage sector. France’s activism contrasts the prudence of the Anglo-Saxon giants. While BP and Chevron are still partly affected by unsatisfactory returns on investments made in previous years, Exxon and Shell are still moving with caution. After the first steps taken in biofuels, the US major has strengthened its collaboration with the company FuelCell Energy in the carbon capture and storage (CCS) sector, while the Anglo-Dutch group has actually created a division dedicated to the development of new energies, with an annual capital spending planned at around $200 million.

Pragmatism and caution

It is clear that the figures are still ludicrous, if compared with the turnover (and investments) of these companies in their core business area: production of the hydrocarbons, a sector currently suffering due to low oil and gas prices which, on the one hand, should encourage companies to diversify their portfolio to gain new slices of a rapidly expanding market and, on the other hand, dramatically limit their capacity for financial action. A situation that requires a deep reflection process, within each company, as well as for the sector as a whole. The failures of the first cycle of investments in the renewables and low-carbon technologies sectors has, in fact, left a clear mark on some of the players involved, which are evidently reluctant to alter their nature and industrial structure. This clearly emerged during the Shell shareholders’ meeting, who rejected, with an overwhelming majority (97%), a motion aimed at re-investing profits from the oil sector to strengthen the "green" side of the company. CEO Ben van Beurden himself gave a strong warning on the methods and timings by which the Anglo-Dutch giant will have to proceed to redefine its scope of action, stressing that any rash moves and changes made too quickly could place the very existence of the company at risk. Although there is no foolproof recipe to ensure a progressive (and sustainable) transition from an industrial model based exclusively on the exploitation of hydrocarbons to a model that is able to increasingly embrace the low-carbon component, it is clear that in the coming months the sector will face a significant number of challenges and opportunities. Those who manage to take advantage of the latter, without stumbling over the former, will likely be ready to enter a new energy era.