Turn, turn, turn? Is really Big Oil turning into Big Green?

Martedì, 1 Dicembre, 2015

Carlo Durante

Let’s be clear: Big Green is Big Business. Despite investments in clean energy have lowered if compared to previous years, Green still seems to be where energy investment is ultimately headed. Question is if Big Oil is anticipating the move.

Big Oil has been in and out of Green in the past decades. Even before Margaret Thatcher had put climate change on the spot in 1988, BP was investing into PV, wave power and energy efficiency striving to understand how emissions could be reduced, anticipating the Green bubble by twenty years. More recently, ten Oil Majors including the likes of BG, Saudi, Shell, Statoil, Total, Eni and BP addressed a message to the UN and its member governments: Big Oil wants to be considered as an active participant of the 2C° solution, not the main issue. It seems to be straight. However, even if Big Oil invested billions in clean / low-carbon tech in the past, it never shifted away from its nature.

In principle, Big Oil is not rejecting the idea of developing new lines of business. If Big Green was a long-term profitable business, why shouldn’t they pursue it. The average GreenCo takes years to start making profits, and Big Oil has the patience to fund and wait. Also, from the operational stand point, Big Oil is perfectly positioned to understand the Green logics, from appraisal to feasibility to construction to operations and maintenance, to market. And don’t forget that Big Oil can also show a remarkable track record in understanding and lobbying government policies – and quickly figure out how incentives can or should be crafted: Europe’s Green agenda is the single greatest factor driving up energy bills, up 40% since 2005 – there might have been an opportunity there.

Also, Green could have become an important risk mitigation strategy within the usual business of Big Oil – however, given profits fall and increased price volatility, Majors are hesitantly investing, postponing or cancelling their steps into Big Green. Looking at what the Majors do, we have two diverging pictures: those stepping fast into Big Green and those leaving and getting back to where they once belonged.

On one hand, Shell plans to invest in global clean energy with focus on India and Africa: 75 Bn US$ for a five years plan in India alone – a timely move considering that India is shaping up to be one of the most relevant players in solar. Total has acquired a 66% in Sunpower, becoming an integrated PV player.  Statoil has been the channel for the Norwegian government to invest their 860 Bn US$ oil fund in clean energy.

On the other hand, Chevron recently preferred to distribute dividends to shareholders instead than approving an investment plan on low-carbon technologies. Eni had started a solar investment in the eighties, but has given up in recent years, just before the solar boom in Italy even if in the past days has announced a new Energy Solutions division dedicated to Green. And BP, in the past decade “Beyond Petroleum”, cancelled billions of low-carbon and green energy projects going back to investing their funds into fossil fuel extraction efforts: back to where they once belonged, before Margaret Thatcher. Is it the case that Big Oil investors might have perceived that there is a problem with their long-term business model but still prefer that Big Oil pays out cash in dividends rather than investing in Green?

Question remains thus unsolved if Big Oil is seriously willing to make a step change into Big Green or not, and why.

The majority of the comments in the energy industry press suggests that a greener Big Oil just means a more acceptable way to communicate and persuade: how does it feel and what do you do when you have to cope with Deepwater Horizon? However, money is money – consensus is that, provided adequate returns, all industries would benefit from being greener. Big Oil being no exception, then the issue has to be related with low returns.

Starting with revenues, not so much could have been yielded trying to extract value from governmental supports. Key driver of transformation is the reduction of carbon emissions: Shell, BP and others have preached for an “effective pricing of carbon emissions” so then what should have been the price for it that would have triggered any real shift. The EU ETS resulted in too low prices and no big stimulus for change nor innovation.

Also, despite similarities, Oil and Green are different industries. Big Oil is used to invest into large developments whose side is on a different order of magnitude than those in Wind, Solar or Bio. Just to provide the reader with a rough example, if totally converted in electricity the 2014 BP oil production is equivalent to around 1,900TWh that would need about 1TW of wind capacity or 1.5TW of Solar to be produced – while the global wind installed capacity is 370GW, solar is 180GW. The entire Big Green wind and solar is smaller than BP alone. Hence, a key factor, scale, is totally different. Moreover Big Green is a large, capitalized, technology intensive business driven by the same kinds of profitability logic that drives Big Oil, however knowing that it will never be as efficient as Big Oil, the industry would likely need to operate even more ruthlessly than what we’re used to with Big Oil to profitably deliver the energy we need – at the price we need.

Given the above, nothing else could Big Oil so far do to get greener rather than investing in natural gas. And the majority of the outlooks suggest that fossil fuels will be able to provide the bulk of the supply for decades into the future: no one else than Big Oil is positioned to be your long-term supplier of choice.

In conclusion, those who are investing in Green are not just fashioned by it but either improve their public image or believe that there are alternative ways to drive or protect their margins, in this Green being an opportunity along with others, trading and refining seen as priorities. Others who had spotted the Green thing but got away from it believe that it would have required an even more corporate capitalist, technology driven approach than the one they are used to handle – and understood that the financial community do not acknowledge that this shift could make any sense.

Turn, Turn, Turn. Turning water into wine is probably more doable than turning Big Oil into Big Green.


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