Are renewables the future for the oil majors?
- The spread of the COVID-19 pandemic has disrupted the oil market and made investments on renewables more attractive.
- The big oil and gas companies in Europe have made considerable commitments in 2020 toward net-zero emissions, while the Big Oil in the U.S. remain largely focused on fossil fuels.
- For major U.S. oil and gas companies, a move to more renewables will depend on investor pressure and oil market recovery.
There’s no doubt that the oil industry is under pressure. Oil demand as a result of the COVID-19 pandemic has dropped, oil prices are volatile and there’s currently a glut of supply.
In addition to the above challenges, the industry is facing calls to make its business more sustainable and reduce its carbon footprint in order to comply with emissions targets set during the 2016 Paris Agreement discussions on climate change.
A balancing act between profitability and sustainability
Pre-COVID-19 the oil majors were beginning to tweak business models and invest in renewables as a way to address sustainability.
However, the pace of change was slow. According to a 2018 CDP study “it was estimated that the industry as a whole only invested 1.3% of its total 2018 capital expenditure in low carbon.”
Although under pressure from investors, banks and campaigners, the reality was that renewable energy delivered lower returns on capital invested.
COVID-19 has changed investment returns!
The COVD-19 pandemic has changed all that. Lower oil prices and fragile demand have significantly impacted revenues and profitability, while at the same time the investment return on renewables has remained stable and firm. According to analyst Wood Mackenzie, “at the current oil price, returns from oil and gas are now in line with what investors can expect from low risk solar and wind projects.”
This change in market dynamics – together with a desire to build a more sustainable business model – has accelerated the shift by some oil majors towards a greater investment in renewables, while for others their strategy has remained the same.
A U.S./European divide
Recent announcements from European oil majors Shell, Total and BP have shown a significant change in business direction compared to ExxonMobil and Chevron in the U.S. The European oil majors are re-positioning themselves as International Energy Companies, committing to delivering zero carbon operations by 2050 and proposing to invest more heavily in renewable energy.
Chevron on the other hand has invested in solar, wind and geothermal projects over the past 20 years and ExxonMobil’s green strategy revolves around reducing greenhouse gas emissions, advancing biofuels, and carbon capture and storage (CCS), however both companies appear to remain largely focused on oil and gas.
Will the gap widen?
As the COVID-19 pandemic continues and countries work to control its spread, oil prices will remain volatile and the move to renewable energy will continue to be an attractive investment. However, I feel that even without the COVID-19 pandemic there is now a permanent shift across the European majors to build more sustainable business models and become energy companies rather than simply oil and gas companies. This move to renewable energy sources is certainly the right one for the planet.
But will the US majors follow? It will surely depend on investor pressure and the speed and the extent to which the oil market recovers post-COVID-19. However, with all that said, in the short term I see the gap widening.
As for the future, only time will tell.