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Why big oil is buying into clean energy

04/09/2019
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Fossil fuels are facing an uncertain future. In response, Europe’s big oil companies including Shell, BP and Total are venturing into the production, distribution and sale of electricity to industrial, residential and transport markets, in direct competition with traditional multinational utilities such as Enel, Iberola and RWE. This diversification, though small for now, heralds the transition of oil and gas companies into full spectrum energy suppliers.
European oil and gas companies are starting to buy into clean energy in a big way
In the last few years European oil companies notably, Shell, BP, Eni, Equinor and Total have added climate–friendly gas to their business portfolio, a natural extension to their core business of oil production and refining. Natural gas offered a path to growth with the additional merit of technical and operational synergies. In contrast, renewable energy and electricity lie outside the core competencies of big oil and acquisition is the principal entry route.

Some European oil companies have invested in renewables, not only for an added source of revenue, but also as a means to reduce their carbon footprint and earn green credentials. Exceptionally, Norway’s Equinor, has led the development of floating wind farm technologies which has opened new opportunities for offshore wind farms in deep waters off Norway, California and Hawaii, as well using such energy from planned floating wind farms to power some of its North Sea oil rigs.  
By shifting into the generation, distribution and retail of electricity oil and gas companies are directly competing with traditional utilities such as Enel and RWE

Reasons why


Global concern over the impact of climate change culminating in the Paris Accords and the annual warnings from the IPPC of the urgent action required to limit world temperature rises to 1.5 percent, underpin the changing business climate of fossil fuel companies. Heightening public concern is mirrored by increasingly stringent regulations to decarbonise economies. In parallel, investors are waking up to the climate and environmental risks in their portfolios. Hedge fund managers ranging from the New York Pension Fund, the World Bank and Norway’s trillion sovereign wealth funds, have recently announced planned divestments in fossil fuels.     
 
Economics also plays its part in big oil’s diversification into renewables and electricity markets. The growth in demand for coal, oil and gas is slowing in Europe and the United States. The phasing out of coal power stations in Britain is nearly complete and renewables provide around 33 percent of the country’s power.  Peak demand for oil could arrive in the 2030s with the electrification of transport and increasing market share of renewables in the power market. European leaders have announced bans on the sale of internal combustion engine (ICE) vehicles. Austria, Denmark, France, Germany, Ireland, the Netherlands, Norway and the UK have all set dates to end new fossil fuel car sales. Denmark has banned ICE sales from 2030.   Portugal and Spain offer subsidies for EV cars. Other countries will follow.  There will be a shift towards electric vehicles which, according to Bloomberg’s BNEF Electric Vehicle Outlook 2019    could account for up to 57% of global passenger car sales by 2040 and at least 80 percent of municipal bus purchases.  This revolution in transportation will require a substantial increase in the power sector of Asia, Africa and Latin America.  BP’s long-term Energy Outlook to 2040, estimates that the power sector will account for almost 70 percent of the increase in primary energy. These market and regulatory trends threaten big oil’ expansion and long-term viability making finding new customers and markets in renewable electricity production, distribution and sales a route to future growth. In coming decades, some big oil companies could transition to become big green power companies whilst others could harvest their assets and invest in entirely new unrelated businesses.
Climate change is one of many factors driving big oil's shift to clean energy

Challenges


Since 2014, the ten biggest international oil companies have invested just $20 billion in low-carbon energy compared with total capital expenditures of more than $350 billion according to Ernst & Young, business management consultants.

Big oil’s comparatively small investment in cleaner energy technologies such as wind, solar or power markets, owe much to issues of financial returns and scale.  Renewables such as wind and solar power typically have a lower rate of return (IRR) than oil and gas. Whilst the former has an IRR ranging between 5 and 8 percent, oil projects typically enjoy IRR rates above 7 percent reaching a high of 33 percent with US onshore oil note energy consultants, Wood Mackenzie.    A case in point is Shell which requires margins of between 8 and 12 percent from its investment in power.  Moreover, big oil is accustomed to bigness, yet the power market is highly fragmented and zero-carbon businesses are typically small or held within a regional or local utility making buyouts, mergers and acquisitions necessary routes into national power markets.

Action taken


A few examples of recent investment in Europe’s power sector are outlined below, starting with market leader Royal Dutch Shell.
Shell is leading the charge to a future beyond its core business of oil and gas

Royal Dutch Shell


Shell is leading the charge to a future beyond its core business of oil and gas by spending big. It has announced plans to double the amount it spends on green energy to $4bn (£3.2bn) a year by 2025. To date it has gained a 20 percent share in the 731.5 MW Borssele offshore wind farm off the Dutch coast and currently offtakes renewable power from wind farms and solar parks in Great Britain and mainland Europe.

In anticipation of a growing market in electric vehicles and growth in charge cards, Shell recently bought New Motion which operates over 30,000 private electric charge points for homes and businesses in the Netherlands, Germany, France and the U.K. and access to some 50,000 public charge points across 25 European countries, serving over 100,000 registered charge cards.

More ambitiously, Shell became a producer of renewable electricity with its purchase of the UK’s First Energy, now named Shell Energy Retail Ltd. All the company’s existing and new residential customers now receive 100% renewable electricity alongside discounts at Shell service stations across Great Britain. The company is also rolling out a range of smart home technology including smart thermostats and home electric vehicle charging.
Further afield, Shell purchased a 44 percent stake in Silicon Ranch Corporation, which operates solar and wind farms across the U.S. for $217 million and has entered the Australian power market with a $418 million investment.
Solar is the main focus of BP's clean energy efforts
(Image via BP).

BP


BP returned to renewables with its $200m investment for a 43 percent stake in Lightsource, Europe’s biggest solar developer. Dev Sanyal, BP’s chief executive for alternative energy was quoted in the Guardian newspaper saying “BP was returning to solar because the sector had matured, and the model had shifted from manufacturing panels to developing solar farms. It [solar] will make up around 10 percent of global power in the next 20 years and is growing around 15 percent per annum.” BP has gone one step further with its acquisition of ‘internet of things’ software developer Ubiworx, which is working to create a digital system combining a solar panel, battery and electric vehicle charger responsive to real-time changes in power. Its appeal lies because it enables customers to always consume the cheapest power. This digital energy system could also create ‘virtual power plants‘ by simultaneously releasing stored power from groups of batteries to help the National Grid meet customer demand reports, The Sunday Telegraph.
Eni has already ventured into gas-fired power generation and is now expanding its footprint within solar and wind generation
(Image via Eni Instagram).

Eni


Italian oil giant Eni has moved into producing power and heat from its gas power plants in its home country and began selling electricity in France in 2017. To ensure the company’s future growth, Eni has announced plans to invest almost £1.3 billion over the next four years into increasing its wind and solar energy capacity by adding 1 GW by 2021 rising to 5 GW by 2025. Commenting on this investment, Claudio Descalzi, CEO of Eni, acknowledged the growing contribution of renewables and said that he expected a yield of around 10 percent from this new investment.
Equinor's clean energy efforts are focused heavily on offshore wind
(Image via Equinor).

Equinor


In May, Norwegian oil major Statoil, announced that it was planning to change its name to Equinor to reflect a major investment programme of around €10.36 billion in new renewable energy towards 2030. Like its peers, Equinor is increasing investment in renewable power generation across Europe including Britain, Germany, Norway and Poland. The last involves two projects with a planned capacity of 1200 MW, sufficient to power over 2 million Polish households. In the North Sea, Equinor is pioneering the development of Europe’s 30 MW Hywind Scotland floating wind farm.
French oil major Total is investing heavily to enter the electricity utility space
(Image via Total).

Total


Last but not least, French oil company Total, is in the early stages of creating a domestic utility with its acquisition of a 23 percent stake in Eren Renewable Energy for €237.5 million with an option for majority control in five years. Previously, Total invested $2 billion in French battery maker Saft and SunPower, a U.S. solar panel maker for homes, business and solar farms. In fact, Total has committed to having 20% of assets in renewables by 2030. 

The big difference between big oil’s incursions into the power sector is that current investments focus on production, distribution and sale of renewable sourced electricity and this is in marked contrast to previous investments which focused on creating markets for climate-friendly natural gas and creating optionality for gas marketing and trading operations.
As oil companies pivot to clean energy, what impact will this have upon their workforce requirements?
(Image via Total).

Impact on jobs in the energy space


Job prospects in terms of numbers, new skills requirements and skill mix are amongst the key challenges facing big oil’s HR departments, training officers and prospective recruits.   

Even without the transition to low carbon energy, low skilled roustabouts are being replaced by automation and medium skills are vulnerable to digitalisation, big data and the industrial internet of things. Already, energy analysts forecast that introducing further advanced technologies will most likely reduce the headcount on oil rigs from 25 to 15, a fall of 40 percent.   Moreover, Automation is coming to distribution of oil and gas. Tankers and LNG vessels are becoming larger and with the prospect of full automation, control and supervision tasks will fall and the people will move to onshore control centres.

Likewise, coming automation of power stations will reduce employment in the power sector.  A case in point is the planned $1 billion, 1,100-megawatt DTE Energy Natural Gas Plant in Michigan. Currently, a plant of this size needs a crew of around 500, yet this new plant will employ just 35 people. 

In contrast to the fossil fuel and power sector’s declining headcount and upskilling requirements, employment in the solar and wind sectors is exploding, generating jobs 2.5 times faster than the fossil industries in the US. Some 855,000 people were employed in the US renewable energy industry in 2018. Globally, the number increased by 700,000 in 2017 to 11 million in 2018, reports the International Renewable Energy Agency. 
Modernisation of the oil, gas and power sectors will raise skill level requirements for their workforces
(Image via Total).

Modernisation of the oil, gas and power sectors will raise skill level requirements. People who are able to troubleshoot, tune-up and programme the turbines and automated systems in power plants will be in demand. In oil, employees will need key skills including creative problem-solving, the ability to manage change to analyse data in real-time in the field, conduct course corrections and innovate. This means that people who understand automated processes will become highly valuable in the new job market. In fact, the skills body of the energy industry OPITO envisages a massive transformation in human resources requirements.  Their study published by Robert Gordon University, forecasts that 30 to 40 percent of jobs in the energy sector in ten years’ time “simply do not exist right now.”   

In sum, the headcount of the fossil fuels industry is set to diminish in coming decades whilst we can expect jobs in the renewable energy sector to increase as their market share rises in power production, land and sea transportation sectors.  Upgrading of existing skills and the creation of new skills in computing, engineering, interdisciplinary knowledge and critical thinking will challenge the energy industry’s future training and HR departments.
Recent Comments
I love reading your articles, especially about clean energy... would be delighted to receive future newsletters... Be Great!
Dr. Santiago Fronda, 05 September 2019
Equinor is bullshitting ... plans to explode sonic devices searching for oil in the Great Australian Bight, a pristine place and breeding ground and sanctuary from whales
Daniel Boon, 05 September 2019
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Why big oil is buying into clean energy - Time to read 10 min
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