How Big Oil Evolves: Dealmaking in Renewable Energy

This article covers big oil's investments and dealmaking in renewable energy as society transitions to a post-fossil fuel future.

Norway’s $1 trillion Government Pension Fund Global is trying to insulate itself from “the permanent oil price decline” by selling off its stake in 134 oil companies and investing $14 billion into clean energy project. This may not signal the collapse of the fossil fuels-driven society as we know it, but the shifting strategy from Norway’s largest investment fund (a country where, we might add, oil and gas is the biggest contributor to the economy and makes up around 17% of the national GDP) could have a reverberating effect for the global renewable energy mid-market.

“The objective is to reduce the vulnerability of our common wealth to a permanent oil price decline,” said Norway’s finance minister, Siv Jensen, in a statement. “Hence, it is more accurate to sell companies which explore and produce oil and gas, rather than selling a broadly diversified energy sector.”

Norway’s not the first nation to forecast the demise of oil prices. Institutional investor sentiments have denoted a long-term decline for several years now, citing policy risks from increasing efforts to curb climate change and resource dependency, alongside technology risk from the improving economics of renewable energy and electric vehicles. Together, these factors add up to investor risk, where institutional investors are trying to mitigate the impact of these threats.

“The crucial point to note about these risks is that they operate in a feedback loop, intensifying one another,” as Mark Lewis, managing director of European Utilities Research for Barclays Capital Investment Research, told The New York Times.

Then there are the major oil companies, who for the past decade have nominally hedged risk by nibbling on mid-market renewable energy companies and projects. Currently, majors own less than two percent of the solar and wind projects operating globally. But that’s changing. The renewable energy market itself is forecast to reach $1.5 trillion by 2025—a compound annual growth rate of 6.1 percent between 2018 to 2025.

A Growing Fraction for the Oil and Gas Faction

According to a report by CDP, an international non-profit that drives companies and governments to reduce their greenhouse gas emissions, oil and gas companies only spent 1.3 percent of their 2018 budgets on alternatives such as wind and solar power or battery storage and carbon capture. Since 2010, they’ve funnelled $22 billion into alternative energies.

“The shift to a low-carbon economy presents the question of what role oil and gas companies will play in this transition, and what their strategic options are in the more immediate and longer term,” Luke Fletcher, senior analyst at CDP, said in a statement. “Equinor’s recent rebrand to a broad energy company, expecting to invest 15 to 20 percent of CAPEX in new energy solutions by 2030, is symbolic of this shift.”

In fact, most of the majors have made investments in mid-market renewable companies. ExxonMobil has an ongoing $500 million joint venture with Synthetic Genomics to use genetically engineered algae to produce renewable crude from sunlight and carbon dioxide. Royal Dutch Shell paid $217 million for a 44 per cent stake in solar developer Silicon Ranch and acquired MP2 Energy, an on-site power generation company. And Total SA’s Total Energy Ventures has funnelled around $160 million into 20 startups ranging from microbial fuel factories, to enhanced cellulosic sugar recovery.

But it seems their appetite has been tempered by trepidation over this market’s threat to their main source of revenue: oil.

Building or Buying into Renewable Energy

“A lot of these companies are still figuring out how to get involved on a larger scale,” Rick Wheatley, head of leadership and innovation at Xynteo – a sustainability and long-term planning consultant that works with big oil companies like Shell, Statoil and Eni SpA told the Calgary Herald. “They invest in start-ups to learn and to demonstrate intent. For the cost of a drilling campaign, they can invest in dozens of start-ups.”

Sure, companies with pre-existing engineering expertise in something like offshore oil could apply that edge to building an offshore wind farm, but is it worth it to build for themselves when they can buy that expertise directly?

According to a report by Wood Mackenzie Power and Renewables, a North American onshore oil project will elicit a 22 percent return on equity investment versus the five to seven percent return on solar projects and the seven to nine percent return on wind projects with guaranteed revenue. “The renewable energy market is highly competitive and fragmented, returns on investments are typically lower than in oil and gas, and the average investment is much smaller in size,” according to a report by consulting firm Wood McKenzie.

That’s where dealmaking may be a more efficient route.

“The Majors may want to look towards mergers and acquisitions, developing offshore wind, or solar PV in emerging markets, in order to find a competitive edge and be able to deploy sufficient capital to grow in the sector,” write the report’s authors.

The added bonus of buying is in neutralizing a potential threat to their market share further down the road.

Evolution Rather Than Salvation

Perhaps the biggest barricade to big oil’s movement into renewables is big oil itself. In a report surrounding the Paris Agreement (an international agreement on climate change and greenhouse gas emissions) last year, Shell says that while it has its eye on renewables, oil is still its focus. “The company will still sell the oil and gas that society needs, while preparing its portfolio to move into lower-carbon energy, when this makes commercial sense,” said the company in a statement surrounding the report. It’s a sentiment more-or-less echoed across the board with big oil.

Even Norway’s GPFG doesn’t plan to fully divest from big oil. According to Forbes’ Jim Collins, “the white paper contains the prediction that 90% of renewable energy investment between now and 2030 will come from companies whose main source of revenue is other than renewables.”

The prognosis: the renewable energy sector shouldn’t expect big oil to kick down the door anytime soon. But like the inevitable permanent oil price decline, there’s no question renewables are the direction we’re going.

“Committing more capital from renewables projects would also mean leaving value on the table for their shareholders,” said Valentina Kretzschmar, director of corporate research at Wood Mackenzie told Greentechmedia. “At the same time, most of them understand this is the future, this is the way things will evolve.”

Illustration by Christy Lundy


Andrew Seale

Andrew Seale is a Toronto-based business writer who contributes frequently to Yahoo Canada Finance, The Globe and Mail's Report on Business and The Toronto Star.