Renewable energy is suddenly taking a very important role in the energy industry; especially solar and wind. In light of this, major players in the oil and gas industry have begun to position themselves for this forecasted energy transition.
Major investments by the oil majors into renewable energy has called for the question of whether this is an indication that they are gradually transitioning into energy companies. Also, upon closer study of this trend, it is easy to classify the major players into leaders in renewable energy investment and slackers.
The results indicate that of eight majors, five have invested significantly in renewable energy. The results also indicate a very noticeable link between renewable energy strategies of oil majors and their proven oil reserves.
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Projections from BP’s 2018 Energy Outlook show that renewable energy would be the most rapidly growing energy source and is estimated to increase five-fold by 2040.
The figure would then effectively make up about 14% of primary energy globally by this time in the future. In addition, the oil and gas industry has taken hits and the majors are looking for other profitable prospects as this industry gradually declines.
Although there has been no peak demand for oil in a while, it is expected to occur soon as this industry typically experiences oil demand growth slows down first before peaking. Therefore, oil and gas jobs are still very much in circulation.
Renewable Energy Strategies by the Major Players
In light of these happenings, the oil industry is at a crossroads as to whether it should somewhat reinvent itself and bear the banner of renewables businesses instead.
This is further encouraged by the increasing costs of extracting hydrocarbons, this effectively presents an incentive of gravitating away from hydrocarbons and accelerating the energy transition towards the cheaper renewable energy resources.
This also calls for the question of whether renewables could be the next big business for oil majors to divert their scarce capital into and away from upstream oil.
Due to this, most oil firms are constantly researching what other sustainable ventures can replace what is the best cash cow presently available in the world so that their future is assured.
On top of all of these, the increasing concerns about climate change, especially after the Conference of the Parties 21 (COP21) Paris Agreement may be further motivation for this strategy in order to prevent hardening investor sentiment towards carbon emissions.
In the wake of COP21, over 170 countries reached a consensus to make efforts towards placing a limit on global warming to significantly below two degrees Celsius, and this would very well require major investments in low-carbon energy sources.
Sequel to this, the chief executive officer of Royal Dutch Shell Mr. Ben van Beurden recently made it known to investors that Royal Dutch Shell was now an energy transition company as against its previous oil and gas company tag.
The present business models of the oil majors and renewable companies, however, do not share similarities. And the oil industry would very much likely for instance, have an entirely different capital cost compared to the renewables sector.
Majority of renewable ventures such as solar and wind projects typically churn out cash flows similar to annuities for decades after an initial up-front capital expenditure that usually comes with a low price risk and this is very much different from the models of oil businesses that put in place the probability of facing oil risk.
This brings about the argument that the power business is almost becoming an identical version of the oil industry with the increasing share of intermittent renewables.
This often requires the skill set of a trader in order to increase volatility and it also provides a risk reduction in a future that is going to be an environmentally low carbon one.
The Rise in Renewable Energy
Data from the International Energy Agency indicates that renewable energy accounted for nearly two-thirds of the net new power capacity globally in the year 2016; in addition, almost 164GW came on stream.
Projections show that over the course of the next 20 years, renewable energy would experience the most rapid growth in terms of global primary energy and would be responsible for two-thirds of global investments in power plants to 2040.
As a form of a strategic response to the rising cost of hydrocarbon extraction and growth potential in the renewable energy sector, oil companies have started to exhibit a major presence in the renewable energy and electricity sector.
However, there are various levels to this engagement, the oil majors, of course, are at the forefront and are fast developing strategies to acquire the major portions of this rapidly growing renewable energy market.
While at this, they also continue to get a grip of value propositions of renewables while weighing it still against oil and gas developments.
This comes as a result of pressure from climate activists and shareholders to limit global warming by reducing carbon emissions from hydrocarbons.
It is worthy of note that oil majors including Royal Dutch Shell, ExxonMobil, Chevron, Total, BP, Eni, Petrobras, and Statoil/Equinor have all begun to gravitate towards big energy.
In addition, of all oil majors, only ExxonMobil has not made a move towards developing solar and wind assets. None of the oil majors have investments in geothermal energy while only Total and Petrobras have exposure to hydro activities.
The oil and gas industry is one that has taken quite a few hits over the past few years with oil prices constantly fluctuating.
However, this doesn’t imply that the industry is indeed still a very formidable one. With the rise in global warming, major oil players have begun to seek other alternatives for clean and sustainable energy and prevention of energy losses.
This implies that one thing is certain, the oil and gas industry is indeed evolving and this, therefore, guarantees longevity.