Over the last two decades, the large Western international oil and gas companies, or IOCs -- BP, Chevron, ConocoPhillips, ExxonMobil, Shell and Total -- have largely followed a common path with regard to renewable energy sources, albeit with variations in the pace and extent of their engagement. Specifically, initial moves into a wide range of technologies have been followed by a general withdrawal from many renewable positions. As of early 2015, the IOCs’ activities in renewables are mainly limited to biofuels. This pattern of engagement and then partial disengagement has been driven by a number of different factors, most of which are, unsurprisingly, rooted more in these companies’ core oil and gas activities than in external developments in renewables.
Some oil companies had made tentative moves into renewable energy as early as the 1980s, mainly in response to the oil price shocks of the previous decade. However, their more recent forays began in the late 1990s, as the concept of manmade climate change, and the need to develop alternative resources to fossil fuels, gained traction in public and governmental thinking. With the growth of scientific consensus -- as expressed in successive reports by the Intergovernmental Panel on Climate Change (IPCC) -- the IOCs began to abandon their previous opposition to the concept.
BP was the first to change its public position in 1997, and ExxonMobil the last in 2008.
Almost all of the Western majors subsequently increased their activities in renewable energy, either through the revitalization of earlier operations or new investments. This phase was characterized by a relatively scattershot pattern of activity across the sector. Biofuels have been a major target for oil companies, unsurprisingly given the obvious overlap with their fuel production and distribution operations. Against a background of increasing incentives, and in many key markets, mandatory consumption levels, IOCs invested in their own supply sources, and launched research into advanced products such as cellulosic ethanol and algae feedstocks. However, many also moved into renewables with a more tenuous connection with their core activities, including wind, solar, geothermal and hydrogen, alongside associated technologies such as carbon capture and even nuclear power. Notable developments included large-scale moves into solar manufacturing (BP, Total), wind power (BP, Shell), and R&D on hydrogen/fuel cells (BP, Shell and Total). Chevron, meanwhile, continued to develop its established geothermal energy operations (the company is the world’s leading geothermal operator). During this period, ExxonMobil stood out as the most reluctant player, holding back from renewables other than state-required biofuels distribution. The company’s only major move was the formation in 2009 of a partnership to develop algae-based biofuels, in which it planned to invest some $600 million.
However, these initial investments were followed by widespread retrenchment. In 2009, Shell announced that it would not be making any further large scale investments in non-biofuel renewables, citing their inability to compete economically with other opportunities. The company continues to operate in biofuels, notably through its Cosan ethanol joint venture in Brazil. BP withdrew from its solar operations in 2011, before cancelling a planned cellulosic ethanol plant and selling its wind interests outside the U.S. In 2013, the company also put its larger U.S. wind portfolio up for sale, although this plan was later shelved. BP’s statements on the issue indicated that it does not plan to construct any further wind capacity, and while the company met its $8 billion renewable investment goal in 2014, it has not set any further targets. Meanwhile, ExxonMobil’s flagship algae partnership was reported to have faltered in 2013, with a strategic reorientation toward more basic research, while Chevron sold its main renewable subsidiary in September 2014, and the company’s CEO announced that its advanced biofuels research efforts have yet to meet with success.
In 2014, only Total appeared to remain committed to the development of its non-biofuel renewable investments, largely through its majority stake in solar group SunPower, which has grown as an integrated manufacturer and project developer and recently announced plans to expand its capacity. However, Total also appears to have stepped back from several of its earlier ventures in wind, hydrogen and nuclear power.
Figure: IOC Renewable Activities (Including R&D and canceled/scaled-down projects)
Unsurprisingly, the pattern of IOC involvement in renewables has been mainly driven by factors linked to the IOCs' core activities in oil and gas. The majors’ transition from being climate skeptics to enthusiastic (if mostly small scale) renewables players was motivated more by “soft” concerns than operational rationale. Specifically, well-publicized renewable projects made more sense as a tool in combating negative publicity stemming from the majors’ status as the “public face of climate change” than on purely business grounds. Most renewable technologies offered little in the way of operational overlap with the IOCs’ core businesses, and -- during the early stages of development -- very limited potential to bring in appreciable returns.
The initial rush to invest in renewables also took place in the wake of moves to increase vertical integration and prioritize scale, including the series of “mega mergers” that created many of the IOCs as they currently stand, as well as (prior to 2008) a period of strong refining margins and high overall earnings. This environment, and the essentially political motivations for the majors’ involvement in renewables, offset the lack of direct financial rationale for their renewables investments.
However, these factors were subsequently outweighed by more pressing oil and gas concerns. As national oil companies increased their power (amid an upsurge of “resource nationalism”) and the prospect of diminishing crude reserves became more apparent, the majors became increasingly focused on securing long-term upstream resources in new areas such as deepwater drilling and more remote locations, adding to their investment costs.
More significantly, the emergence of shale gas as a major resource required yet more capital expenditure, as the majors competed to establish large-scale gas positions. The post-2008 economic climate and its impact on downstream businesses, particularly refining margins, played a further role, helping to encourage company-wide restructuring programs for several (including BP, Shell and ConocoPhillips) that prioritized cost savings and upstream oil and gas growth, and saw previously core refining and marketing businesses divested or sold off. In this climate, peripheral investments in renewables became less attractive. Finally, the firming up of regulatory incentives and mandates for biofuels in many key refined product markets helped to sharpen the majors’ focus within the overall renewables market, by encouraging or (in markets such as the U.S. and the EU) requiring the blending of ethanol and biodiesel in transport fuels. The convergence of these factors served to outweigh the perceived benefits of a visible presence in other renewable technologies for many of the oil companies.
Key questions for the IOCs now are whether there is any real rationale for re-entering the renewable market beyond their current positions, and if so, what their options are for re-engagement. On one hand, one of the reasons behind the IOCs’ original entry into renewables has not gone away. The majors continue to be targeted by numerous climate-related campaigns; 2014 saw ongoing protests against cultural sponsorship activities by BP, as well as efforts to encourage investors to divest shares in fossil fuels in favor of renewable assets. It seems certain that the IOCs will continue to face pressure to invest in renewables -- even those in which they have no particular expertise or advantage -- as a form of “redress” for the impact of their core operations on the environment. Accordingly, it is possible that at least some of the oil majors that have withdrawn from most of their renewable activities may in the future find themselves under pressure to recommit at least some resources.
In addition, renewables have begun to attract more attention from the governments of major fossil-fuel-producing countries, as the opportunity cost of supplying growing domestic demand from their own resources, versus selling into export markets, becomes evident. A notable instance is the Kingdom of Saudi Arabia, where spiraling domestic energy consumption is currently served by heavily subsidized fossil fuel production, spurring major efforts to develop solar power for domestic use. In this environment, it is possible that the ability to supply renewables could aid IOCs in their efforts to secure new upstream resources.
However, as discussed above, it is clear that with the exception of biofuels, the purely economic argument for developing new renewable positions from scratch is relatively weak, due to lack of operational overlap, the capital expenditure requirements involved, and the increased level of competition in the industry in the wake of its rapid development in recent years. For example, the solar market has been transformed by the entry of large-scale Chinese manufacturers even in the short period since BP’s exit in 2011. However, this growth could present the majors with an opportunity, in the form of potential strategic participation in established renewables operators. Total has already pursued this direction, through its SunPower holding, and could provide an example of how to re-enter what is likely to remain a major growth market, while going some way to diffuse negative public attention and even generating appreciable returns.
Whether such investments would be welcomed by a renewables market that continues to achieve rapid growth in the absence of major investments from the oil and gas industry remains to be seen. Finally, the Western oil majors -- alongside all other upstream crude producers -- currently find themselves in the midst of another of the industry’s periodic seismic shifts, this time in the form of a drastic slide in crude prices. Whether the implications of a sustained period of low prices will lead to yet another realignment of IOC strategy in renewables will only become clear in the longer term.
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Matthew Morton is a consultant within Nexant’s Energy and Chemicals Advisory Services Unit in London.