Could Big Oil become Big Power in a low-carbon world?

El Hierro is a tiny rugged Canary island that has gone all out to produce all its electricity from renewables.

LONDON: European oil companies have started to address what they worry may one day be an existential threat to their business - the end of a century of oil demand growth in a low carbon world. The emergence of the electric vehicle and demand among investors and consumers for cleaner energy to limit climate change has pushed the European side of Big Oil to take baby steps toward refocusing their businesses from oil production and refining to electricity via natural gas and renewables.

Their funding for oil exploration dwarfs any alternatives, but they are buying up power generation and retail utilities to integrate with their long-standing natural gas and emerging renewables ventures.

Relatively small investments in electricity aim to help them ride the energy transition by offering households and businesses cleaner power than coal can provide and giving their petrol stations a green edge with EV charging.

Testing an electrification route also helps meet demands from shareholders that they “future proof” their businesses.

The International Energy Agency predicts regulatory changes to curb carbon emissions will mean demand for electricity will grow much faster than that for oil as Asia’s power-hungry middle class expands.

The industry sees oil demand peaking any time from 2020 to 2040.

Diversification is not new to the oil and gas business and has a patchy record at best.

Oil majors have bought stakes in coal, household cleaning, pet food, nutrition, shrimp trading, nappies, hotels and steel, with limited success.

Critics say power will not deliver the profits the oil and gas companies need to sustain the large dividends their investors are used to.

BP lost billions in its first foray into renewables 20 years ago when it rebranded itself “Beyond Petroleum.” It closed its solar manufacturing division in 2011 and tried to get rid of its wind farms but says it now has a more successful model.

Profit is the first challenge when joining the dots between renewables, gas-fired plants and utilities facing growing competition in markets that are fragmenting fast. None of the companies break down their results from renewables or power.

BP returned to solar in 2017 with a $200 million investment in U.K. solar generator Lightsource and dipped a toe into U.K. electricity retail by buying a 25 percent stake in Pure Planet, a small challenger brand supplying some 100,000 customers with renewable electricity.

Dev Sanyal, head of BP’s alternative energy division, told Reuters BP plans to expand its alternative energy capacity - the biggest among the majors, according to CDP, a climate-focused research provider that works with major institutional investors.

Gazprom’s large hydropower interests put it in second place ahead of Total and then Shell, CDP calculations show.

On retail, the French and Italians are ahead. French giant Total’s purchase of Direct Energie last year gave it a portfolio of gas fired and renewable energy power plants and a platform to challenge state-controlled utility EDF.

It is targeting 7 million customers in France and Belgium by 2022 and said in a recent investor presentation it aims to make low carbon electricity 15 to 20 percent of its total offering by 2040.

Eni says it is now Italy’s second-largest electricity producer with six power plants, large electricity trading business and 2 million customers.

Shell says that it wants to become the biggest electricity provider and over the past year has made a number of investments including a Brazilian gas-fired power plant and a U.K. utility.

Last week it renamed that utility Shell Energy and switched all 710,000 customers to 100 percent renewable electricity, offering them discounts on petrol and electric car charging in its petrol stations.

In a sign of the growing competition among the majors for power assets, Total is considering a rival bid to Shell for Dutch energy company Eneco, according to sources close to the matter.

Total declined to comment.

Eneco is valued at around 3 billion euros and has 2.2 million customers and Shell’s Gainsborough said it could provide a template for a power business model.

Returns on solar and wind projects are typically around 5-10 percent, according to climate research provider CDP, half of those from many oil and gas projects.

So far the oil majors have committed a small fraction of their annual investment to low-carbon technologies as they balance shareholder demands for returns and innovation. Shell and Equinor plan to put between 5 and 6 percent of their capex investments into clean energy technologies, while Eni is targeting around 4 percent and Total and BP plan about 3 percent each, CDP research showed.

Those numbers rise with investments in gas-fired power generation but are still small enough to swallow if rivals make things difficult, particularly at the retail end, where they include supermarkets, fintech startups and Amazon.

A version of this article appeared in the print edition of The Daily Star on April 05, 2019, on page 4.




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