The phrase “Energy transition” has become a commonly used phrase in recent years – but what does it actually mean?
As part of our ongoing work to support our clients across the energy industry, Xodus recently conducted an analysis of the renewable energy investment activity for the top 100 Oil and Gas companies (By revenue) to assess the current state of the energy transition worldwide.
Whilst most Oil and Gas companies have acknowledged the need to address climate change and diversify their operational portfolios to include renewable energy, only 36 out of 100 of the companies we considered have made investments of any scale into low carbon projects. Our analysis found that their approaches could be categorised into three broad approaches, based on the general time and geographic scope of their renewable investments.
In general, renewables have been of some interest to oil and gas companies for a long period of time. The first investments date back to the 1970s, when the Brazilian government began promoting bioethanol as a fuel and used the state-owned Petrobras to initiate and manage biofuel production. Stronger interest in the sector became visible in 2003, when Oil and Gas majors began investing in renewable energy projects. However, the high cost of technologies and the lack of beneficial political support at the time, led to the interest in those projects gradually waning, particularly around the time of the global financial crisis. For instance, Shell decided to divest from the offshore windfarm in the London Array back in 2008.
The global financial crisis did not entirely erase the renewables sector from the investment horizon though, with the period of 2007-2014 seeing some National Oil Companies (NOCs) (Dong and Statoil, now Orsted and Equinor respectively) starting to develop home-grown projects to ensure future energy and price security. The sharp slump in oil prices in 2014 also contributed to the rise in renewables investments. In comparison to 2013, the investment in the renewable sector increased twofold. The activity of the oil and gas investors in the renewables sector peaked in 2016 - the year after the Paris Agreement was reached, where 196 states formally declared their joint ambition to keep the global temperature increase below two degrees Celsius.
According to Xodus led research, Asia and Europe dominate the energy transition market, with 53% and 35% of the oil and gas companies with interest in renewables headquartered in these regions respectively. In the case of Asia, a strong correlation between the location of the company and the projects is noticeable, with 45% of all renewable projects developed by Asian oil and gas companies, being based in Asia. The most likely reason for this investment profile is the steadily increasing energy demand in Asia. According to the IEA, Asia is expected to account for 40% of the global energy demand by 2040. In addition, the focus on a single market has partially to do with the parent company’s ownership structure, as most of them are NOCs, heavily controlled by their respective national governments.
In contrast, European oil and gas companies have adopted a drastically different investment strategy. Even though Europe remains the key destination for renewables investments for European oil and gas investors (25%), strong presence is also noticeable in the North American market, taking 20% of the total number of projects developed worldwide. As a general trend, our analysis found that US oil and gas companies prefer to concentrate their business on hydrocarbons, with ExxonMobil and Chevron being the only exceptions.
However, the levels of commitment to energy transition vary greatly from company to company. Amongst the 36 companies analysed, three types of strategies were identified:
“Full transition”. The first type of energy transition strategy is characterised by fundamental changes to the company’s core operational portfolio. Renewables grow steadily as part of the operational portfolio of the company and the overall percentage of portfolio investments in hydrocarbons is reduced cumulatively. Usually the company builds strong expertise in one type of clean energy (i.e. solar, onshore or offshore wind, biofuels etc.), develops projects in multiple markets around the world and continues to advance its expertise in other types of renewable energy. Full rebranding of a company image takes place, with hydrocarbons given secondary focus on the companies’ websites.
“Established presence”. This type of the energy transition response strategy is characterised by investments in renewables of a much smaller scale. Oil and gas still maintain the dominant positions in the company’s operational portfolio and will continue to do so in the foreseeable future. In most cases renewables projects are developed in joint ventures with local renewable energy companies over longer periods of time. Project investments are usually made in countries where the hydrocarbon projects have been developed in the past.
“Limited interest”. The third type of the energy transition response involves a rather limited investment in renewable energy. These companies prefer to concentrate their operations solely on hydrocarbons with some investments made in research and development (e.g. carbon capture and storage technologies, algae and biofuels etc.). This type of activity can generally be defined as driven by corporate social responsibility targets, rather than reflect any real intent to invest or diversify. While R&D are necessary steps towards diversification, more activity is needed to serve as an adequate response to climate change challenge. In our opinion, these companies put themselves at risk by delaying (if not avoiding) diversification.
From the analysis conducted, commitment toenergy transition does not pre-suppose a complete withdrawal from oil and gas, substituting them with the renewables. The reality of energy transition is likely to be the gradual expansion of operational portfolios of the oil and gas companies. In this respect, the first and second investment strategies appear to be the most successful as companies look for a healthy balance between hydrocarbons and renewables; they must continue being successful in the present as well as be best prepared for the future. Whilst the 26 (out of 36) companies adopting the third strategy undeniably contribute to technological progress that makes the energy transition possible, these investments are not themselves likely to be sufficient to meet the ambitious goals of the Paris Agreement. Societally, given the scale of the climate crisis threat faced, it is important that more companies adopt the “Established presence” strategy. Similarly, such a move will help companies remain commercially competitive, now and in the near future.
Xodus recognises that such a move might be perceived with some trepidation, but there is no reason why changes should be dramatic or difficult to implement. We have been using our vast experience of both the oil and gas and renewables industries to support a range of clients in moving forward in a de-carbonised future.
Xodus have undertaken feasibility studies looking at renewable power options for offshore oil and gas platforms in the North Sea, are in the process of examining the suitability of the UK offshore pipeline network to carry hydrogen and have conducted numerous topsides energy efficiency studies. Combining such knowledge and experience with a real understanding of how oil and gas companies work and a real appetite to make decarbonisation effective, makes it possible to draw up a road map for our clients that will facilitate the energy transition to truly deliver the sustainable change that they are looking for.
Author: Sofiia Bairamukova