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Page added on November 9, 2017

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Peak oil? Majors aren’t buying into the threat from renewables

Business

Two decades ago, BP set out to transcend oil, adopting a sunburst logo to convey its plans to pour $8 billion over a decade into renewable technologies, even promising to power its gas stations with the sun.

FILE PHOTO – A combination of file photos shows the logos of five of the largest publicly traded oil companies; BP, Chevron, Exxon Mobil, Royal Dutch Shell, and Total. REUTERS/File Photo

That transformation – marketed as “Beyond Petroleum” – led to manufacturing solar panels in Australia, Spain and the United States and erecting wind farms in the United States and the Netherlands.

Today, BP (BP.L) might be more aptly branded “Back to Petroleum” after exiting or scaling back its renewable energy investments. Lower-cost Chinese components upended its solar panel business, which the firm shed in 2011. A year later, BP tried to sell its U.S. wind power business but couldn’t get a buyer.

“We made very big bets in the past,” BP Chief Executive Bob Dudley told Reuters in an interview. “A lot of those didn’t work. We’re not sure yet what will be commercially acceptable.”

The costly lesson of the biggest foray yet by an oil major into renewable energy was not lost on rival firms.

Even as governments and environmentalists forecast a peak in oil demand within a generation – and China and India say they may eventually ban gasoline and diesel vehicles – leaders of the world’s biggest oil firms are not buying the argument that their traditional business faces any imminent threat.

A Reuters analysis of clean energy investments and forecasts by oil majors, along with exclusive interviews with top oil executives, reveal mostly token investments in alternative energy. Today, renewable power projects get about 3 percent of $100 billion in combined annual spending by the five biggest oil firms, according to energy consultancy Wood Mackenzie.

BP, Chevron (CVX.N), Exxon Mobil (XOM.N), Royal Dutch Shell (RDSa.L) and Total (TOTF.PA) are instead milking their drilling and processing assets to finance investor payouts now and bolster balance sheets for the future. They believe they can enter new energy sectors later by acquiring companies or technologies if and when others prove them profitable.

“There is no sign of peak demand right now,” said Chevron CEO John Watson, an economist by training, who is retiring in early 2018. “For the next 10 or 20 years, we expect to see oil demand growth.”

For a graphic showing BP’s fossil fuel and renewable energy forecasts, see: tmsnrt.rs/2h4vGHd

The International Energy Agency forecasts a 10 percent rise in oil demand through 2040, reflecting the consensus among oil firms. The earliest estimate for peak oil demand from any oil company is late next decade, by Shell CEO Ben van Beurden.

History shows energy transitions – from wood to coal to oil – take a long time. Coal’s contribution to world energy consumption peaked recently at 28 percent and remains above the share from natural gas, though just below oil’s one-third.

Profit, if any, from the majors’ decades-long interest in renewable energy ventures is unclear. None of the largest oil companies disclose earnings from their solar, wind or biofuels ventures.

Investors such as Alasdair McKinnon, portfolio manager at Scottish Investment Trust, believe oil will sustain shareholders far into the future.

“There isn’t a viable alternative to fossil fuels on the horizon,” he said. “We’re not buying into the long-term demand destruction for oil.”

The confidence in oil’s future relies largely on rising consumption from emerging economies. Exxon forecasts that transportation will require 25 percent more fuel by 2040, propelled by growth in Asia. Chevron’s analysis of the India and Nigeria markets, meanwhile, concludes that infrastructure needed for electric cars is unlikely to be built.

Cars account for about a fifth of oil consumption, BP estimates. So if electric vehicles do eventually capture mass markets, oil firms would still expect growing demand from the air, rail and trucking industries.

Natural gas – now a smaller business than oil for most majors – can grow to nearly a quarter of all energy used by displacing coal in power generation and through expanded uses in chemicals, these companies forecast. Natural gas can also fuel the power needed for electric cars.

Although Shell forecasts peak oil demand coming earlier than its rivals, it is preparing for that prospect mostly with massive natural gas investments. The firm last year spent $54 billion acquiring BG Group, which derives half its production from gas. Chevron, Exxon and Shell recently have spent billions of dollars on new liquefied natural gas projects across the globe.

Exxon declined to comment for this article.

SHORT-SIGHTED STRATEGY?

Critics of oil majors’ cautious renewable strategy – including some big investors – say the firms are being short-sighted in their trust that change will come slow, or that one fossil fuel will gradually replace another. Just as cheap natural gas is supplanting coal, even cheaper wind or solar eventually will displace gas, they argue.

FILE PHOTO: BP’s Chief Executive Bob Dudley speaks to the media after year-end results were announced at the energy company’s headquarters in London, Britain, February 1, 2011. REUTERS/Suzanne Plunkett/File Photo

South Australia is soon to become a proving ground for a project could pave the way for renewable power to supplant fossil fuels for peak electricity – a combined wind farm and grid-scale battery storage facility, by electric-car maker Tesla Inc (TSLA.O) and operator Windlab Ltd.

Fossil fuel companies need to quickly reorient themselves to the low returns of the solar and wind industries, said Jules Kortenhorst, a former Shell executive who runs the Rocky Mountain Institute, a nonprofit energy research organization.

“You cannot flip a switch on a Monday morning from being one to another,” he said. “Paychecks in the oil and gas industry are based on fundamentally believing that the world cannot see economic growth without fossil fuels.”

To achieve the same share of the renewables market that the largest publicly-traded oil companies now hold in oil and gas would require an investment of about $350 billion over the next 18 years, estimates consultancy Wood Mackenzie. Such spending would cut into the generous dividends that oil firms’ shareholders have come to expect.

“We think it will be a real challenge for these companies to change their business model,” said Nathan Fabian, director of policy at Principles for Responsible Investment (PRI), a United Nations-backed group.

PRI has guidelines calling for investment analysis that weighs environmental, social and governance issues. Its principles have been adopted by investors with $70 trillion in assets under management.

SMALL SCALE RENEWABLES INVESTMENTS

FILE PHOTO: John Watson, Chevron’s chairman and CEO, speaks during an interview on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 8, 2017. REUTERS/Brendan McDermid/File Photo

Oil companies have made relatively modest investments a wide range of renewable technologies. Chevron has a smattering of mostly small wind and solar ventures; Shell invests in sugar-cane ethanol in South America, wind farms in the United States and electric-car charging stations in Europe; and BP still owns the U.S. wind farms it once tried to sell.

John Browne – who as BP’s CEO two decades ago helped launch the early investments in renewables – said he still believes the renewable power will grow.

“It will take time,” he said in an interview with Reuters last month. “And they have time.”

Shell pledged to invest up to $1 billion a year by 2020 in what it calls “new energies.”

Total said this year it would spend $500 million annually on developing alternatives. But soon after that announcement, it unveiled its $7.5 billion acquisition of Maersk Oil, part of a plan to pump more crude from Norway’s North Sea.

Total CEO Patrick Pouyanne in October explained the focus on economics at an October oil conference in London.

“When you ask our customers what their priority is, either in developed economies or in emerging countries, price comes first,” he said. A hasty shift to renewables, he said, “could bring great economic and social damage to our 6 billion customers.”

Exxon Mobil is backing research into biofuels, joining with gene modification firm Synthetic Genomics to coax algae to produce more lipids, an oil substitute. It hasn’t detailed its investment but said the effort remains far from commercialization. By comparison, Exxon this year spent $5.6 billion on U.S. shale oil assets.

BATTERY-POWERED CARS, PLANES

Some of the oil industry’s largest customers are planning a shift to renewable alternatives, especially in transportation, which accounts for about a quarter of annual energy consumption.

Ford Motor Co (F.N) earlier this fall disclosed it would aim, by 2030, to derive a third of its sales from battery-powered cars and another third from gas-electric hybrids.

A startup backed by Boeing Co (BA.N) and JetBlue Airways Corp (JBLU.O) recently announced plans for a small hybrid jet by 2022, using batteries from Tesla and battery supplier Panasonic Corp (6752.T).

Yet oil firms continue to forecast aggressive growth in liquid fuels. Exxon predicts 90 percent of the transportation industry will rely on petroleum through 2040.

BP projects the world’s auto fleet doubling to 1.8 billion vehicles by 2035, with only 75 million of those powered by electricity.

“We’ll see if (electric cars) can be delivered in a way that doesn’t require large subsidies” from governments, Chevron’s Watson told Reuters. “That’s what we’re seeing now.”

reuters



11 Comments on "Peak oil? Majors aren’t buying into the threat from renewables"

  1. makati1 on Thu, 9th Nov 2017 6:15 pm 

    There is no threat from “renewables”. They will never be more than a small percentage of energy sources. The whole energy system is going to fall apart when the SHTF. What comes out the other side will probably not resemble anything I have read in any prognostication articles. Think 1700s? Maybe earlier? We shall see.

  2. MASTERMIND on Thu, 9th Nov 2017 6:33 pm 

    UC Davis Study: It Will Take 131 Years to Replace Oil with Alternatives (Malyshkina, 2010)
    http://pubs.acs.org/doi/abs/10.1021/es100730q

    University of Chicago Study: predicts world economy unlikely to stop relying on fossil fuels (Covert, 2016)
    https://www.aeaweb.org/articles?id=10.1257/jep.30.1.117

  3. MASTERMIND on Thu, 9th Nov 2017 6:36 pm 

    Renewables are a scam and don’t get me started with Tesla anything..They are techie dreams don’t understand that technology doesn’t create energy, its energy that creates technology.

  4. onlooker on Thu, 9th Nov 2017 6:46 pm 

    Sssh, MM, you will shatter the hopes and dreams of our techie friends here, who would rather not dwell on the limits of the planet but like to think like their idol Julian Simon that human intellect is the ultimate resource and so lets continue filling up the Earth with humans.

  5. Apneaman on Thu, 9th Nov 2017 6:50 pm 

    Dr James Hansen speaking at #COP23 – intro to main interview talking about renewables and how the current system plays into the hands of the fossil fuel companies. – 1 min

    https://www.youtube.com/watch?v=o37FNBuuoPI

  6. Boat on Thu, 9th Nov 2017 7:37 pm 

    ape,

    The horse still lives to this day. When I go to Home Depot to buy materials it ain’t by horse. Over 3 million Mongolians still live in tents and ride horses. When EV trucks and cars take over FF and horses will still be around.

  7. Anonymouse1 on Thu, 9th Nov 2017 8:38 pm 

    R-e-t-a-r-d (see above).

  8. Cloggie on Fri, 10th Nov 2017 2:29 am 

    One thing you can learn from this article and the behavior of the oil majors is that peak fossil is not going to happen any time soon. No immediate depletion eorries. Yes European oil majors are investing a little more in renewables because of European anti-fossil legislation, but the fast growing world is much bigger than Europe so no worries for peakoil demand any time soon.

    But the oil techies are making a big mistake here in underestimating renewable tech. The EU energy policy is one huge hidden subsidy for e-vehicles and everything related to renewable energy, so expect this technology to mature in Europe first. And China and India will be forced to follow because of massive pollution problems, as well as competing each other to death for the global solar panel market, leaving America, minus Syria.lol, holding the bag.

  9. Davy on Fri, 10th Nov 2017 5:24 am 

    “One thing you can learn from this article and the behavior of the oil majors is that peak fossil is not going to happen any time soon.”
    Peak oil dynamics is occurring as we speak and never rests. Peak conventional oil has happened and is accelerating. Peak oil dynamics of places like Venezuela teetering on economic collapse and Nigeria probably in a cue too. The fact that the costs of unconventionals are high and if the economy tumbled the ability of a greatly reduced economy to produce them would surely drop. More and more people every year must have fossil fuels for food and support pushing us towards that maximum production point which we surely are close to considering peak oil dynamics. How much over the neighborhood of 90M barrels are we going to go? The renewable build out must have fossil fuels and it will be stopped dead in its tracks as the economy and fossil fuels drop expansion. Peak oil is not gone by a long shot it just needs to be properly discussed not as a game of winning and losing but as a terminal long term condition and one among many.

  10. rockman on Fri, 10th Nov 2017 10:34 am 

    Having worked in the petroleum industry not once have I heard any concern over renewables, EV’s or even peak demand. And that includes today. The major concern is not finding enough economically viable locations to drill. And that concern was just as great when oil was $90/bbl as it is today.

    Yes, even peak demand isn’t on our minds as long as there is some demand. A privco’s primary concern is net cash flow. As long as it’s delivering a profit to the owner all is well. My company has difficulty finding enough viable projects to drill (just as it did when oil was $90+/bbl) so low demand for products we can’t develop is not a problem. But my owner is very pleased with the ROR we deliver. He just wished we had spent more then the $260 million since we started the company.

    Pubco’s have a different priority: adding proved reserves y-o-y. Again that causes them to focus on finding as many economically viable projects as possible. In that case if lower demand produces lower prices that will limit the number of projects they can drill. But again look at the near record high demand we have today and yet still half the rig count as when demand was lower. IOW during the previous lower demand period pubco’s added a lot of reserves on their books.

    Bottom line: there is not a simple (or predictable) relationship between demand, drilling activity or the price of oil. And one of the most difficult aspect to take into account is the long time lag between phases. If PD reduces prices which reduces new development eventually a lower demand period might see higher prices. But for how long? And if lower prices produce a new higher PD (as we’ve just experienced) how long before declining production reduces demand as a result of higher prices that will eventually be seen?

    A snap shot of a single moment in time doesn’t come close to characterizing the relationships.

  11. Kenz300 on Sat, 11th Nov 2017 9:17 am 

    Electric cars, bikes and mass transit are the future. Fossil fuel ICE cars are the past.

    Save money. No stopping at gas stations. No oil changes Less overall maintenance.

    People love to save money.

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