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Page added on February 15, 2019

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Big Oil’s Big Issue With Embracing ‘Big Energy

Alternative Energy

Oil majors increasingly are trying their hand at being alternative-energy minors.

Royal Dutch Shell Plc, which traces its roots back to the late 19th century, just bought Greenlots, a California software company serving the electric-vehicle charging sector. This follows other deals by Shell — along with the likes of BP Plc, Chevron Corp. and Total SA — to invest in renewable energy, retail power, batteries and other non-fossil fuel businesses.

For now, though, this is still pinky-toe dipping. Shell’s plan to invest $1-2 billion a year on “new energy” opportunities is a hefty check, but less than 10 percent of its capital expenditure budget. Besides anything else, there’s a straightforward reason for taking it slow: returns.

Oil majors have a testy relationship with investors these days. Shell’s stock is one of the better performers, but mainly because it has embraced a strategy centered on payouts: Its dividend yield scrapes 6 percent. A decade of high spending trashed return on capital across the industry.

Uncertainty around long-term oil and gas demand has compounded the erosion of trust when it comes to the majors’ spending plans. In a recent survey of institutional investors, the Oxford Institute for Energy Studies found hurdle rates required for new conventional oil projects have risen appreciably compared with historical rates of return, as investors price in risks around the energy transition.

Transition Insurance

Investors’ concern about reinvestment risk translates into relatively high hurdle rates for new oil and gas projects

Source: Oxford Institute of Energy Studies

Note: Rate of return on new projects relative to excess cash being returned as dividends or buybacks.

In this context, alternative-energy investments can be justified on one level. A solar farm in the southwestern U.S. is a relatively low-risk project for a more risk-averse crowd. But they also raise a conundrum, especially if eventually done at a meaningful scale. As the chart suggests, investments in power-related infrastructure provide fundamentally different returns from what oil majors have offered historically. These companies have been built to take world-scale risks in the hope of generating high returns to match that.

French oil major Total provides a useful example here, because it has made some of the biggest investments in alternative energy businesses and, as a result, has come closest to actually splitting this business line out in its accounts. The “Gas, Renewables & Power,” or GPR, segment includes downstream natural gas activities, but it offers some insight to how these businesses compare with Total’s traditional operations:

The Sum Of Total

Total’s downstream operations picked up some of the slack as the oil crash hit the upstream. The gas and power business has had steady returns of about 10 percent

Source: Total

Note: Return on average capital employed. Gas, power & renewables data begin in 2015 as a result of corporate reorganization in 2017.

While that chart shows what’s happened to returns, it doesn’t show relative scale. This chart shows average capital employed for each of Total’s divisions in 2015, when data for the GPR division begin, and 2018.

High Center Of Gravity

Total’s upstream oil and gas business accounted for more than four-fifths of capital employed in 2018, just as it did in 2015

Source: Total

It’s hard to see there, but capital employed in the GPR business has risen by 18 percent a year, compounded, since 2015. In absolute-dollar terms, though, the upstream division has expanded by almost four times as much. The upshot is that a one-percentage-point improvement in return on average capital employed in the exploration and production business translates to $1.1 billion of adjusted operating income for Total — almost 16 times what a one-point improvement in the GPR business’ return would generate.

What complicates this further is the commodity cycle. Even if an oil major’s leadership has taken the view that oil demand is nearing a plateau, that doesn’t mean oil-price cycles are dead. And that can make a huge difference to returns in the traditional upstream and downstream bits of an integrated oil company. To get a sense of that, here is the annual change in adjusted operating profit by business line for Total over the past three years:

This Way Up

Oil’s crash and recovery dominates Total’s income profile via the upstream business

Source: Total

Note: Change in adjusted operating income.

This may seem like a truism: Bigger divisions move the needle more. But this will continue to matter as oil majors discuss capital allocation with shareholders, who may well prefer to make their own decisions about allocating excess oil rents to new ventures rather than leave it to an oil CEO. Managers in dominant upstream divisions enjoying a commodity upswing may chafe at seeing budgets allocated to businesses that are ultimately antithetical to oil, even if they do fall under the rubric of “Big Energy.”

It can be argued that alternative-energy businesses may not necessarily provide the thrills of cyclical upswings, but they do generate steady returns. Certainly, renewable-power projects seem to do so. But these are still early days. John Abbott, who runs Shell’s downstream business and was in San Francisco last week for Bloomberg NEF’s summit on the future of mobility, told me and the audience quite candidly, “The reality is, in some of these value chains that we’ve been talking about, we don’t know exactly where the rent will sit.”

Hence, Shell is taking an integrated approach to power, electric-vehicle charging and the like, similar to its existing model in oil and gas, aimed at capturing margins on several levels. One critical question concerns whether or not value will move up and down the electrified value chain, the way it does with oil and gas. I think this will be less the case, with value tending to accrue at the customer-facing level, given that deflation in power generation is one of the primary drivers of greater electrification in the first place.

Proponents of oil majors pivoting to a brave new world can point to examples such as Ørsted ASA, the Danish oil and gas company that became an offshore wind-power giant. Two caveats, however: First, Ørsted’s target for annual return on capital employed through 2025 is 10 percent — about what you would expect for this sort of company but not an oil major. Second, getting investors comfortable with such a transformation is definitely a lot easier when you’re 50 percent-owned by the Kingdom of Denmark. For everyone else, the battle royal over what that incremental dollar goes toward — old energy, new energy, shareholders — is just getting going.

bloomberg



10 Comments on "Big Oil’s Big Issue With Embracing ‘Big Energy"

  1. Cloggie on Sat, 16th Feb 2019 4:29 am 

    “No moving parts”. 40 years later solar panels still work:

    https://www.concordmonitor.com/oldest-solar-panel-NH-power-18318376

    Hahaha, so much for writing off a solar park after 20 years.lol

    That shabby panel in the picture may have produced 1.2 MWh over these 40 years, or 1200 man-days of very hard work or more than 5 man-years, based on a 5 day labor week and 6 weeks vacation.

    https://deepresource.wordpress.com/2012/11/09/one-kilowatthour/

    If properly maintained and oriented it would have produced twice that amount. This is a small panel of perhaps 100 x 40 cm.

  2. Cloggie on Sat, 16th Feb 2019 4:49 am 

    More encouraging results, but this time accurately established:

    https://deepresource.wordpress.com/2019/02/16/solar-panel-still-working-after-40-years/

    University of Oldenburg in Germany, 35 year old solar array. Efficiency reduction over 35 years:

    8.55% –> 8.20%

    Hardly noticeable.

  3. Cloggie on Sat, 16th Feb 2019 5:25 am 

    Why renewable energy Cornucopianism is the intellectually only honorable position. Please challenge.

    Some calculations. A standard 300 Watt panel of 160 x 100 cm at a price of 250 euro…

    https://www.bol.com/nl/p/solar-panel-300wp-full-black/9200000095654528/

    … (without installation cost) will produce in Oldenburg something like 285 kWh per year. Multiply that with 50 years = 14.250 kWh lifetime total. One liter of gasoline contains 12 kWh energy in the form of heat. Note that electricity from a solar panel is “higher grade” than heat. You can power your fridge on electricity but not on heat. Conversion of heat into electricity comes with a loss of perhaps 50%.

    So this 30 kilo solar panel will produce the thermal equivalent of 1188 liter of gasoline over 50 years or 2375 liter of gasoline if required for electricity generation. Note that these 2375 liter gasoline weigh 1710 kilo. An amount that needs to be transported from Siberia or Saudi-Arabia to Germany first, where the Good Lawd deliverers all these photons at location in Oldenburg, free of charge (best proof that God exists after all).

    Current consumer price gasoline in Oldenburg: 1.35 euro/liter.
    1188 liter would cost 1604 euro.
    2375 liter would cost 3208 euro.
    The panel would cost ca. 500 euro, including installation, transformer and grid connection.

    From this it becomes obvious that once a society is able to store renewable electricity efficiently, and all the signs are that this is going to work (battery 98%, pumped hydro 80%, power-to-gas 70%, CAES 60%), the shocking result is that renewable energy will be much cheaper than fossil fuel. Note that the figures here relate to Oldenburg in Northern Germany. In North-Africa, Australia or elsewhere, solar conditions are up to twice as good and renewable electricity prices can be slashed accordingly, giving poor but sunny countries the excellent opportunity to make money with the export of hydrogen-based stored energy (H2, NH3, CH4, NaBH4, methanol), generated by huge solar arrays at a cost of 2 cent/kWh base price.

    There.is.no.energy.problem.

  4. Davy on Sat, 16th Feb 2019 5:48 am 

    Solar panels are the way to go for my “REAL” green effort. I am currently adding 6 more 300 watt panels to my current 6 panel system. I almost went with some wind power to give my system a hybrid aspect. There are so many days here on the Ozarks that are not good for solar and nothing at night. The problem is bang for the buck for wind. A similar cost for wind compared to just adding panels was a considerable difference in performance. I am in a great wind spot perched high and in a part of the Ozarks that is a plateau so my location is relatively good for wind. I needed I tower which I was not excited about. As a doomer (lite) a tower with a wind turbine will attract attention in a SHTF situation.

    The way I do solar is I gather solar energy as it shines and I do that without using batteries much. If the sun is really good I turn on as many circuits as I can to max the panels. In the winter I can even dump load some solar into a small heater downstairs. In the summer I can run the A/C as needed. I have a mini split inverter A/C so I can cool areas of the house as opposed to the traditional whole house units. With this system I can turn on the units in different areas depending on the sunshine. I can run the A/C on grid when it clouds up too much. At night I turn the system off. In the future with double the panels I may utilize the batteries more but I like knowing batteries are at peak power ready to go in a crisis situation. It is an option to further gather more solar. Always trade-offs. LOL.

    I have come to follow the daily weather so much more than I once did now that I actively gather solar instead of passive collection. It amazes me how here in the Ozarks a clear morning turns to a puffy cumulous afternoon. So I generally have to turn off some circuits latter in the day or I am running down the batteries. I have lead acid “gel” batteries now. I went cheaper because I know in a few years batteries will likely have more performance for less money. I have an older solar system at the barn with lead acid “water” that are wearing out. I plan to shift these home batteries there and upgrade. I have little cycling going on with the batteries I have in my home so they should be good for over 10 years.

    What I like about solar is it is simple and robust technology that can make a difference for someone dedicated to demand management and energy gathering. When I combine solar with a wood boiler and an indoor wood stove I am very energy independent. I feel “REAL” green also because I am harvesting local energy utilizing biomass, grass, and solar sources.

    I am still on the grid because the grid is so powerful an asset. I run my well, oven, and electric heat (backup) on grid. I heat water with wood except in the summer when I only burn wood if we have a high use hot water day so I use electric the rest of the week. Wood adds to my demand management strategies in summer. I can run my well in an emergency with solar/battery but it maxes out the system so I will only do this in an emergency. The oven is electric but I can cook with charcoal and I have a gas grill and gas burners downstairs. It is my hope the grid goes significantly green in the future with wind power from the Great Plains. Currently my areas uses coal, NUK, and some hydro. We get a small amount of wind from the Plains.

  5. Anonymouse on Sat, 16th Feb 2019 7:07 am 

    Exceptionaldumbass, between your multi-polar posting and feces flinging you do here pretty much non-stop, and the boring, turd-salads you seem to think matter to….whom again?, that you grind out on your discount cell-phone, you dont have any time for ‘farming’, let alone installing equipment you cannot afford and do not understand. So do everyone a favor and cut the shit would you?

  6. Davy on Sat, 16th Feb 2019 7:54 am 

    “Exceptionaldumbass, between your multi-polar posting and feces flinging you do here pretty much non-stop, and the boring, turd-salads you seem to think matter to….whom again?,”
    Obviously it matters to you and juanpee. Your entire time here revolves around attacking me so I think I am vital to you and Mr. mental illness. I am on-topic and relating my real green movement. What are you doing? You are hating Americans which is all you do besides cock fluff makato. You pretend clogg is a jew and so forth. You hide behind your anonymity because your life is obviously a failure. You are a deeply troubled young man likely with no future. Maybe life will beat you to an inch of your miserable existence and you will become something. As for mr.mental illness and makato the senile old man they are done. There is no changing for them

    “that you grind out on your discount cell-phone, you dont have any time for ‘farming’, let alone installing equipment you cannot afford and do not understand.”
    I have a IPhone and a top of the line dell laptop. I got up a 4:30 and drank my coffee. I commented here and went through the news. I contributed something intelligent unlike you that just did some mental masturbation. It is 10 degrees with 5 inches of snow. I fed the outdoor wood boiler first thing. After first light I fed birds and gave chickens water. I walked to the goat barn which is 1/8 mi. I greeted the dogs who are happy. Goats are kidding now. I have 6 does in stalls so I fed them hay and some grain and changed their water. The other does that have not kidded yet I gave hay to. I came back and split some wood for the indoor woodstove. I got a fire going for the wife. I am now lifting weights and when done I will eat breakfast. In a little bit I will go over to the cows and feed them some grain which I do when it is cold. I need to bring them another round bale. I then have a list a mile long of stuff I could do but maybe I will just hang out. I am very efficient so I am not under any pressure. WTF have you done yet today boy wonder? Masturbated?

    “ So do everyone a favor and cut the shit would you?”
    Who is everyone, you, mr.metal illness juanpee, and makato the senile? LMFAO I wish you would choke on a big mak fruit loops.

  7. Robert Inget on Sat, 16th Feb 2019 3:11 pm 

    EVERY DOLLAR made trading oil and gas goes into utilizing additional solar projects.
    That’s MY revenge.
    Latest project, around storage.
    I don’t have to tell anyone here, when it snows, solar panels go darker then, well, you finish.

    In January we had clear bright cool days everyone loves. Beginning February, snow covered hill tops
    and valleys almost daily.
    No amount of ‘storage’ would have pulled us through. W/O grid tie we would have had to run NG powered generators.

    I prefer to look on propane as an emergency fuel,
    Not standby. However, this funny winter has me rethinking storage. Maybe a ‘yard bomb’ is in order for LT power storage.

    Here on the Left Coast we worry about “the big one” earthquakes messing up the ‘grid’ for as long
    as years, not a few weeks.
    With a single freeway feeding us, how long will it take to repair countless over and under-passes?
    (never mind four lanes of road and rail ways)

    The ENTIRE fiber-optic internet backbone goes under and over the ‘old’ highway fronting our farm, dating back 150 years. Are we, you, capable
    of backwards time travel?

  8. makati1 on Sat, 16th Feb 2019 7:24 pm 

    Robert, the negatives with solar are seldom mentioned by those trying to sell a renewables future. Similar to the negative of weather on EVs but every place has weather so…???

  9. Pete Bauer on Sat, 16th Feb 2019 8:00 pm 

    Big Oil will never embrace clean energy because they will not get the type of return that they are expecting.

    There were times that oil companies had 50% margins, 75% margins.

    And big oil will stand and fight. Even if oil usage in power gen, heating and petrochemicals are replaced, they will hold on to transport sector for as long as possible.

  10. Cloggie on Sun, 17th Feb 2019 5:15 am 

    Robert, the negatives with solar are seldom mentioned by those trying to sell a renewables future. Similar to the negative of weather on EVs but every place has weather so…???

    Storage is the final missing link.
    If you can develop a storage to the tune of 41% of your annual primary energy consumption, you have your plug-and-play fossil-free renewable energy system, without “glitches”. They are working on it all over the world:

    https://deepresource.wordpress.com/2018/11/04/iron-powder-as-a-fuel/

    https://deepresource.wordpress.com/2019/01/27/nabh4-the-vice-admiral-has-a-message-for-dutch-parliament/

    https://deepresource.wordpress.com/2017/07/08/formic-acid-as-car-fuel/

    https://deepresource.wordpress.com/2018/11/21/caes-plans-for-britain-and-the-netherlands/

    https://deepresource.wordpress.com/2018/12/31/doggerbank-pumped-hydropower-storage/

    https://deepresource.wordpress.com/2018/10/23/pumped-hydro-storage-for-flatlanders/

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