BP’s billion-dollar move into U.S. offshore wind, in partnership with Norway’s Equinor, has put a spotlight on the volatility of fossil fuel markets and the oil and gas supermajors’ search for other investments.
As energy markets shift to account for remote work and global oil markets rise and fall, I’m fielding calls and doing deals with almost every major player in the oil and gas sector as they move to invest in renewable energy.
The COVID-19 recession, the worst since World War II, continues to hit oil and gas majors hard. In response, virtually all of them — including Royal Dutch Shell, ExxonMobil, Phillips 66, Total, ENI, Enel, Marathon, and HollyFrontier — have been fueling the transition to a green economy at record levels, anticipating an economic recovery.
This summer Saudi Aramco, while declaring that its interest in renewables was “nothing new,” bid an enormous deal that accelerated its pivot into the renewables market.
Philips 66 is branching out from biofuels to join Ørsted and others in the Gigastack project, to turn electricity generated by offshore wind into renewable hydrogen and help meet emissions goals.
ENI has set the firmest emissions reduction goals, promising net-zero carbon footprint by 2030 for Scope 1 and 2 emissions, and from all group activities by 2040.
Oil unpredictability boosts viability of renewable energy
The pandemic has changed Americans’ energy use dramatically, hurting oil companies in the second quarter and now the third. The world’s energy investors watched the historic price crash in April, when West Texas Intermediate crude oil dropped by almost 300 percent, trading at one point at minus $37 a barrel. The price fought its way back over $40 a barrel in August, but again dipped in September.
As many Americans continue to work from home for the foreseeable future, fossil-fueled commutes are in decline. This “new normal” for energy consumption has brought unwelcome variability to what is normally a stable commodity market, with overall oil demand predicted to drop 9%, along with coal dropping 8% for the year in the electricity industry.
For profit-motivated fossil supermajors, all this market volatility makes the business case for renewables even stronger – and they still know how to scale an energy industry and turn a profit.
Oil companies see opportunity and profit in renewables
It’s Economics 101: Oil and gas majors now see a strong business case for renewable investment. While shifting norms impact fossil fuel consumption, renewable energy demand remains strong. This year alone, U.S. renewable energy consumption has increased by 40 percent and India’s by 45 percent.
Pandemic recovery packages are helping drive this demand. The European Union has focused its recovery on sustainability investments, boosting an already growing market. European countries are setting new records for renewable energy integration on the grid.
In a related trend, oil and gas producers are increasingly using solar and wind farms to power their fossil field operations. Both onsite installations and purchases from nearby generators are supplying large amounts of cheap electricity to power drilling rigs in remote rural areas — such as for Occidental, Exxon Mobil, Royal Dutch Shell, and Apache’s holdings in the Permian shale basin of West Texas. Chevron’s largest solar-powered oil field is in California’s Kern Valley, with a dedicated 29MW array.
Using renewables for the necessary electricity lowers the overall carbon footprint of the resulting fossil energy extracted. The Chevon installation even qualifies for the state’s Low Carbon Fuel Standard.
But renewable investments no longer merely address an oil company’s shareholder activism and carbon commitments. Those days are certainly over at BP, which has been rolling out a bold, all-in renewable strategy since February. BP clearly sees how renewable projects can have superior ROI to fossil fuel projects long-term, especially when wind or solar is paired with energy storage.
These oil companies are putting some of their pumping on hold, but pumping investment into renewable projects. Goldman Sachs now projects that in 2021, for the first time, global spending on renewable power will surpass oil and gas exploration and development.
Offshore energy management is ‘in the DNA’ of oil and gas companies
The offshore wind industry in the United States is poised for accelerated growth over the next decade, with the supply chain alone projected to be a $70 billion revenue opportunity through 2030, and 1,700 turbines expected to be installed off seven eastern states.
Leading European energy companies like Ørsted (formerly DONG, which stood for Danish Oil and Natural Gas) and Equinor (formerly Statoil) have successful track records in scaling the European offshore wind industry. They’re already far along in developing U.S. projects, and other oil companies have noticed.
By the mid-2020s, Royal Dutch Shell PLC’s New Energies unit expects to leverage four decades of offshore capabilities forged in the Gulf of Mexico to generate more than 4 GW of wind power from two new facilities off the U.S. East Coast.
“Offshore is something that is in the DNA of Shell,” notes Etienne Delcroix, the company’s commercial director of floating wind. With its decades of experience, Shell brings investment capital, management teams, and the flexibility to help developers like EDF Renewables successfully kickstart the U.S. offshore wind market, as they are together on the massive Mayflower Wind project south of Martha’s Vineyard in Massachusetts.
A successful financial green recovery can and must bring fossil fuels along
The economic disruption from the COVID-19 has wreaked havoc on society at large, but it will end someday. Already renewable energy has emerged as a bright spot. As our energy and financial markets continue to rebound, this is a huge opportunity to rebuild better — creating new jobs and profitable investments, while addressing climate change for future generations.
Leveraging the collective knowledge and capital of the fossil fuel industry will accelerate our transition to this greener economy. It is already providing a new path to the future for its companies.
Mona Dajani is a Partner and Global Co-Head of Energy, Infrastructure, Renewables & Water at Pillsbury Winthrop Shaw Pittman.
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