Big Oil and Green Energy: A Long History of Collaboration, Recent Moves, and Allocating Capital as a Hedge Against Future Contraction in the Oil & Gas Industry

Big Oil and Green Energy: A Long History of Collaboration, Recent Moves, and Allocating Capital as a Hedge Against Future Contraction in the Oil & Gas Industry


Big Coal vs. Big Oil


The U.S. coal industry has been in a state of decline, a state of contraction, for several years now. Bankruptcies are common, coal use continues to decline, few new mines have been opened, and no new coal-burning power plants are likely to be built in the U.S. While there is some occasional export growth in metallurgical coal, thermal coal continues to stagnate and that is very unlikely to change. There is little upside potential for coal companies to transition into companies with cleaner portfolios. Aside from a few vague and thus far uneconomic opportunities to do things like deriving rare earth elements from coal mine tailings or coal ash or to use coal ash to make high-strength carbon materials there is little upside potential for company transitions. On the other hand, oil majors have long been investing in green tech and renewable energy. Such investment has waxed and waned through the years as company profits have risen and fallen. Exxon has been developing algae-derived biofuels for many years. Exxon was also instrumental in the development of the lithium battery, especially through the work of employee John Goodenough, who led the research and development of lithium battery technology.


The Long History of Big Oil and Green Energy Collaboration


In the recent book, The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World, author Charles C. Mann notes that at one point in the 1970’s the two biggest developers and utilizers of photovoltaic solar panels were the Pentagon and Big Oil. The main uses were military satellites and powering offshore oil platforms. Indeed, 70% of all solar panels were bought and deployed to power those platforms. Thus, the collaboration between Big Oil and green energy goes back about half of a century. The following paragraph from the book is a good summary:


 “Realizing that solar had become essential to oil production, petroleum firms set up their own photovoltaic subsidiaries. Exxon became, in 1973, the first commercial manufacturer of solar panels; the second, a year later, was a joint venture with the oil giant Mobil. (Exxon and Mobil merged in 1999.) The Atlantic Richfield Company (ARCO), another oil colossus, ran the world’s biggest solar company until it was acquired by Royal Dutch Shell, the oil and gas multinational. Later the title of world’s biggest solar company passed to British Petroleum (now known as BP). By 1980 petroleum firms owned six of the ten biggest U.S. solar firms, representing most of the world’s photovoltaic manufacturing capacity.”


Much of the initial green energy investment by oil majors was prompted as well by notions common at the time that oil was likely to run out sooner rather than later. Peak oil production and resource depletion was a serious concern in those times. Investments went up and down with the latest reserve estimates as well as with the latest profits of the oil majors.


Revival of Green Energy Investment by Oil Majors, Particularly European Oil Majors


Several of the multinational oil majors, particularly the ones based in Europe, have indicated that they intend to move toward carbon neutral operations by 2050. That plan includes more investment in renewable energy companies as well as R & D. European oil and gas major in particular have made recent acquisitions in solar and offshore wind. France’s Total has controlling interest in major solar player SunPower and recently brought its renewable energy portfolio to 5.1 gigawatts. BP, Galp, Eni, Equinor, Repsol, and Shell also have large amounts of renewable assets. The biggest solar asset owner outside of China is NextEra Energy with about 4.6 gigawatts but Total is closing in with diverse solar assets spread across 15 countries. Total is apparently focusing on solar in its goal to get 20% of its revenue from low carbon businesses by 2040. Equinor is leading oil and gas sector investment in wind, expected to be 4.6 gigawatts by 2025 while Shell projects 1.8 gigawatts in wind investment by 2025. That would give Equinor and Shell about 6% of global installed wind capacity by 2025. Total has also been moving into offshore wind investment. Another collaboration is reviving the utilization of green energy from onshore or offshore to power offshore oil platforms.


One reason European oil and gas companies have been investing in renewables is shareholder pressure. Such pressure is less in the U.S. so far but could increase. Companies like Exxon and Conoco are thought to be readying for such a trend if it looks likely to happen. Aside from shareholder demands, some form of carbon taxes could make oil and gas less profitable and renewables more profitable so readiness could be important. Thus, in some ways it could be seen as a hedge against possible future contraction in the industry. With the coronavirus majorly impacting oil demand we can get a glimpse of what a drop in oil demand can do and already the prospects are not good. Oil majors may also hedge by focusing on downstream refining and petrochemical production. 


Big Oil and Renewable Energy R & D: New Projects Include Green Hydrogen Development


Aside from investment in utility-scale solar, (mostly) offshore wind, and associated infrastructure, there are a few other Big Oil R & D projects worth noting. One is Shell’s project in developing so-called Green Hydrogen. The project is only in feasibility phase but the plan is to develop 3-4 gigawatts of offshore wind capacity in the North Sea to power by 2030 to make hydrogen, with dynamic, quick-start/quick stop, electrolyzers along the coast of the Netherlands and offshore. Although less than 1% of hydrogen currently comes from renewable energy that percentage is expected to grow quite a bit this decade, eventually beginning to displace oil. If enough European renewable energy is curtailed due to peak generation and peak demand imbalance then prices for that excess drop. The dynamic electrolyzers could be set to quickly use excess renewable generation, take advantage of low dynamic pricing, and help wind and solar generators to sell excess at reduced rates rather than lose it. Hydrogen can be stored in large tanks for later use, for industrial applications, or to power fuel cells. However, in order for green hydrogen to be economic relative to hydrogen made from fossil fuel, usually natural gas, the cost of renewables relative to gas would have to drop by 2-3 times. That could happen by 2030 which would be the bet. If carbon taxes get ratcheted up by then that is a pad for the bet. Nonetheless, it is a risky endeavor at present. Even so, WoodMac notes that global green hydrogen deployment, currently as 252 megawatts, is expected to grow to 3205 megawatts by 2025. That is a big jump. Economics are expected to improve by 2030. 


References: 


The Solar Industry’s New Power Player: Oil Majors – by Jason Deign, in GreenTech Media, Feb. 26, 2020


Shell Exploring World’s Largest Green Hydrogen Project – by John Parnell, in GreenTech Media, Feb. 27, 2020


The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World – by Charles C. Mann, (Alfred A. Knopf, 2018)


Could Green Hydrogen Become the New Oil? – by Stephen Lacy, in GreenTech Media, Jan. 23, 2020


Energy Transition: The Future for Green Hydrogen – by Wood Mackenzie, Oct. 25, 2019