Oil companies - throwing cash into the wind?
Oil companies might seem an odd place to look for renewable energy investment, but oil majors are increasingly throwing their financial weight behind clean energy.
The trend of oil companies courting renewable energy technologies is spreading fast. Oil majors Statoil, Shell, Total and Exxon have all announced interests and projects in low-carbon technologies; from solar to wind to carbon capture storage.
In the past, oil company investment in renewable energies has been dismissed as just “lip service” from a carbon intensive industry. But one little understood implication of the trend is the scale of capital available for oil companies to redirect away from oil investments, should strategic intentions shift.
Hey, big spenders
Capital expended by major listed oil companies was in the region of $200 billion in 2017. It was around $400 billion in 20141. On the other hand, total clean energy investment in 2015 was estimated at $286 billion2. So when oil majors start redirecting capital towards renewables, the market should take notice. With strategic presentations increasingly highlighting the range of renewable energy investment plans, it appears oil majors are beginning to recognise the challenges posed by a more carbon-conscious world.
2016 saw activity really begin to take off. Total acquired SAFT for $1.1 billion. Statoil acquired a 50% stake in the Arkona offshore windfarm; a $1.4 billion total project cost. Exxon, meanwhile, has announced that it would be furthering its partnership with FuelCell Energy on CCS (carbon capture and storage) technology. Whilst investments to date are small relative to capital spend by oil majors, there is scope for sizeable increases. Statoil has indicated that it could spend 15-20% of capital expenditure on renewables in 2030.
The rationale for all this is obvious; policies that could be enacted to combat climate change pose direct risks to the demand for carbon-based products. This adds risks to the business models of oil majors.
Renewables also represent other benefits. Regarding project economics, renewables offer a very different cashflow profile, typically one of steady earnings power compared to cyclical earnings of oil investments. One could justifiably argue that there is merit in renewables as a means for risk mitigation, both against carbon policies but also to stabilise cyclical earnings.
Oil majors shifting capital spending from carbon-based resources to renewables could add significant levels of capital to the renewables industry. Indeed, the levels of investment could exceed expected levels of growth by market participants, leading to greater demand for projects and boosting revenues for companies exposed to renewable engineering.
1.Morgan Stanley, 17 February 2017 ↩
The views and opinions contained herein are those of Schroders' investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.'s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.