31 May 2016

Oil majors eyeing up the energy sources of the future


As the oil price hovers around $50 a barrel, over the past year profits at the world’s biggest energy companies have taken a hammering. Some of them are turning to alternative sources in a bid to seek more sustainable profits over the long term.

The latest round of shareholder AGMs last week revealed some shifts in strategy and unrest among shareholders concerned about the long term viability of the energy giants’ traditional business model.

Leading the way was French firm Total, which announced a nearly billion dollar purchase of high-tech battery manufacturer Saft, giving the company a foothold in future energy storage technology. This comes on the heels of the company’s $1.4 billion purchase of US solar firm SunPower and a commitment last September to invest at least $500 million a year in renewable energy.  Elsewhere  Norwegian rival Statoil last month outlined plans to spend $1.2 billion with E.ON on the Arcona windfarm in the Baltic Sea.

Total’s Chief Executive Patrick Pouyanné told the Financial Times that he planned for the group to have 20% of its assets invested in low carbon within 20 years.   Total have also announced they are reducing their exposure to Canadian tar sands, avoiding the Arctic ice pack and assuming a carbon price of $30-40 when deciding where to drill.

These all come under the company’s ‘2 degree Celsius scenario’ which highlights that part of the world’s fossil fuels deposits will not be exploited and is in line with the outcomes of the Paris Accord agreed by nearly 200 nations at last year’s climate summit.  Mr Pouyanné said: “The energy world is evolving. There are new areas over the next 20 years beyond oil and gas that we think can be profitable.”

Pouyanné added that his moves were in part motivated by concerns expressed by major investors Blackrock and Norway’s sovereign wealth fund among others.  Last week investors also rattled their sabres at Shell, with Dutch pension fund PGGM warning the firm that it was “not convinced Shell has sufficiently internalised the consequences of climate change in its strategy and future plans.”  Shell’s Chief Executive Ben van Buerden admitted the oil and gas industry needed to invest up to a trillion dollars a year in renewable energy to stay within the two degrees scenario. He stopped short of changing Shell’s business model to be compatible with 2 degrees.

There were similar shareholder challenges at Exxon and Chevron on Wednesday calling for stress tests to determine the risks that climate change pose to their businesses. Both resolutions were defeated but the proposals drew more support than any contested climate-related votes in the companies’ history with 38% and 41% respectively.  Exxon shareholders were successful in one proposal giving investors greater power to propose directors candidates.  Beth Richtman, investment manager at the California Public Employees’ Retirement System, which manages $290 billion, told the Wall Street Journal that the number of shareholders supporting the climate-risk measures “is significant, and will continue to grow.”

But it’s not just the corporate oil giants that are feeling the strain of being too closely chained to the black stuff.  Saudi Arabia’s Prince Mohammad bin Salman has announced a program of radical ‘Thatcherite’ reforms to wean the Kingdom off its narrow oil dependency and overhaul its archaic economy. In comments to Al Arabiya television, he said: “We have an addiction to oil. This is dangerous. I think that by 2020 we can live without it.” A four year time frame would appear to be wishful thinking.  The Kingdom’s economic plan involves the part privatisation of the state owned oil giant Aramco with the income used to diversify its investments.  Up to $80 billion of wasteful spending is to be slashed, water subsidies pared back, female participation in the workforce increased and Riyadh plans to develop a national defence industry.

But Ambrose Evans-Pritchard, the Daily Telegraph’s International Business Editor, thinks the desert kingdom may not have given themselves enough time to turn around the oil tanker: “The Saudis may have left it too late to break oil dependency in time, especially as renewable energy reaches parity and the COP21 climate accords signal a move to worldwide carbon pricing. India is already examining plans to switch its entire transport system to electric power.”

Ultimately the shareholders of the oil giants will be hoping their companies can adapt quick enough to plot a more sustainable long term path.  Total’s Pouyanné is hoping he’ll be ahead of the pack: “Some of our competitors are defensive [about the changing energy landscape], but we are saying we want to make a business out of it.”

The energy landscape has been changing rapidly in recent years, and change is only set to accelerate driven by a combination of technological innovation, market forces and increasing regulation around the world on carbon emissions. It is an instructive case study in Schumpeter’s creative destruction.

Until recently the oil majors were betting the house that the world would not get serious on climate change. In addition they were perhaps complacent about how little technology would disrupt their business models. The signals in recent days may herald simply another round of greenwashing like BP’s famous “beyond petroleum” brand push. But with increasing shareholder pressure the penny might finally have dropped for Total, Shell and their ilk.

Joe Ware is a writer at Christian Aid