The energy transition is not a straight road and we see many players changing their roles to adapt to new conditions. Rachel Millard writes in The Sunday Times about how oil giants are changing their approaches to take advantage of the energy transition. What are your views?
Electric shock as oil giants make a power play
When the great and good of the oil industry gathered at their annual conference in Texas this month, they were joined by a few unfamiliar names. In a sign of shifting times, the guest list at Ceraweek in Houston also included Amazon Web Services boss Andrew Jassey and executives from Japanese car maker Mitsubishi.
Big Oil, facing disruption from huge shifts in technology and energy use, is gradually trying to do something about it. Shell executive Maarten Wetselaar, responsible for so-called new energies, spoke for the first time of the Anglo-Dutch giant’s ambitions to become the world’s biggest electricity company in little more than a decade.
“We believe we can be the biggest power company in the world in early 2030,” said the Dutchman. “We think the power market will grow faster than other energy markets and it is easier to grow in growing markets.”
He outlined audacious plans for up to 30% of Shell’s $400bn (£303bn) business to be in generating, trading and selling electricity, compared with a fraction now. “Electrification is the biggest trend in energy over the next 10 to 15 years because we think it is the easiest way to decarbonise energy usage.”
The oil and gas majors are under pressure to change like never before as environmental concerns rise up the agenda. Volkswagen’s “dieselgate” emissions scandal has accelerated the shift away from combustion engines, and car makers are ploughing billions into electric vehicles.
Meanwhile, energy efficiency is making household devices less power hungry, and efforts are under way to electrify home heating. This month, the UK said that gas boilers would be banned in new homes by 2025 to ease climate change. The proportion of energy provided by electricity is set to jump to about 50%, up from 20% now. Within that, renewables such as solar and wind power are set to become the world’s target source of global electricity by 2040, BP is predicting, as the technology gets cheaper.
Views are mixed as to when “peak oil” will behit and demand will start to fall. BP concededfor the first time this year that it believes it will peak in the 2030s.
Shell’s plan to shift towards electricity is a logical next step for it and many of its peers, positioning it as a provider of energy, not just oil and gas — but it also plays to its core strength
Gas is likely to be a key fuel for power stations for decades to come, replacing coal-fired power across China. Shell has placed its bet, splashing out $70bn for rival BG in 2016, making it a superpower in the global gas market.
Wetselaar’s bold statement in Houston follows several moves by Shell so far. It bought UK electricity retailer First Utility at the end of2017, and this year it has acquired digital energy platform Lime-jump and German battery storage supplier Sonnen, getting deeper into power supply and management. It has ploughed cash into ffshore wind in America and into solar power there and in Asia.
Others are also dipping their toes into the electricity market. French oil and gas major Total splashed out $1.7bn on Direct Energie in a challenge to state-controlled utility EDF. BP bought a small stake in UK supplier Pure Planet and has a partnership with solar power developer Lightsource BP, taking a 43% stake in the company. The tie-up is central to an advertising campaign BP has launched in recent weeks.
For all the noise around investment in new technologies, the reality does not match the hype. Of its $25bn annual budget, Shell is investing only $1bn-$2bn in “new energies” such as electricity suppliers, renewable companies and technology. BP is investing about $500m of its budget of up to $15bn in similar areas.
The big bets are still being placed on extracting hydrocarbons from wells. America’s shale gas boom has revived the country’s manufacturing base and also turned the country into a huge exporter of liquefied natural gas (LNG), which is cooled and shipped across the Atlantic. BP splashed out $10bn on miner BHP’s shale oil and gasfield wells in the American south last year, beating Shell and Chevron in a race for the assets.
The oil giants’ hesitancy is justified. In their tentative tilt towards the power sector, both Shell and BP are acutely aware of the challenges of making money in this brave new world. Oil companies can generate returns of more than 20%, while utilities languish in the low single digits. Once-mighty Centrica is wrestling with the transition, its shares having plunged from 345p in 2014 to 120p last week. Oil giants are wary of becoming the next utilities, watching as once-reliable power suppliers shed customers as they are undercut by nimble upstarts, price caps and the whims of government.
BP and Shell, prized dividend payers supporting a raft of pension funds, are wary of doing anything to jeopardise that. Becoming utilities would create fundamentally different business models — with fundamentally different returns Generating energy from wind and solar, or running power grids, are very different investment propositions. Neither generates the sort of cash the companies are used to. Shell paid out about €13.6bn in dividends last year, yielding 6.2%. BP paid out about $8.3bn in 2018 yielding 6%.
“For oil majors to come into this business, it really depends on which part of the business you are in and how much you are willing to change,” said Prajit Ghosh, head of global energy, power and renewables at the research firm Wood Mackenzie. “Dealing with barrels of oil and dealing with kilowatt hours are very dfferent things.”
Wetselaar said Shell’s plans to hugely increase its power business depended on being able to achieve returns from the power business of 8%-12%. Crucially, he added, he was confident of doing so.
Here, Shell and other oil and gas companies spy an opportunity to do things a little differently. Rather than imitate the utility dinosaurs, they want to embed themselves into customers’ homes and lives. They want to earn money from services such as plugging electric vehicles into the grid or helping households put their washing machines on when costs are lower.
In an interview with Bloomberg, Wetselaar said: “We are not interested in the power business because we like what we saw in the past 20 years, we are interested because we think we like what we see in the next 20 years.
“With a much more complex system, we believe that by optimising and trading around this we can make better returns than the industry has done so far. Our sense is that returns will be higher on the customer end.” Simon Virley, head of energy at KPMG, said: “In a world of decentralised energy and electric vehicles, successful retail energy companies will provide consumers with the energy services they need in a hassle-free way, rather than simply selling kilowatt hours.
“There will be winners and losers in the battle for the home that is now under way. Some well-known names are bound to disappear from the UK market over the next few years.” Wetselaar said he believed that the 30m people who visit Shell’s petrol stations every day are an immediate possible customer base for its electricity. Shell may need an image overhaul, however. “Would you rather buy energy you hope is clean from Shell or from a new company with a wind turbine on their logo?” said an observer.
“You have to think there would be a degree of scepticism about buying clean energy from one of the largest fuel producers on the planet.”
Shell’s UK archrival, BP, is taking a more cautious approach in the power sector. It was burned by its splurge on solar panel manufacturing in the early 2000s, exiting the business in 2011. Investments now are more tactical. As well as its Pure Planet and Lightsource BP deals, it has a bio-power business in Brazil and a wind power operation in America. It continues to amass petrol stations, building on its partnership with Marks & Spencer in the UK, where is has more than 280 sites.
BP paid $200m for its 43% stake in Lightsource but allows the company’s management relative autonomy. Lightsource develops, installs and manages solar farms and provides technology for people to manage their homes.
BP’s head of strategy, Dominic Emery, said: “We are looking to take positions in the full value chain. What we are still wanting to understand is where we think different winning business models will be. This will probably be in different parts of the chain depending on geography. I think the main considerations will be about the returns profile from the investments . . . so we are being quite thoughtful about how we play in this space.”
For all the oil giants’ ambitions to diversify, gas will be at their heart for many years to come.