Molecules to electrons; Can Big Oil become a great power?

LONDON (Reuters) – European oil companies have begun to worry about what worries them may one day be a potential threat to their business: the end of a century of growing demand for oil in a world of low carbon emissions.

The emergence of the electric vehicle and the demand of investors and consumers for cleaner energy to limit climate change have pushed the European part of Big Oil to take steps to refocus their activities from oil production and production. refining to electricity via natural gas and renewable energies.

Their financing for oil exploration exceeds all possibilities, but they are currently buying electricity and retail generation services to integrate them into their long-standing natural gas and natural gas businesses. renewable energies.

Relatively modest investments in electricity are helping to overcome the energy transition by providing households and businesses with cleaner energy than coal and at gas stations with an ecological advantage through the charging of electric vehicles.

Testing an electrification route also helps meet the demand of shareholders who want "sustainability" of their activities.

The International Energy Agency predicts that regulatory changes to reduce carbon emissions will mean that demand for electricity will grow much faster than oil demand, as the Asian energy-hungry middle clbad develop. The industry sees oil demand peak between 2020 and 2040.

Diversification is not new in the oil and gas sector and at best has uneven results. Major oil companies have bought stakes in coal, household, pet food, nutrition, shrimp trade, diapers, hotels and steel, with limited success. Critics say that electricity will not bring the benefits that oil and gas companies need to sustain the large dividends their investors are accustomed to.

BP lost billions in its first foray into renewable energy 20 years ago by adopting the name "Beyond Petroleum". It shut down its solar energy manufacturing division in 2011 and tried to get rid of its wind farms, while claiming to have a better model.

"Most of what we do today is related to our core capabilities," said Dev Sanyal, head of BP's alternative energy division, Reuters. "If you can start combining molecules and electrons into an integrated offering, you start creating something more interesting."

PROFIT

Profit is the first challenge to distinguish between renewable energies, gas-fired power plants and utilities facing increasing competition in rapidly fragmenting markets. None of the companies break down their renewable energy or energy results.

BP returned to the solar sector in 2017 with a $ 200 million investment in the UK Lightsource solar generator and dived into the British electricity retail business the same year by acquiring a 25% stake in Pure Planet. , a small challenger brand providing renewable electricity to some 100,000 customers.

"The renewable energy business last year has been generating free cash flow (…) we have moved in a positive trajectory over the past three years," said Sanyal. "Today we have industrial customers and, over time, there may be retail customers."

He added that BP plans to expand its alternative energy capacity – the largest among the majors, according to CDP, a climate-driven research provider that collaborates with large institutional investors. Gazprom's strong interests in the hydropower sector put it in second place ahead of Total and then Shell, according to CDP calculations.

In the retail trade, the French and Italians are ahead.

The purchase of Direct Energie by the French giant Total last year gave it a portfolio of gas-fired and renewable energy power plants as well as a public services defense platform, EDF.

It targets seven million customers in France and Belgium by 2022 and said in a recent investor presentation that it was intended to provide low – intensity electricity to customers. carbon from 15 to 20% of its total supply by 2040.

Eni claims to be Italy's second largest electricity producer with six power plants, a large electricity trading company and two million customers.

Shell says it wants to become the largest electricity supplier and has made a number of investments during the year, including a Brazilian gas plant and a British utility.

Last week, it renamed the utility Shell Energy and switched its 710,000 customers to 100% renewable electricity, offering them discounts on refilling gasoline and electric car at its service stations.

Mark Gainsborough, head of the new energy division of the Anglo-Dutch company, told Reuters that his goal was to expand his retailer base in Britain.

Shell has been considering acquiring the retail division of its competitor SSE in recent months, but discussions over the government's decision to cap most energy prices have made little progress, indicated industry sources, an example of the risks facing the world's electricity markets. Shell and SSE declined to comment.

As a sign of growing competition among large energy companies, Total is considering a competing bid for Shell for the Dutch energy group Eneco, according to sources close to the case. Total declined to comment.

Eneco amounts to approximately 3 billion euros and has 2.2 million customers. Gainsborough, of Shell, said he could provide a model for a commercial energy model.

"The typical aspiration is to find an integrated mode with positions in trading and supply and customer books," Gainsborough said.

CAUTION

BP's former CEO, John Browne, who ran the first London-based renewable energy company, said much lower production costs for wind and solar projects and a better understanding of future growth in energy markets. energy had radically changed the game since.

"The question is whether you have the skills, the people and the determination to succeed in this job and if you are happy to see that in reality, the returns you achieve are better than those of your other activities." said Browne to Reuters.

Yields from solar and wind projects are typically around 5 to 10 percent, according to CDP's climate research provider, half of those from many oil and gas projects.

Until now, major oil companies have spent a small portion of their annual investments on low-carbon technologies as they balance shareholder demands for performance and innovation.

Shell and Equinor plan to invest between 5% and 6% of their clean energy technology investments, while Eni targets around 4% and Total and BP expect about 3% each, according to research. of the CDP.

These numbers increase with investments in the production of electricity from gas, but they are still small enough to be swallowed if competitors make things difficult, especially in the retail sector, where they include supermarkets, fintech and Amazon startups.

"If at the end of the day, that does not work, these companies have a lot of resources and would be able to create energy divisions," said Munir Hbadan, head of clean energy at CMS law firm United Kingdom.

The difference between the returns of power and oil and gas had not changed much, he said, but there was a new momentum as the perceptions of shareholders and their children l? had done.

"Some of the oil companies will succeed," Hbadan said. "But I wonder if they will find it more painful than they would have expected."