Green Oil: second wave of investment in low-carbon assets is substantial but hardly tidal
by Mike Scott, March 8, 2019
Oil majors are under significant pressure from investors to develop climate-friendly business areas but less than 1.5% of their combined investment budgets is expected to go into low-carbon assets globally this year. However, 70% of that is set to come from European oil companies who are reacting positively to market signals by participating in coordinated industry schemes designed to help meet Paris targets. Here is an overview of some of the more significant investments which, according to Mike Scott, are indicators of a permanent, growing green shift in the portfolios of these household-name giants.
The oil and gas sector has embarked on a second wave of green investment, a decade or so after abandoning a push into renewables that was spearheaded by BP’s Beyond Petroleum campaign, as the financial crisis hit and the oil price plunged.
There is so much happening, it is difficult to keep up. Here is a snapshot of recent activity:
- Shell recently announced it wanted to double its investment in renewable energy to up to $4bn annually, having recently invested in solar power, wind farms, electric car infrastructure and even a utility, the UK’s First Utility. In the first two months of 2019, it has invested in Autogrid, which uses artificial intelligence to make energy systems more flexible; US electric vehicle charging group Greenlots; Nordsol, a producer of bioLNG; autonomous driving company Aurora; Makani, a company aiming to generate wind power using kites; a demonstration project for a floating wind turbine; and sonnen, an energy storage company. And most recently, it bought UK-based Limejump, a virtual power plant company that will boost its position in demand response.
- BP’s joint venture with DuPont, Butamax, has developed technology that converts sugars from corn into an energy rich biofuel known as bio-isobutanol. It has more than 1GW of wind power capacity in the US, and in 2018, it bought solar power developer Lightsource, and UK EV charging company Chargemaster. (image: BP’s Butamax biofuel investment)
- Total has been involved in solar power since 1972. It bought SunPower in 2011 and covers the entire solar value chain, from manufacturing solar cells to installation. In 2016, it bought Saft, a leading provider of energy storage solutions. It has also been involved in biofuels since the 1990s and has opened France’s first biorefinery at La Mède.
- Italy’s Eni is investing €1.2bn to install 1GW of renewable capacity by 2021, and it aims to have installed capacity of 5GW by 2025, mainly in PV and wind, but also in concentrated solar power, biofuels and green chemistry.
- Equinor plans to devote 25% of its R&D budget to renewables by 2020 and to invest $1bn a year in renewables to 2030. It is one of the biggest players in offshore wind and is developing the world’s first floating offshore wind turbine project, Hywind. It has been storing CO2 in its Sleipner gas fieldsince the 1990s and it is one of the world leaders in CCS research. In solar, it has invested in Oxford PV, a leader in perovskite technology, which could lead to greater efficiencies, and Convergent Energy + Power, which develops solar and storage projects.
- Exxon has a $500m joint venture with Synthetic Genomics to genetically engineer photosynthetic algae to produce renewable crude from sunlight and carbon dioxide, but even though it has been investing in this area for decades, there have so far been few results.It is part of a $1bn a year programme of basic research in low-carbon technologies. Last year, it signed the biggest renewable energy power purchase agreement of any oil and gas company, to buy 500MW of wind and solar in Texas, which it will use to produce oil.
- Chevron has invested in solar, wind and geothermal, as well as renewable diesel but only at a small scale to evaluate the technologies.
A number of firms, including Total and Equinor, have their own venture investment units. In addition, the Oil and Gas Climate Initiative (OGCI), an industry scheme that includes most of the oil majors, has a $1bn investment fund that is investing in areas such as reducing methane leakage, cutting CO2 emissions and recycling CO2.
The fund has made a number of investments in start-up companies working in areas ranging from low-emissions cement and catalyst technology that enables CO2 to be used as a raw material, to data-providers monitoring methane leakage and CO2 emissions using satellites and aerial surveys, as well as more fuel-efficient and less polluting petrol engines.
So, is this different from the last time Oil majors dipped their toe in the water of renewables investing, and if so, why?
There are a number of reasons to believe that what is going on now is a more lasting change. Firstly, cost and technology developments such as the growth of the energy storage sector have made renewables much more viable for power generation and transport than they were a decade ago.
Second, the science is much firmer than it was in the early 2000s, when the last wave of investment kicked off, buoyed by the birth of the European Emissions Trading Scheme and Al Gore’s Oscar-winning turn in the film An Inconvenient Truth.
Subsequent reports from the Intergovernmental Panel on Climate Change (IPCC), backed up by a growing body of anecdotal evidence, have shown with much greater certainty that climate change is happening and it is man-made. At the same time, advances in analysis and research have made it much clearer who is responsible for greenhouse gas emissions. The US Environmental Protection Agency reported that in 2016, more than three quarters of US emissions came from burning fossil fuels for the transportation (28%), industry (22%) and electricity (28%) sectors.
The Science Based Targets Initiative has worked out the contribution of individual companies to emissions, creating a baseline of what is acceptable if companies are to do their bit in limiting the effects of climate change. A growing number of companies have signed up to the initiative and through their own efforts to cut their impact, they are putting pressure on their energy providers to be more sustainable.
The Carbon Tracker Initiative has set out the risks of the transition to a low-carbon economy to the oil and gas sector in reports with titles such as 2020 Vision: why you should see the fossil fuel peak coming; Mind The Gap: the $1.6 trillion energy transition risk; and Expect the Unexpected: The Disruptive Power of Low-carbon Technology. And the Taskforce for Climate-related Financial Disclosures (TCFD) is gaining increasing traction with investors, who are demanding answers from companies on how they are dealing with climate risks.
As a result, and most importantly, investors are firmly on board this time. The clearest illustration of this has come outside the oil and gas sector in recent days, with the announcement from Glencore, the world’s biggest exporter of thermal coal and one of the companies most bullish on the case for coal, that it will cap production at current levels, align its business with the goals of the Paris Agreement and prioritise investment in commodities that support low-emissions technology.
It is testament to the success of shareholder pressure in changing behaviour, especially the impact of the relatively new group ClimateAction 100+, which also recently persuaded Shell to halve its net carbon footprint by 2050, with a 20% cut by 2035, and to link executive remuneration to these targets. The group, which is targeting the biggest emitters, is also asking BP to align its business strategy with the Paris Agreement in a shareholder resolution, and, significantly, BP is recommending that investors approve the move.
The group is planning to target other large polluters and is likely to have significant success, given its recent achievements and the fact that it represents more than 300 investors and over $33 trillion in assets under management.
Another key driver is a wave of climate lawsuits targeting oil and gas companies, filed by cities such as New York and San Francisco, along with a group of 21 young people, with ExxonMobil a particular target. It’s unclear how successful these suits will be, but even if they ultimately fail, they cost time and money to defend and if oil companies are found liable, the costs would likely run into billions of dollars.
And if oil executives want to see which way the wind is blowing, they need only watch thousands of schoolchildren skipping school to protest against climate change every week or hear the latest developments in the Green New Deal.
All of these developments suggest that the sector is moving towards an acceptance that they need to change. The moves they have made so far are significant, but it’s important to remember that the $3.38bn the world’s largest oil firms spent on climate change reduction initiatives in 2018 was just 1.3% of their combined budgets, according to climate researchers CDP. And most of that spending, some 70%, is by European oil groups, suggesting that companies in other regions, including many national oil companies, may struggle to cope with a changing market.