Petroleum is one of the main sources of energy in the world and is also one of the main contributors to environmental pollution in the world. Activities from the oil and gas industry can be directly linked to some of the world’s biggest environmental disasters; from the destroyed ecosystems in Nigeria and Indonesia, to the 1989 Exxon Valdez spill, which is said to have been the worst environmental disaster in history.
Exxon Valdez Spill, 1989
The true price of oil for the environment and climate change is becoming harder to ignore as the world starts to observe more extreme weather conditions around the world. In January 2019, several newspapers in the United States ran with the headline “Mars is 35 degrees warmer than Chicago”. In March of 2019, ironically in the midst of Africa’s climate week, Cyclone Idai ravaged through Mozambique, Malawi and Zimbabwe, causing damages valued at $2bn and claiming over 700 lives.
These events have led activists, organizations and concerned individuals to call for the oil industry to develop sustainable business models and practices that will at least minimize harm caused to the environment. At the same time, vested parties are pushing for a complete departure from the use of oil and other fossil fuels for energy. Most importantly, such sentiments against traditional oil & gas born out of their negative impact on the climate are now being reflected in legislation and on changing consumer behaviors. Legislation is to only being passed to reduce impact of fossil fuels but is also providing incentives for renewable energy adoption such as through the Energy Policy Act of 2005. Consequently, these moves in legislation and changing consumer sentiment will definitely impact the business models and future strategies of traditional energy companies. It must be noted however that progress may be slow towards this end as despite the campaign against the oil industry, demand for oil is still growing and large oil companies continue to develop long term strategies to expand their oil operations.
There is still some hope however as some oil companies are making strides towards developing and implementing sustainable business models and operations to reduce their share of environmental pollution. One such company is Equinor which is trying to accomplish this and has changed its name to signal a profound pivot away from oil and gas to a renewable future.
Equinor, formerly known as Statoil, aggressively invests in maritime renewable energy developments in Europe with plans to grow into the emerging U.S. offshore wind industry (e.g. Empire Wind), investing a greater proportion of its capex in these projects than any other oil and gas company. Despite a clear signal of their intention to become more sustainable that is demonstrated via their supporting investments in renewables, Equinor still maintains a strong oil and gas presence, both within their home country of Norway, and abroad; it tends to favor joint ventures or partial investments in projects abroad. This is consistent with their strategy to create a “resilient and options-rich portfolio” across the energy space.
Equinor’s Wind Farms
Despite its important investment, renewable energy still represents a small proportion of Equinor’s total revenue (0.2%), and assets (2% of current assets and 3% of new asset investments). Our opinion is that Equinor is well positioned to pivot to renewable energy, especially in the offshore environment. Indeed, the organization has aggressively procured offshore wind farms and leases, including the most attractive sites – the one that generates the most power – and benefit from the most favorable power purchase or regulatory arrangements, thereby building a sustainable first-mover advantage through physical pre-emption. Going forward, it is also required from the governments around the world to offer more opportunities in the renewable energy space.
Hence, although the company has decided to increase its share of spending on the clean energy from 5% to 15-20% by 2030, however this is not enough we believe the company should consider fully transforming its utilities business from “black to green energy” by divesting progressively its oil and gas business. Such transactions would complete Equinor’s transformation away from fossil fuels into a leading, pure-play renewables company. By focusing solely on transforming its business into a global leader in green energy Equinor will systematically divest its oil and gas businesses and position itself as a leader in the renewable energy sector.
I believe that traditional oil and gas companies, like Statoil, Shell, and BP, will not play a large role in the energy transition. These relatively small actions are there to attract investment from sovereign wealth funds, who are increasingly demanding greener initiatives from the companies they own stakes in. Additionally, I see almost no synergies between oil and gas companies’ current operation and the operations involved in running wind farms. I think this move by Statoil is nothing but a PR initiative.
I believe that there is a big role for traditional oil and gas companies to shape the energy transition and they also realise that a business model fully based on fossil fuels is finite.
Shell for example, in the Netherlands, has invested in a large off-shore wind park called Borselle 3&4. They were awarded the contract through partnering with a consortium of companies involved in renewable energy, off-shore and turbine manufacturers.
More recently, Shell has also bought the NewMotion EV charging company to enter the electric vehecle market, in addition to its existing hydrogen research.
As a percentage of their global revenue, investing a couple of billion a year might not seem substantial, but in my opinion it needs to start somewhere and I do believe that the weight put on renewables going forward will increase.
Very interesting read! Great to hear about more companies shifting away from oil and gas towards renewables, at any scale. Orsted actually also rebranded away their oil image name, formerly Dong (Danish Oil and Natural Gas), and now focuses solely on renewables.
It is indeed hard to believe that traditional oil companies will deviate so drastically from their core business. I see their strategy on investing in renewable energy more like a hedging system, where they are getting prepared to a potential disruption. Therefore, although well positioned in terms of technology and resource availability, they will most likely not be the agents to push for immediate change, which is what the planet really needed.