Oil majors have been present in the renewable energy space for years. But with momentum building around the Paris COP21 climate talks at the end of the year, their focus has changed.
Traditional energy players are positioning themselves in the debate on carbon pricing and emissions reductions, rather than wind and solar. Greater engagement by oil companies should be welcomed as cooperation between the public and private sectors will be critical to moving the conversation forward both in Paris and beyond.
Several factors shaped this evolution from hydrocarbons, to renewable energy, to carbon pricing.
While the long-term energy outlooks put together by ExxonMobil and BP still recognize fossil fuels as the predominant source of energy in decades to come, renewables will be growing rapidly in that same time.
Consumers are more savvy and proactive, governments are advocating more ambitious clean energy goals, and a push back against fossil fuels has gained momentum, particularly in Europe.
Renewables, especially solar and wind, are also becoming more competitive. Low oil prices may provide some short term relief for oil producers but the slashing of exploration and production budgets will mean a slowdown in production.
Oil majors were smart to get ahead of the curve, albeit in an uneven way. Oil companies started funding renewable research, buying up solar and wind generation capacity, or in the case of Total, getting into the manufacturing side. Investment in biofuels such as ethanol was particularly attractive.
However, after a wave of initial investment in the late 90s and early 2000s, many companies then took a step back.
Chevron, which had vaunted its renewable energy branch, later decided it could no longer justify the investment. Others, such as Shell, have maintained some wind farms but are not making any new investments. Biofuels is the main area in which oil majors still operate.
Instead, company language has changed. International oil companies now talk about efficiency and reducing carbon emissions as both market opportunities and market-based solutions to growing demand and the climate change reality.
In June this year, European oil companies BP, Statoil, ENI, BG Group, Shell, and Total wrote an open letter calling for carbon pricing to be on the table at this year’s climate negotiations.
Most large oil companies already factor a carbon price into long-term planning, recognizing the likelihood of such a policy eventually coming into force. According to ExxonMobil’s VP for Government and Public Affairs, Ken Cohen, the price used in the company’s analysis varies by region but is up to $80 per ton. BP’s standard cost assumption includes a $40 price per ton of CO2 for industrialized countries.
For those companies that dabbled in renewable energy investment, carbon pricing is a more efficient and cost-effective way to contribute to global efforts on climate change. The majors are also wise to position themselves as relevant players ahead of the COP21 talks.
Still, there’s no mistaking oil companies’ main profit driver remains oil. As Shell CEO Ben van Beurden noted in February this year. “Yes, climate change is real. And yes, renewables are an indispensable part of the future energy mix. But no, provoking a sudden death of fossil fuels isn’t a plausible plan.”
Of course, a sudden death of fossil fuels is not part of Shell’s, BP’s or any other oil major’s business plan. And why should it be? Even as renewable energy assumes a much larger portion of the energy mix, oil will still play an important role, particularly in transportation.
Another question is whether it is relevant or even necessary to have oil majors competing in the renewable space. Fortune 500 power companies Sempra, AES Corporation, and others are investing in renewable power projects across the globe.
And innovation is coming from elsewhere. Companies like Tesla are challenging the gasoline-powered combustion engine, and could finally solve the storage problem that is holding renewable deployment back.
Oil majors are right to acknowledge the very real and devastating impact of climate change. Promoting market-based solutions such as carbon pricing will not undermine their primary mission.
But they are not the only game in town. And while oil and gas companies deserve a seat at the table, this should not be at the expense of truly innovative solutions coming out of the private sector, whether they are new technologies to generate renewable energy or efficiency gains that allow for lower consumption of fossil fuels.
The private sector, in terms of both traditional and non-traditional energy players, all have a significant role to play going forward. Talking the talk is a good place to start.