EU oil companies hedging their bets

As many are acutely aware, a growing number of petroleum companies around the world are investing heavily in renewable diesel and sustainable aviation fuel (SAF) production at their refineries, but according to a new report, many of these European supermajors are also hedging their bets by placing wagers on the growing electrification trend that could push liquid fuels―both fossil and renewable―out of the on-road transport and heating markets.

In the name of climate change, a dozen and a-half governments around the world are at some point in the process of banning the new sale of internal combustion engines while pushing "zero-emission" vehicles like electric cars, and the U.K.'s recent decision to do so by 2030 begs certain questions, such as:

• Will the power grid will be ready to handle this influx of demand in such a relatively short period of time?

• Will the proliferation of electric vehicles simply shift greenhouse gas emissions from tailpipes to smokestacks?

• Will renewable energy make up an appreciable share of power generation by then?

While 37 percent of the U.K.'s power last year was considered from "renewable sources" (and setting aside the arguments many pose about whether wood pellets, which are wildly popular in the U.K., are sustainable or carbon-neutral), power generation in most other countries around the world is not so progressive.

According to the U.S. Energy Information Administration, more than 60 percent of U.S. electricity came from fossil fuels in 2019, including 38 percent from natural gas and 23 percent from coal. Only 17 percent of U.S. electricity in 2019 was derived from renewables. Globally, coal-fired power plants alone provided nearly 40 percent of all electricity in 2018.

Not only will renewable power need to continue to make up a larger share of the existing power demand, but it will also have to satisfy more traditional increases in demand that organically occur over time as both populations and standards of living increase. Introduce these massive influxes of electricity demand from projected policies favoring electric vehicles and we seem to enter problematic territory.

The EIA projects that world energy consumption will grow by nearly 50 percent between 2018-'50. Growth in end-use consumption results in electricity generation increasing 79 percent between 2018-'50, according to EIA.

Essentially, then, what is 17 percent renewable energy generation in the U.S. in 2019 would be like 9.5 percent in 2050.

Back to oil companies hedging their bets. GlobalData released a report on how European oil companies are leading the way in "renewable strategy" with the top six having more than 28 gigawatts of renewable power generation capacity in the pipeline.

"European international oil companies (IOCs) are leading the way in terms of progressing strategies for renewable power growth, ahead of U.S. players that have not, so far, made the same switch," GlobalData stated in a Nov. 27 press release. "The top six European firms have over 28GW of renewables capacity in the pipeline, with BP, Total and Equinor making up over 70 percent of this. However, the scale of these companies' developments still lags behind major power sector incumbents..."

Will Scargill, managing oil and gas analyst at GlobalData, said, "IOCs' current development portfolios are still significantly smaller in scale than those of incumbents in the power sector. However, long-term targets suggest an ambition to make up this ground―with BP's 2030 target of 50GW significantly exceeding Orsted's target of 30GW. The rapid build-out of European IOCs' renewable portfolios is encouraging as they look to position themselves for the energy transition. However, lofty ambitions do come with significant risk―particularly as they will still look to their oil and gas businesses to be the major cash generators through the medium term. A weak oil and gas market could leave companies unable to fully fund their renewables growth plans, leaving them with a diminished position in the overall energy market."

GlobalData says oil and gas companies looking to transition into the renewables are making significant moves in the mergers and acquisitions (M&A) space to support their growth ambitions. "Recent months have seen Total announce a flurry of deals in the wind and solar sectors, while BP announced its entry into offshore wind with a $1.1 billion deal to partner with Equinor in U.S. developments," the company stated.

Scargill continued, "Solar PV and offshore wind developments account for most of IOCs' renewables development pipelines. Solar has the benefit of low costs and a short investment cycle, supporting rapid capacity build-out, while offshore wind is expected to see the fastest growth within renewables over the next decade and has the benefit of exploiting oil companies' experience in offshore development."