Annual Report - The Rationale Behind O&G Companies’ Increasing Investment in Renewables

Annual Report - 2017


DAMIEN SAUER

The Rationale Behind O&G Companies’ Increasing Investment in Renewables

DAMIEN SAUER

Beyond Petroleum or Back to Petroleum – Will the 21st century be the last one for fossil fuels? While early, the evidence is mounting. The meaningful advances made in cleaner power will introduce a new industrial revolution that will bring about a profound change in the way we behave.

Renewables are already the fastest growing source of new power generation and will increasingly become cost competitive without subsidies.

The reality is 2018 is the re-birth of the “Seven Sisters” and considerable enthusiasm builds for the potential of the sector. After three very challenging years, the major European companies have repositioned their businesses to work in a $50/bbl world. As the benefit of cash flow from projects start to accelerate, free cash flow is set for material underlying expansion. However, the sector is not without its attendant risks. Balance sheets are, by and large, still overextended and the prospects for commodity pricing are anything but assured.

Nonetheless, we all know that oil and gas will continue to be a significant part of the energy mix for decades to come. However, O&G companies believe that the ongoing energy transition is reshaping the energy industry with technology and innovation rapidly reducing the cost of renewable energy. Renewables are already the fastest growing source of new power generation and will increasingly become cost competitive without subsidies.

IS THIS TIME DIFFERENT?

Investing in renewable generation now is a different value proposition than in the early 2000’s. BP, Total, Chevron and Shell have focused on green energy strategies because:

  • Fully proven and advancing technologies are driving the levelized cost of electricity (LCOE) down with renewables becoming more competitive than fossil fuels across multiple markets
  • Solar and wind risk-adjusted returns rank favorably with many O&G full-cycle projects, and are associated with a lower risk profile
  • Renewables provide a high degree of cash-flow visibility while also offering scale and scalability in line with large upstream projects
  • End-markets continue to develop and are transitioning towards decentralized power generation which can only be addressed with renewable solutions

These new energy implications for each O&G incumbent present the opportunity to build a new regional or global energy leader.

  • Opportunity: leverage dominance in O&G, brand, capital and expertise to build a new energy leader and play a major role in the energy markets of the future
  • Risk: some verticals within the new energy industry are still in their early days and might take slightly longer to reach full value potential
    and return hurdles
  • Consequences: major impact on O&G, significant business diversification, change in reputation and investor perception

As cost of capital requirements to adopt renewable generation technologies keeps decreasing, management teams, boards and regulators will have to pay attention to this resource innovation megatrend. Investments in sustainable infrastructure should flourish, contributing to greater prosperity and a healthier place to live.

The Rationale Behind O&G Companies’ Increasing Investment in Renewables

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