۱- Introduction

۲- Literature review

۳- The rise of renewable energy

۴- Analysis of the renewable energy strategies of global oil majors

۵- Results and discussion

۶- Conclusion and further research

References

Abstract

Renewables, especially wind and solar, are taking a role of increasing importance in the energy industry. Therefore, oil majors are progressively positioning themselves for the proclaimed energy transition. This indeed raises the question of whether sizeable capital allocation into renewable energy could indicate that oil majors are indeed transforming into energy companies. This paper helps to address this query by investigating the oil majors’ renewable energy strategies and investments. Furthermore, a complete quantification and categorization of oil majors into renewable leaders or laggards is provided. Results show that of the eight oil majors, five have undertaken considerable investment into renewable energy. The analysis also demonstrates the strong linkage between the oil majors’ proved oil reserves and their renewable energy strategies.

Introduction

According to BP’s 2018 Energy Outlook, renewable energy will be the fastest-growing source of energy, increasing five-fold by 2040 thus providing around 14% of global primary energy at this future point in time [1]. Concurrently, oil majors are gradually facing potential prospects as a declining industry: while peak demand for oil has not yet occurred so far, it may be expected that this scenario is indeed approaching as oil demand growth slows and eventually peaks [2,3]. In light of this, the oil industry is confronted with the question of whether it should try and at least partially reinvent itself as renewables businesses [2] as in fact also the rising cost of hydrocarbon extraction creates an incentive to consider accelerating the energy transition away from hydrocarbons toward progressively more affordable renewable energy resources [4]. In other words, could renewables be the oil majors’ next big business to which scarce capital will be diverted to from upstream oil [5]? As such, oil firms are essentially attempting to figure out how the best presently available cash cow in the world can be replaced [6] for the benefit of their own sustainable future. Furthermore, growing concerns about climate change following the Conference of the Parties 21 (COP21) Paris Agreement [7] may provide an additional drive for such strategy to hedge against hardening investor sentiment towards carbon emissions. Following COP21, more than 170 countries agreed to try limiting global warming to well below two degrees Celsius, an effort that will require major investments in low-carbon energy sources. In witness whereof, the chief executive officer of Royal Dutch Shell Mr. Ben van Beurden, for example, told investors recently that Royal Dutch Shell is no longer an oil and gas company, but an energy transition company [8]. However, the current business models of oil majors and renewable companies are distinctively different, and the oil industry is likely to have, for example, a different cost of capital to the renewables sector [2]. Most renewable ventures, like wind and solar projects, churn out cash flows akin to annuities for several decades after initial up-front capital expenditure generally with low price risk [5], quite different to the business models of oil majors that face oil price risk. However, one could argue that with an increasing share of intermittent renewables, the power business is becoming more akin to the oil industry requiring a trader’s skillset to manage increasing volatility and provides a hedge in a future low carbon environment. Therefore, this paper sets out to analyze the question of whether oil companies are transitioning to become energy companies in the broader sense (Fig. 1) and are making sizeable capital allocations to the renewable energy sector as part of their corporate strategies. Section 2 provides a literature overview. Section 3 presents the rise of renewable energy. Section 4 analyzes the strategic responses of the eight oil majors. Section 5 discusses the results, and Section 6 concludes and provides ideas for further research.