International fossil energy majors know they’re in a race against technological change and the falling cost of renewable energy that they’re bound to lose—unless they hedge their bets, international consultants Wood Mackenzie advise in a recent study.
The cost and penetration of wind and solar generation “have reached a point where they’re impossible for the world’s largest oil and gas companies to ignore,” writes Greentech Media, another arm of the Woods Mackenzie franchise, citing the analysts’ report.
“The majors are faced with a mega-trend of cost reductions and continuous growth in renewables that started slowly but is gaining momentum,” said co-author Valentina Kretschmar, the consultancy’s director of corporate research. “It’s driven by technology innovation that seems absolutely unstoppable right now, and there is a realization among the majors that it’s a trend that’s not going away—and that it’s a threat to their core business.”
Despite excitement over regularly shattered records for installed generation, renewables still meet only 1% of humanity’s energy demand. But Wood Mackenzie sees renewables as “the fastest-growing primary energy source worldwide over the next 20 years,” Greentech reports. On a business-as-usual case, solar will enjoy average annual growth of 11% per year, and wind 6%. By contrast, “primary demand” for oil will remain almost flat—growing just 0.5% per year.
In that scenario, wind and solar will capture 8% and 5%, respectively, of global electrical power supply by 2035, the consultancy predicts. “In a future with tighter environmental regulations, Wood Mackenzie projects solar and wind will make up a 23% combined share of the global power market by 2035, and 6% of the total market for all forms of energy.” In a scenario with strong adoption of electric vehicles, highly efficient gas vehicles, and faster adoption of renewables, demand for oil peaks before 2030 and thereafter puts prices for fossil fuel under downward pressure.
If policy continues to increasingly constrain the burning of carbon, the international consultancy forecasts that renewable energy will generate nearly three times as much energy as American “unconventionals’’—tar sands/oil sands and “tight” oil and gas formations— by 2035.
Chevron, BP and Shell, to name only three of the oil majors, have made moves into green investment and messaging before—only to pull back. “Things are different now,” Kretschmar advises. “What’s different is there’s momentum behind the technology, and we’ve seen renewable energy costs drop dramatically in the last five years. Also, we didn’t have the same mental pressure 10 years ago.”
Recently, Norway’s Statoil has leveraged its experience in offshore oil drilling to make investments in offshore wind, in Europe and soon in the United States. France’s Total has “positioned itself to be a global leader in solar and batteries,” Greentech Media observes.
“European companies have tended to be more active in the clean energy space,” than American ones, Senior Editor Julia Pyper adds, likely “because U.S. firms are benefiting from low-cost unconventional oil and gas production, and don’t feel the same sense of urgency to invest in new businesses.”
Moreover, Woods Mackenzie underscores, the financial returns to oil majors for investments in renewables remain about half of what oil and gas production produces. “This presents difficult capital allocation choices in the near term,” the report states. “The majors will need to strike a balance between sustaining their core oil and gas business while keeping their options open in alternative energy.”
Nonetheless, the report says fossil majors have a limited time to put off a post-carbon strategy of some sort, and early movers may secure permanent advantages. “If there is rapid penetration of renewables into the energy mix and entry costs rise, players that are slower to embrace new energy could find themselves at a structural disadvantage,” the analysts conclude.