Fitch: Oil Majors' Investments in Renewables on the Rise

Major oil companies' investments in renewables businesses are likely to provide a useful hedge to secure positions in the fledgling alternative energy industry, rather than be a radical step to transition away from traditional businesses, Fitch Ratings says. So far these investments have been incremental, especially compared to the annual multi-billion dollar capital expenditure made by the majors in the traditional businesses, and this balance is unlikely to shift significantly in the medium term, leaving any credit implications muted.

Oil majors entering renewables is not something new. Oil producers started investing in the sector as far back as the 1980s, with a well-publicised wave of investments in the 2000s, only to quietly exit the sector shortly after the financial crisis of 2007-2008. Rapid expansion in electric vehicles (EVs) and pressure from shareholders to be in the frontline of greener energy are among the contributing factors to the latest wave of investments, including in some cases power supply. However, this time it could indeed be different, given how much the technology, the market and the perception of renewables have changed. Global regulatory and public pressure to move towards a lower-carbon future is also conducive to this shift.

Solar and wind projects constitute the bulk of majors' investments in the sector, but carbon capture and storage, digital technology, and biofuel are also in their sights, although the relative interest in the latter is declining. Oil majors have the scale and capacity to invest, and they have global reach, but they have very few other advantages in renewables and clean technology. Renewable generation is still a largely localised sector, while clean technology is highly specialised and knowledge-based. Therefore, very often the majors become partners in joint ventures in renewables projects and sustainable technology, providing financial backing and sharing risks with others who contribute expertise and know-how. This is done to test business ideas and technologies before increasing their capital commitments.

Shell has made the largest public commitment to invest in "new energy" with expenditure of up to USD2 billion per year until 2020. This amount is dwarfed by the expected USD23-28 billion average for investments in the traditional businesses. Planned and executed investments from other major producers, like BP and Eni, in green energy are measured in hundreds of millions annually versus multi-billion capital spending on fossil fuels. The proportion of investments in renewables could increase if and when returns on investments in alternatives come closer to those on traditional businesses. Statoil, which is planning to change its name to Equinor to stress its commitment to renewables, indicated its ambition to increase the share of capex on "new energy" to 15%-20% by 2030 and expects competitive returns of 9%-11% on these investments. Even Exxon and Chevron, whose strategies are firmly rooted in fossils, have been paying increasing attention to alternative energy.

Growth in energy produced from renewable sources does not mean the imminent demise of traditional oil and gas production. Energy consumption has been growing as the world population and its prosperity increase, and renewables benefit from this growth rather than encroach on the positions of traditional energy. However, electricity markets have been undergoing a structural change with largely negative implications for incumbent power producers as a result. Furthermore, although transportation is the largest user of oil, a full transition to EVs and other types of electricity-powered transportation is likely to be a protracted process, requiring EV charging infrastructure, among other things. In the meantime, demand for oil and gas from other sectors, such as industrials and petrochemicals, is likely to grow, supporting demand for oil and gas in absolute terms at least in the next decade. Therefore, investments in renewables by oil majors could become complementary to traditional businesses, rather than cannibalise them.

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