Oil and gas companies are used to taking big risks, but they’ve also grown accustomed to large payoffs.
That paradigm doesn't necessarily translate easily to the renewables market, where relatively low risk translates to low, but mostly guaranteed, returns.
“That’s the key pushback we get when we speak to companies like ExxonMobil, Total, or any of the oil and gas majors,” said Tom Heggarty, a senior solar analyst at Wood Mackenzie Power & Renewables and the author of a new report assessing the place for majors in clean energy.
“Although they understand from a risk perspective the projects are a much lower risk than they would be used to in the oil and gas space, the returns are typically quite lower as well.”
Despite the pushback, Heggarty said majors are turning to WoodMac more and more to understand the challenges and opportunities in the renewables sector.
Majors have no plans to ditch their traditional business, but corporate sustainability pressures and the attractiveness of renewables is pushing many toward clean energy. Before majors will truly increase investments though, many are concerned about negotiating the balance between risk and return, and a desire to not get left behind.
“Committing more capital from renewables projects would also mean leaving value on the table for their shareholders,” said Valentina Kretzschmar, director of corporate research at Wood Mackenzie. “At the same time, most of them understand this is the future, this is the way things will evolve.”
According to WoodMac's analysis, the 22 percent return on equity investment for North American onshore projects dwarfs the 5 to 7 percent return on solar projects and the 7 to 9 percent return on wind projects with guaranteed revenue. But renewables can compete with returns on exploration, downstream projects and upstream merger and acquisition investments.
Majors own less than 2 percent of the world’s operating solar and wind projects. Though lower returns may cause hesitation, Heggarty said many majors are actively looking to translate experience in oil and gas to the clean energy business.
That’s especially true in Europe, where majors face more external pressure from government, investors and consumers — and they don't have the same access to cheap oil as do their counterparts in the U.S.
But even U.S. companies have demonstrated an interest. Last week, Chevron and ExxonMobil joined a climate initiative that already includes European companies like Shell and British Petroleum as members. Though Kretzschmar said the move doesn't indicate those companies will quickly diversify into renewables, it does indicate mounting pressures to act on climate. She does think ExxonMobil and Chevron will more earnestly move toward clean energy technologies “when the time is right.”
When that time comes, Heggarty said majors might choose to concentrate on areas where their expertise can easily be translated.
Offshore wind, for instance, makes sense for a company with in-house engineering expertise that’s already worked in offshore oil and gas exploration. Big solar projects in emerging markets like Saudi Arabia, where oil and gas companies already have working experience, could also be easier points of entry. But to see real success in the clean energy space, Heggarty said majors will have to approach it with a different mindset, rather than trying to “shoehorn” those projects into a company’s existing business.
“One of the challenges is that oil and gas companies are comparing renewables projects on a similar basis. Although they are both in the energy space, they are very different propositions. Totally different risks, challenges, and returns at the end of the day,” said Heggarty. “What we’re saying to some of these guys is they need to think about these investments in a totally different way.”