The new decade marks a potential turning point for the oil industry, where it has the opportunity to take the lead in the transition to clean energy.
Global oil company Repsol, based in Madrid, made the most sweeping statement yet from a big oil company when it pledged in December to become carbon-neutral by 2050. While such claims may elicit scepticism, big oil players with vast financial resources, engineering and project management capabilities are uniquely equipped to develop cleantech and build utility-scale wind farms, solar parks and other clean energy enterprises.
The International Energy Agency (IEA) stressed this point in its Oil and Gas Industry in Energy Transitions report, launched in January at the World Economic Forum Annual Meeting in Davos. “With their extensive know-how and deep pockets, oil and gas companies can play a crucial role in accelerating deployment of key renewable options such as offshore wind, while also enabling some key capital-intensive clean energy technologies – such as carbon capture, utilisation and storage and hydrogen – to reach maturity,” said IEA Executive Director Dr Fatih Birol.
Repsol is hardly the first to voice a commitment to energy transition. And yet, many oil executives have been loathe to put a time frame on it or make sizeable clean energy investments. Thus for most of the oil industry, the transition is moving at a crawl. Giants like ExxonMobil and Chevron in America continue to rely on oil. European majors Royal Dutch Shell, Total and BP favour natural gas.
Oil executives argue that oil generates double-digit returns on capital, versus clean energy’s single digits. This is debateable. Peter Parry of Bain says that it has become “something of a myth” that oil is a high-return industry. The Boston Consulting Group points out that in the second half of the 2010s, no big industry performed worse for shareholders than oil and gas.
The oil industry need only look to the past decade to see that disruption can happen in a flash. The rise of American shale upended oil markets the 2010s. At the same time European utility companies underwent transformation, prompted by the rise of solar and wind. Germany’s E.ON and RWE restructured and emerged cleaner and stronger. Others, such as Spain’s Iberdrola and Italy’s Enel, shifted their focus to renewables. According to The Economist, “Last year total shareholder returns from the reinvigorated European utilities left the oil and gas industry in the dust.”
Oil companies could boost profitability by scaling up offshore wind and similar businesses. They could also use venture capital to back clean energy ventures. BP said it plans to build five $1 billion-plus “unicorns” over the next five years aimed at generating more energy with lower emissions. The industry is also in a position to back research and development in potentially ground-breaking technologies such as high-altitude wind energy. There are profits to be made, and all the incentive in the world.