Saturday, 29 July 2017
IT IS a foregone conclusion that the rapid growth of renewable energy (RE) cannot be ignored. Today, it accounts for around 3% of global energy demand, excluding large-scale hydro-electricity.
Sure, the majority of our needs are still fulfilled by fossil fuel. Nonetheless, it is undeniable that the growth of RE is rising, and with it investments too.
With governments cracking down on carbon and consumers switching to cleaner alternatives such as solar, wind and electric cars, this doesn’t appear to be just a trend – it’s potentially a significant shift in the world’s energy consumption and the big boys are starting to invest.
British Petroleum, for example, has the largest operated renewables business among its oil and gas (O&G) peers. In Brazil, it operates three bioethanol sites with a combined nameplate capacity of 10 million tonnes per year.
It is also among the top wind-energy producers in the United States. As at Dec 31, 2016, it directly operated 14 wind farms across eight US states, along with a separate facility in Hawaii. Its net share of US wind generation for 2016 was 4,389GWh.
Norway’s Statoil is investing in offshore wind, while France’s Total has acquired solar companies.
Wind and solar, especially, are radically changing energy markets.
Global energy, metals and mining consultancy firm Wood Mackenzie says that the case for the oil majors to build a renewables position is increasingly compelling.
While it may now be a niche energy market, renewables will be much bigger by the middle of the next decade, as O&G demand growth slows.
“The value proposition is also competitive versus some upstream investments, with long-life cashflow a key attraction,” it adds.
It notes that the oil majors have taken the first step to move beyond the core O&G business into wind and solar power, as well as energy storage. But most are still weighing the options and have yet to make telling strategic moves in renewables.
A potential tipping point for the shift into wind and solar could be an anticipated decline in the majors’ hydrocarbon production.
Although it won’t change the majors’ portfolios materially for decades, investment in renewables presents a substantial opportunity.
“At current costs, achieving the same market share the majors have in upstream O&G (12%) would require US$350bil in wind and solar investments out to 2035. While this seems like an unlikely scenario, renewables could account for over one-fifth of total capital allocation for the most active players post-2030,” says Wood Mackenzie.
For now, most oil majors have avoided investing heavily in renewables. High cost, unreliable subsidies and whether it really has a future are among the reasons. But now, as RE costs start to come down, thanks to technology, the oil majors are reconsidering.
Solar costs have almost halved over the last five years.
Of course, it would take a very long time before RE can make up a meaningful portion of energy companies’ total production.
Still, it is clear that fossil fuel investments no longer look as attractive as they once did. Oil and natural gas prices remain depressed due to serious gluts, forcing large energy companies to postpone long-term and expensive projects like deepwater drilling.
For all of the Organisation of the Petroleum Exporting Countries’ (Opec) efforts to prop up oil prices, there is a far bigger problem – the growth of US shale. This revolution is depressing O&G prices.
And it is this fast-growing US crude oil production that has been the biggest factor in generating the current glut situation.
This is also largely why Opec’s initial strategy was to try and ramp up output in late 2014.
It presumed lower prices would kill shale producers, accelerate bankruptcies and shut down some production. And for awhile, it was right.
Yet, that was just for a flash.
After Brent and WTI oil prices bottomed in early 2016, US oil producers responded to higher prices by pumping more – but with fewer rigs.
So, rather than kill the shale revolution, it would seem that Opec’s quotas ushered in a new era – one targeted at lowering production costs but massively increasing productivity.
As of mid-June, the US produced 9.4 million barrels per day (mbpd), just under its 9.6 mbpd peak two years ago. Yet, it is doing so with less than half the rigs used in 2015.
Fisher MarketMinder says that in 2015, it took 1,600 rigs to produce 9.6 mbpd. Now, it takes fewer than 800 for 9.4 mbpd. Costs are down too. In 2015, producers sank around US$130bil into exploration and production investment. That now stands at US$72bil.
With rigs and investment trending upwards, America is unlikely to relinquish its new producer status any time soon.
Wood Mackenzie has begun forecasting a “carbon constrained” scenario, where oil demand peaks before 2030 and enters a slow decline as investor sentiment towards carbon “hardens.”
In that scenario, the firm estimates that solar and wind power could make up nearly one-quarter of the global power market by 2035. Here too, Wood Mackenzie says RE could generate nearly three times more revenue by 2035 than all of US shale.
For now, many energy companies, including Petroliam Nasional Bhd (Petronas), have shifted towards natural gas, which is seen as a cleaner fossil fuel.
Here’s another stubborn fact.