Oil and gas majors in renewable energy – Hunt for the best returns
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Increasingly, the oil and gas Majors are seeking to establish renewables as a profitable part of their business. However, the value proposition of renewables is different from what the Majors see in their legacy oil and gas operations.
Upstream development economics beat typical returns from wind and solar. But renewable returns are competitive when compared to full cycle upstream resource renewal economics from exploration and M&A. Renewables projects also offer risk diversification for the Majors, something that will be welcome as the energy transition looms large.
The Majors can strengthen the renewables value proposition. They could target projects where barriers to entry for other renewables players are high – making it more likely that they will win in a competitive procurement process. They could also focus on merchant renewables projects, which tend to have higher returns and need to be balance-sheet financed, icing out smaller competitors that lack the Majors' financial clout.
In a recent report, analyst Tom Heggarty points to offshore wind projects and ultra-large solar photovoltaics (PV) tenders as two promising areas for the Majors to explore.
Oil and gas companies may have a competitive advantage in large-scale offshore wind due to transferable technical and engineering expertise, their large balance sheets, and existing stakeholder and supplier relationships.
Currently, a lack of technical expertise and high capital expenditure needs is limiting the number of offshore wind suppliers, as we’ve previously written about. Developers also typically use debt at the corporate level to finance offshore wind projects, which can exclude investors that lack the balance sheet capacity to fund large projects.
This combination presents a clear opportunity for the Majors to play a leading role in the development of the offshore wind space.
Ultra-large utility solar is also a ripe opportunity, particularly in emerging or more challenging markets, where project financing may be more challenging. Asset owners with large balance sheets – such as the Majors - could have an advantage over smaller players. Additionally, the Majors will notice a tempting overlap between profitable low-cost solar geographies and countries where they already do business through their oil and gas operations.
The Middle East and Latin America are breaking record after record for low solar pricing, with auctions regularly coming in under USD $40/megawatt-hour. Emerging markets offer the best condition for low-cost solar due to low land and labor costs; Saudi Arabia, Mexico and Malaysia are seeing record-low bids for solar. We expect the Majors to leverage their relationships with governments, suppliers and stakeholders in emerging economies to develop material positions over the long-term.
Read about our second report in this series here. We examine the challenge of scaling up effectively in renewables.