We've seen a wave of new energy deals by the Majors. The spectre of peak oil demand and disruption from renewables and EVs has sparked a response – if you can’t beat them, join them. 2017 was the year Big Oil started to position for a low-carbon future.

The difficulty is defining what the end game is. Until this decade, oil and gas companies had a simple goal: sustain or grow reserves, refine and sell products.

Now sustainability has an altogether different meaning. But there’s no roadmap for the energy transition, no clear view of the timing, or what the winning technologies will be. How will oil companies fit in, if at all, to a future, carbon-free world?

So everyone is making it up as they go along, or so it might seem. The European Majors lead the industry, each sowing seeds in their own way.

There is a veritable forest of opportunities out there – global wind and solar capacity will double in ten years and the Majors presently own less than 1%.

But patterns emerged in the recent transactions that suggest companies see the wood rather than just trees. Here are pen-pics of who’s where.

There are primary producers building portfolios around upstream positions that are advantaged for renewable generation. Statoil is doing mainly offshore wind, where scale is achievable, and leveraging its infrastructure and technical capability in the North Sea (a licence offshore New York hints at global ambition). The aim is for 15% to 20% of investment in carbon-free energy by 2030. Eni is the solar counterpart targeting its upstream operations in Italy, North Africa and Pakistan.

BP has added new solar to its sizeable, legacy onshore wind portfolio with a US$0.2 billion acquisition in 2017. Total’s new energy portfolio is heavily weighted to US solar, but is also moving down the value chain with acquisitions in battery storage and customers in Europe. Total aims for 20% of group assets in renewables by 2035.

Shell has most clearly set out where the industry might be headed. ‘New Energies’ figures large in Shell’s hopes to cut its carbon footprint in half by 2050. Power and EV charging are two of its main disruptive drivers, and leveraged investment will be doubled to US$2 billion p.a. to 2020 – likely the start of a progressive ramp-up.

The integrated model isn’t wildly different to the total energy company concept that surfaced in the 1990s.

New Energies will have renewables production globally, gas storage and trading to provide flexibility and optimisation, and residential and industrial customers.

Selling into homes is the new part (for Total, too); but both companies understand retail to a degree – Shell has 43,000 service stations across 80 countries and each has a weighty global brand to leverage.

A quandary is capital allocation – how much to spend on a new pillar within a traditional business, and when? The returns from renewables projects are modest at 6-10% on our calculations (though could be boosted by a creative approach to financing). Recovering returns in upstream compound the dilemma.

Investment in upstream is again looking more attractive than in the immediate aftermath of the downturn.

Cost-cutting, cyclical and structural, has reduced NPV15 breakevens for many greenfield projects to US$50/bbl and below.
 
A flurry of FIDs in the latter part of 2017 brought the total last year to 33 for fields of more than 50 million boe – the highest since 2013 – and up from 12 in 2016. Global upstream investment is stabilising at US$400 billion in 2018 after three years of decline.

Only spend in LNG is falling; US tight oil is leading the way but other sectors are also now edging up – including in some deepwater provinces where the economics of new projects now look attractive.

Upstream spend will likely outstrip new energy by as much as 40:1 across the oil industry in the next few years. The better returns and familiarity with the legacy business is rightly winning over the risks and modest returns of the new: jam today beats jam tomorrow.
 
But the pendulum is starting to swing. The leading players recognise it and will commit an increasingly higher proportion of capital into next decade.