The businesses of oil extraction, production, refining and distribution have been extremely lucrative for the past several years. Upstream activity has been on an upward trend, with new reserves being continuously across the globe.
Appetite for mergers and acquisitions peaked in the 1990s and the early 2000s, resulting in the formation of large integrated majors such as ExxonMobil and Royal Dutch Shell/BG Group. Coal and oil have both been instrumental in electricity and power generation, serving as the main sources of wealth and power since the days of the Industrial Revolution.
However, the world now appears to be transitioning smoothly into an era that elevates technological progress to new heights and focuses on tackling large-scale problems such as climate change through renewable energy sources. “Clean energy”, or “clean tech”, is being marketed as the future of the power industry, and electricity output generated through renewables doubled between 2010 and 2015. So along with low-carbon technologies, how realistic is clean energy’s bid to upstage oil production in the coming years?
How Can Renewable Energy Be Exploited?
The key driver of this shift appears to be the downturn in commodity prices, which has severely impacted cash flows of all the oil and gas supermajors. A recent report by the Financial Times expressed concern for the sector, implying that the extreme volatility in the market could drive more investment away from expensive fields and projects, reducing the major companies to “relics of a fossil-fuelled past in the Digital Age.”
A record 16 oil and gas firms became insolvent in 2016, with pricing headwinds leading to several offshore rigs being decommissioned in the North Sea area. These struggles provide a platform for businesses specialising in renewables to launch new projects, and for existing power companies to diversify away from struggling conventional fossil fuels.
For instance, German utility giants Eon and RWE have split their renewables portfolios and healthy assets away from oil units to shield them from the commodity shocks.
Examining the Leading Clean Tech Programs
Furthermore, there has been a surge in renewable activity in the BRIC economies, generally associated with plunging costs of installation. A recent paper on global trends in renewable investments shows that average costs of solar PV projects have fallen by over 13% since 2015.
Onshore and offshore wind costs fell by 11.5% and 10% respectively, and China set a record low of 2.91 c/kWh (cents per kilowatt hour) for its solar and wind production in the same period. China recently committed to an investment of up to $360bn in its clean energy program, aiming to create 13m jobs and install around 730GW worth of renewables plants (combined hydropower, wind power, solar power, biomass and nuclear capacity) by 2020.
Meanwhile, India too has its sights set on becoming a global leader in clean energy and low-carbon technology, drafting a 5-year plan that involves expanding its renewable energy capacity up to 175GW by 2022, becoming a global hub for the manufacture of batteries and electric and hybrid vehicles.
Russia is following closely in India’s footsteps, kickstarting its latest renewable energy auction in a bid to create more jobs in the sector. The country is looking to attract outside investment in wind and hydro power, with state-owned enterprises such as Rosatom Corporation re-tooling existing factories to make low-cost turbines and form partnerships with leading European manufacturers.
The nations at the forefront of these changes have all committed to honouring the Paris Agreement on climate change despite the US’s withdrawal in May this year. In order to achieve the goals set out in the agreement, it is vital that all participating countries continue to expand the contribution of renewables to their energy production and embrace low-carbon power.
The Energy Transitions Commission estimated that “in the 2030s many countries could source 95% of their electricity from renewables, with batteries and gas-fired plants for back-up.”
Why the World Cannot Do without Oil
However, one cannot ignore the fact that fossil fuels still account for some 86% of total global power output. BP has forecast a gradual increase in demand for petroleum in the downstream sector as well as the need for oil as a direct source of electricity until 2035, though the exact timing of “peak oil” demand is unknown.
To compound the impediments faced by clean energy proponents, oil (in the form of petroleum) is considered to be essential for HGVs, aircrafts and shipping. Clean tech is, in general, less effective per unit of renewables employed and constructing and defining sites for solar, wind, geothermal and hydro projects can be a lengthy process.
For practical purposes, each nation is typically limited to a few renewable sources; for instance, solar power is unlikely to be particularly useful in equatorial climates with limited exposure to the Sun. Nuclear energy project delays and disasters at Chernobyl and Fukushima have dented the appeal of atomic power as an alternative source of energy.
Oil Majors: Adapting for Survival
Nevertheless, the non-substitutability of oil has not made the integrated majors complacent. Statoil invested $2.3bn into Norwegian offshore wind, whilst Total invested $2.5bn in combined stakes in a French battery maker and an undisclosed US solar company in an attempt to diversify away from primary service lines.
Most majors should look to adapt to the changing needs of their industry, and strike an effective balance between growing with the incoming low-carbon era and squeezing maximum returns out of the final stages of the oil era as fossil fuels start to get phased out.
In the meantime, energy conferences in the USA have hosted discussions on development of oil technology, focusing on the integration of digital processes with traditional exploration & production methods to grow reserves more quickly and make cost/capital inputs more efficient.
Renewables Driving Change
Oil technology has helped identify untapped reserves in the Middle-East, Western/Sub-Saharan Africa and in the USA, and large cost-cutting measures by firms have finally started to help free up balance sheets for new capital expenditures in drilling and refining. As a result, the energy sector is expected to remain resilient in the long-term.
That said, the evidence above suggests that clean energy is certainly poised to mount a serious challenge in the next 10 years, and 2017 marks a defining period in the success of various personal, local, national and global initiatives to drive this change.
Hybrid cars are more popular than ever and should eventually supersede standard petroleum/diesel cars under global emission regulations.
The UK overcame a major milestone in April as it managed to power the National Grid and generate electricity without using coal for an entire day. Over half of the country’s energy was provided by solar, wind, hydro and biomass for the first time.
The best is still yet to come.