“Supermajor” has long been the term used to describe the world’s largest oil companies. Increasingly, it comes to define the world’s largest producers of wind and solar energy.
Large-scale renewable energy developers now have higher ratings than the behemoths in the oil and gas industry.
NextEra Energy Inc., a Florida-based power company and the world’s largest producer of wind and solar power, is now worth $ 138 billion. That’s more than Royal Dutch Shell PLC ($ 112 billion), BP PLC ($ 71 billion) and ConocoPhillips ($ 40.1 billion).
Spain’s renewable titan, Iberdrola SA, is valued at $ 78 billion. And Ørsted A / S, once a tiny Danish utility, has been transformed into a global offshore wind giant worth $ 58 billion.
The reversal of roles is a reflection of the times. Oil stocks have been battered by the coronavirus pandemic and the resulting drop in demand. BP and Shell were forced to write down their assets by $ 17.5 billion and $ 22 billion, respectively, due to weak oil prices. And Exxon Mobil Corp., one of the world’s largest oil companies, was pulled from the Dow Jones Industrial Average yesterday, symbolizing the industry’s sharp economic downturn.
Many of the world’s oil reserves are simply not profitable when crude is trading at $ 45 a barrel.
Very high valuations for renewable energy developers are also a testament to broader changes in energy markets. Some analysts predict that the world may soon see a peak in demand for oil (Climatewire, May 7).
Wind and solar are propelled by a combination of lower costs and government climate targets. This has made renewable energy projects more and more attractive to investors.
Researchers at Imperial College London recently concluded that renewable energy companies offer better returns than their oil competitors. They also found that their stocks were subject to lower price volatility.
“We think we’re going to see a new category of companies called wind and solar majors,” said Sam Arie, research analyst at UBS, the Swiss investment bank. “They are on their way to becoming the size of the oil majors.”
The oil majors have noticed it.
European oil giants BP, Eni SpA, Equinor ASA, Shell, Repsol SA and Total SA all announced ambitious targets last year to achieve net zero carbon dioxide emissions. These announcements have often been accompanied by commitments to invest heavily in renewable energies.
BP is targeting 50 gigawatts of renewable capacity by 2030. Eni envisions a 55 GW renewable fleet by 2050. Equinor aims to tap 12 to 16 GW of renewable capacity by 2035.
These are huge goals. NextEra and Iberdrola, for example, have renewable fleets of around 19 GW and 16 GW, respectively. Ørsted has some 10 GW of renewable capacity on the books.
But the oil giants face a challenge of getting into the green game: building wind and solar projects, distributing energy, and working directly with customers are outside their area of expertise.
This leads many analysts to anticipate a series of acquisitions.
“BP is unlikely to develop this organically,” said Gero Farruggio, analyst at Rystad Energy, a Norwegian oil consultancy firm that tracks the energy transition. “We’re starting to see a new era for supermajors where you’re going to see major acquisitions in the renewable space.”
This comes as competition grows between old and new majors, especially for offshore wind contracts. Shell recently beat Ørsted in an offshore wind auction run by the Dutch government.
Offshore wind differs from other renewable projects because it offers an overlap with the existing expertise of oil companies. Installing turbines in the ocean requires many of the same skills as drilling for oil under the seabed. This is also an area in which the deep pockets of oil companies can be tapped into projects that are too expensive for most other companies.
Some have expressed doubts that the oil majors will overtake their green rivals. They will have to get rid of their fossil fuel assets if they are serious about rebuilding themselves, said Jigar Shah, the founder of Generate Capital, a green infrastructure investment firm.
“When 25,000 people work for you to find oil and gas, they will always be arguing for oil and gas,” said Shah, who worked for BP’s solar division in the early 2000s before starting SunEdison. Inc. “It’s hard to say that they will be best in class at developing renewable energy projects because their DNA is not configured that way.”
Granted, oil companies remain extremely valuable, and many of them are unwilling to go green. Exxon Mobil Corp. is valued at $ 175 billion and Chevron Corp. is worth around $ 159 billion. Neither has presented plans to reduce emissions or invest in wind and solar power at the level of their European counterparts.
Their assessments underscore another point: the world still invests significantly more in fossil fuels than in renewables. In 2019, global investments in the production and distribution of oil and gas amounted to $ 756 billion, according to the International Energy Agency.
The world has spent an additional $ 90 billion on coal mining and $ 130 billion on electricity generation from fossil fuels. Investments in renewables and energy efficiency, by contrast, amounted to $ 560 billion.
Those numbers will have to change if the world is to achieve net zero emissions, said Arie, the UBS analyst. In a recent note to investors, he said the world would need to spend around $ 1.2 trillion a year on green investments to achieve this goal, including $ 590 billion for clean energy production, $ 550 billion for modernization of the electrical system and $ 90 billion for energy storage.
At first glance, these investments seem huge. But a closer look shows that the world is on track to spend an estimated $ 10 trillion on oil and gas infrastructure over the next 30 years. The challenge is really to reallocate the way the money is spent, Arie said.
The rising valuations of renewable energy promoters are a sign that change is underway.
“If you think about how a capitalist world economy would deal with climate change, it would be through the allocation of capital,” he said. “What we are seeing is a constant and inexorable increase in the cost of capital for fossil fuel activities and a reduction in the cost of capital for clean activities.”
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