11 Oct 2019
An energy landscape that has been broadly familiar for a century is in flux as the global economy pivots away from fossil fuels and towards renewable power and electric vehicles. This raises questions about whether oil and gas companies will be able, in turn, to adapt their businesses in the face of growing competition from alternative energy companies.
“We’re already seeing a number of energy market players including European utilities, investing heavily in clean power generation, both in their home markets and, increasingly, in emerging markets where demand for electricity is growing fast,” explains Keegan Kruger, Alternative Energy Analyst at Macquarie.
As we look to the capital goods sector, equipment manufacturers such as Vestas, Siemens Gamesa and Nordex have been driving down the costs of generating renewable power, while simultaneously developing value-added ‘energy-as-a-service’ business models that can generate long-term recurring revenue streams.
“The business model is adapting and changing as manufacturers tap into lucrative operations and maintenance (O&M) service revenue streams which are further down the wind turbine value chain. With the rapid increase in turbine technology, turbine manufactures are in a commanding position to be the sole provider of these O&M services because these systems are just so advanced. That said, the wind sector has proven that it can be cheap, it now needs to showcase that it can be valuable to the grid- which in some instances it already is.” says Kruger.
While the role of traditional electricity generators and renewable energy equipment manufacturers in the energy transition is seemingly clear, the debate continues on the supermajor’s role in the energy transition.
Although the oil majors broadly accept that addressing climate change will reduce demand for the hydrocarbons they produce, they differ in their views about how quickly demand will peak and, as a consequence, how rapidly they should diversify and reorient their businesses towards low-carbon energy production.
David Hewitt, UK Head of Oil and Gas Research at Macquarie Group explains: “While we don’t think the supermajors are currently prepared to be the natural leaders in developing low carbon energy, within the alternative energy space we see lots of interesting opportunities for investors.”
The European oil majors are investing a great deal into alternative energy, albeit while still directing above 90 per cent of their capital expenditure to developing more oil and gas. Whereas the US leaders take the view that demand is likely to grow, perhaps into the 2040s, and they will continue to focus on their core business.
However, a growing cohort of institutional investors take the view that demand could peak as soon as the 2020s and that the majors should accelerate efforts to diversify their businesses.
“Historically diversification has not been easy for the super-majors, it comes down to core skill sets,” Hewitt argues, “if these companies are thinking about moving away from their core competencies, they need to be properly prepared to change their structures and even their DNA.”
He also highlights the role that gas plays and will play as a key transition fuel that can be used to support intermittent wind and solar generation.
“Companies should do what they are good at; if that is no longer required investors can choose where they want to allocate their capital,” Hewitt says.
A shift from high-risk, high-return oil and gas exploration to the more predictable earnings of low-carbon power generation poses a challenge for the oil majors and their investors, argues Hewitt: “Were oil majors to emulate the developments made in the utilities space it would materially shift to a different investment premise.”