Oil Majors to Divert Capital from Upstream to Renewables, Says Report

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A new report by Wood Mackenzie has predicted that capital will increasingly be diverted by the oil majors from the upstream to build positions in wind and solar, as renewable energy sources are set to radically reshape the global energy markets.

The report argued that renewables will satisfy only one per cent of the world’s energy needs in 2017, but will have captured a much bigger slice of the global energy market by the middle of the next decade.

For the majors, the report noted that this poses a threat to legacy oil and gas operations, adding however, that shaping strategies to capture a piece of the renewables action, is also an opportunity to diversify and future-proof portfolios.

Wood Mackenzie’s new report, ‘Could renewables be the Majors’ next big thing?’ takes a closer look at the value proposition in wind and solar and the pace of the shift towards renewables out to 2035.

Wood Mackenzie’s Senior Vice President, Research, Corporate Analysis, Tom Ellacott, said the growth opportunity in renewables could not be ignored.

“We forecast average annual growth rates of six per cent for wind and 11 per cent for solar over the next 20 years. Renewables will satisfy only one per cent of the world’s energy needs in 2017, but will have captured a much bigger slice of the global energy market by the middle of the next decade, as oil and gas demand growth,” Ellacott said.
Ellacott added that the value proposition is competitive versus some upstream investments.

According to him, returns rank favourably with many of the majors’ pre-sanction long-life developments, the most comparable upstream asset class.
The long-life nature of wind and solar projects and stable cash flow visibility could also provide much-needed support for dividends.

The reported added that European majors are leading the way in shaping strategies to establish a presence in this fast-growing market.
It explained that offshore wind may be the most attractive route to organic growth in the near term as it offers scale and scalability on a par with upstream mega-projects.

The report stated that solar is more fragmented and competitive, adding that Total has used mergers and acquisitions (M&A) to establish early mover advantage.
Wood Mackenzie expected capital to increasingly be diverted from upstream to build positions in wind and solar.
Renewables could account for over one fifth of total capital allocation for the most active players post-2030, the report said.

According to the report, wind and solar are not going to transform growth prospects for the peer group as a whole.
“The scale of the opportunity is simply not there on our forecasts for solar and wind, at least not in the next 20 years. We estimate spend of $350 billion on wind and solar out to 2035 is needed for the Majors to replicate the 12 per cent market share they hold in oil and gas. But even this ‘bull’ scenario would lift renewables to just 6.5 per cent of the majors’ production in 20 years’ time,” Ellacott explained.

Wood Mackenzie argued that wind and solar are increasingly important strategic growth themes that the majors cannot afford to ignore as they plan for 2035 and beyond.

“Companies are only just starting to sow the seeds for the radical changes that lie ahead. The majors can bring their expertise in the energy value chain to build optionality and portfolio balance which will help hedge against any future erosion of the upstream value proposition and the anticipated progressive hardening of investor sentiment towards carbon,” the report added.