Renewables on the rise: are the major oil producers ready to invest?

Wind and solar energy are poised to radically reshape the energy market over the coming decades, presenting a threat to legacy oil and gas operations, but also an opportunity to diversify and future-proof portfolios, according to research group Wood McKenzie.

“The momentum behind these [renewable] technologies is unstoppable now,” said Valentina Kretzschmar, director of research.

“They [the oil companies] are recognising it is a megatrend; it’s not a fad, it’s not going away. There is definitely a risk to their core business.”

The commodities analysts found the major energy companies would need to spend more than US$350bn on wind and solar power by 2035 to take a market share similar to the 12% they have in oil and gas.

Wood Mackenzie admitted that such spending was high even for oil companies and therefore an “unlikely scenario”, but forecasted that renewables could still be more than a fifth of capital allocation beyond 2030.

Major producers have taken the first steps to move beyond the core oil and gas business into wind and solar power, as well as energy storage. But most are still weighing up the options and have yet to make telling strategic moves in renewables.

A potential tipping point for the shift into wind and solar could be an anticipated decline in the hydrocarbon production. With new resources needed to sustain volumes beyond 2025, wind and solar could step in to the breach if discovered resource commercialisation, M&A and exploration fail to deliver, or economics weigh against continued development.

Wood Mackenzie predicted demand for renewables would grow faster than oil in the next two decades: the analysts forecasted annual growth rates of 6% for wind and 11% for solar, compared with 0.5% for oil demand.

Offshore windfarms are probably the most attractive individual technology because of the comparable in scale to drilling for oil and gas, Wood Mackenzie said.

But “dramatic reductions” in costs for solar and wind meant that in some places both technologies were now subsidy-free, it added.

Wood Mackenzie said returns for renewables were about half those of oil and gas production, but the long-life of cashflow from assets such as windfarms could help firms support their dividends.

The analysts warned that companies that delayed diversification could risk finding themselves left behind - “at a structural disadvantage” - if wind and solar grow even more rapidly than expected.

Revenues from oil and gas are 33 times the level of renewables, but expected to narrow to 13 times by 2035.

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