Archive

No. 3, 2012

Vitalia Tsarik

RENEWING OIL BUSINESS


How the oil majors are investing in renewable energy generation and why

OIL COMPANIES ARE TRADITIONALLY PERCEIVED as the main rivals and opponents of renewable energy. But today it is they who can provide the industry with investments and high-quality management in order to make clean energy truly competitive.

A PROMISING INDUSTRY

The decision made by the world's leading economies to cut down on harmful emissions and lower dependence on fossil-based energy sources, primarily oil, has been the main stimulus for developing renewable energy. The success of these two branches of the energy industry (traditional and renewable) would seem to be inversely proportional (i.e. the more successful the one, the less successful the other), since they compete for customers, investors, and government support. However, large international oil companies have long been investing in green energy, at times developing several renewable technologies at the same time.

Competition between these industries is indirect, since most renewable energy technologies apply to electricity generation. Whereas in 1973, a quarter of electricity was produced with the help of oil, in 2009, the share of oil in electricity generation amounted to only 5% (according to the IEA). So oil companies can invest in geothermal, solar, wind, and hydro energy without worrying about a conflict of interests.

Even the most optimistic forecasts of renewable energy leave room for oil in the foreseeable future, while this diversification will also provide oil companies with additional stability in the conditions of the changing legislative framework.

What is more, renewable energy production holds great promise since electricity generation is one of the most rapidly growing sectors of the energy industry; according to BP estimates, it accounts for 57% of the expected growth in primary energy consumption until 2030. The growth rates of renewable energy as a whole (including bio fuel) are also the highest in the industry: according to the BP forecast, they will amount to around 8.2% a year between 2010 and 2030. For comparison: the growth rates of the gas sector during this period are forecast at 2.1% a year, and this is the highest index among fossil fuels.

Furthermore, the high price of oil and gas make renewable energy production even more attractive in terms of investment.

The high prices, in turn, make oil companies the most stable and generous investors, which has been particularly pertinent in recent years.

Traditionally, the government has been directly or indirectly subsidizing renewable energy by means of tax benefits, interest-free loans, direct financial participation, and other ways of regulation. However, the ongoing recession after the world financial crisis has aggravated the budget deficit problem.

The politicians of many countries are highly tempted to reduce spending on support of the green sector of the economy rather than carrying out unpopular reforms to cut back the number of civil servants and reduce budget workers' salaries and benefits.

In these conditions, the oil industry could save green energy and ensure its smooth transition from government subsidies to market conditions.

WIND ENERGY

As of today, wind energy is considered the most efficient sector in renewable energy. So it is not surprising that it also attracts oil companies.

Norway's Statoil Company is currently implementing a pioneer project in wind power production called Hywind. This offshore project aims to show the viability of operating windmills in deep-water environments. In order to implement it, Statoil is using its immense experience in offshore oil-production projects.

Shell is investing in wind-power engineering in Europe and North America, where it is helping to fund 11 projects, eight of which are in North America. Its share in these projects provides the company with wind energy capacities amounting to 550 MW. This saves 1 million tons in CO2 emissions a year (if compared with similar capacities in the coal industry).

BP is developing 13 wind energy projects. Since 2005, BP has invested more than $7 billion in BP Renewables, which is engaged in renewable power generation. Another billion are to be spent before 2015. The main vectors of development are wind-derived electricity and bio fuel, which produce larger amounts of electricity than solar panels.

Several oil companies are joining efforts to develop renewable projects, such as Russia's largest private oil company LUKOIL and the leading Italian oil company ERG. Their joint enterprise LUKERG Renew announced this year that it has purchased a wind power plant near the city of Dobrich in Bulgaria with a capacity of 40 MW, which constitutes 10% of the Bulgarian wind energy market. In addition to this, LUKERG Renew has plans to makes its debut on the Rumanian wind energy market.

Recently, smaller companies have also been following suit in order to keep up with the majors. In November 2011, the Brazilian oil company Petrobras, in cooperation with Electrobras, Alubar Energia, and Wobbin WindPower, launched an industrial wind park in the northeast of the country. The Mangue Seco project generates 104 MW by means of 52 wind turbines. Its construction cost is $244 million. Brazil is one of the leading countries in renewable power generation mainly due to its hydro resources and favorable climate for producing bio fuel.

THEY COME AND THEY GO

Solar energy is experiencing difficult times: since August 2011, several large U.S. and German companies working in solar energy have declared bankruptcy. One of the greatest blows to the industry was when BP Solar, which had existed for 40 years, closed down in December of last year. In recent years, BP Solar has been dealing with an abrupt drop in the price of solar batteries due to international competition, including with respect to panels from China. Legislative changes also played their part: in particular special rates in Europe were cancelled, while recently the amount of tax benefits for solar power in the U.S. decreased, which is putting off investors. BP's management decided to leave the solar power industry and closed down its last offices in Spain and the United States.

Nevertheless, several leading oil companies continue to operate in the solar power industry - they are not only retaining their stakes in it, but also launching new projects.

In April 2011, Total announced that it was purchasing 60% of the shares in the SunPower Company for $1.3 billion and issued it credit protection of $1 billion. This gave SunPower the funds to develop new projects, as well as enjoy advantages over other competitors, most of whom do not have enough financing.

Chevron Energy Solutions is developing a project with Germany's Solar Millennium to build the Blythe Solar Power Station in California - this project received credit protection of $2.1 billion from the U.S. Energy Department.

In addition, Chevron is investing money in renewable energy technology through a special fund called Chevron Technology Ventures Investments. The fund invests in solar energy and the production of turbines for wind installations and autonomous electricity generators that operate on bio fuel.

One of the world's largest private oil companies, LUKOIL, has also begun investing in solar power generation under synergetic projects: in 2009, the company launched its first solar gasoline filling station in Serbia, followed by another in Krasnaya Polyana near Sochi. This kind of system is particularly valuable in the mountains, since it ensures uninterrupted energy supply even during emergency power cutoffs. The peak capacity of LUKOIL's photovoltaic gasoline filling station in Krasnaya Polyana is 9.6 KW.

However, the company has not stopped here. In December 2011, LUKOIL put its first large photovoltaic plant into operation at LUKOIL Energy and Gas of Bulgaria. The project is being implemented in the resort town of Burgas where the company has been operating for a long time, owning the largest LUKOIL NEFTOKHIM BURGAS Refinery in the Balkans. The power plant's capacity amounts to 1.25 MW, while the annual electricity generation volume should reach 1,500 MWh. LUKOIL has invested around $4 million in the project.

In addition, LUKOIL is working with the Government of Uzbekistan and the Asian Development Bank on a project to build a solar power plant with a capacity of 100 MW in Uzbekistan.

INVESTMENTS IN GEOTHERMAL AND HYDRO POWER

Oil companies are not seen as frequently in the geothermal and hydro power sector; however, they are also investing in these branches.

Paradoxically, the oil giant Chevron is the largest producer of geothermal energy in the world. The company began this business as early as the 1960s in the west of the United States. In the 1970s, two projects were launched in the Philippines, and in the 1980s and 1990s projects followed on the island of Java in Indonesia. Today four projects in Indonesia and the Philippines produce 1,273 MW of geothermal energy, which is enough to provide for the needs of millions of residents. In 2010, the company began looking for ways to expand the production of geothermal energy in these countries.

LUKOIL, in turn, is the second largest producer of hydropower in Russia with a total capacity of 0.3 GW. The hydropower industry is already a sufficiently well-developed branch of renewable power generation. Its growth rates are not as high as those for new types of renewable energy, but it provides a stable source of environmentally clean energy in the event that the reliability and high efficiency of the power plants are maintained.

BIO FUEL: AN ACCOMPANIMENT TO THE OIL BUSINESS

Only bio fuel has the capacity to compete directly with oil companies. Nevertheless, it is one of the most popular "green" vectors in the portfolio of oil companies. The minimum percentage of bio components in motor fuels established by law has made the production of bio fuel a profitable accompaniment to the oil business. This specialization makes it possible for oil companies to depend less on changes in this minimum threshold.

ExxonMobil has been investing in joint developments with Synthetic Genomics, Inc. since 2009. This cooperation is aimed at creating a new generation of bio fuel based on seaweed, which is capable of replacing gasoline and diesel fuel without significant changes in the U.S. fuel infrastructure. ExxonMobil has assessed the total amount of planned investments in this project at $600 million.

Since 2009, BP has also been working on creating alternative bio fuel: the company plans to invest $400 million in a project to build a plant for producing cellulose bio fuel in Florida, United States. The company also plans to reduce the net cost of bio fuel to $1 per gallon by 2022 (approximately 8 rubles a liter), which will make it competitive compared to traditional fuel even without subsidies. The company also announced in March that it was buying a 83% share in Brazil's Companhia Nacional de Acucar e Alcool Company, which produces ethanol from sugar cane. The cost of the deal is $680 million.

BP is also investing in the Verdezyne Company, which is developing bio technology for converting sugar plants into bio fuel and biochemical products. Along with the investments by the Danish Biochemical Company DSM, this money will be enough to support Verdezyne developments and construction of a pilot plant in the next couple of years. Head of Verdezyne William Radany says that such investments signify that his company is being given a vote of confidence.

BP also has a 50% share in another company of this sector - Tropical BioEnergia.

BP's total bio fuel production capacities amount to 1.4 billion liters a year.

In March 2011, Shell declared its plans to create a joint venture, Raizen, with the Brazilian Bio Fuel Company Cosan with a capital of $12 billion. Raizen should become the world leader in the production and supply of ethanol produced from sugar cane. At present, the company is already producing more than 2 million liters of ethanol for sale through a network of stations in Brazil's domestic market, but in the future it also plans to export ethanol. According to Shell's estimates, by 2030, bio fuel will provide Brazil with 40% of its transport fuel. In addition to this, Raizen is using different wastes from ethanol production to generate electricity (900 MW of installed capacity) and for manufacturing fertilizers.

Shell, along with several other companies, is also developing ferments, which promote the faster transformation of biomass into fuel.

Total is the largest investor in the promising Amyris project being implemented in California for manufacturing bio fuel on a by-order basis.

NEW RELATIONS: FROM CONFRONTATION TO INTEGRATION

Oil companies are shifting their investments in green energy projects from sponsoring university developments to investing in pilot plants and creating joint ventures.

Large energy companies, which all oil majors now are, should provide attractive dividends for their shareholders in order to preserve their competitiveness. It was long believed that renewable energy could not produce a quick return on investments. But now the oil industry appears to have changed its attitude toward green energy. Experts think that green energy projects are forming a new trend in the oil business.

This means that renewable energy will receive significant funding, which is hard to obtain from traditional investors in such large amounts. Furthermore, alternative energy projects will feel safer under the wings of a large oil corporation, while oil companies will be giving other investors a clear signal that renewable energy is profitable in the long term.

Recently, oil companies have been selecting projects not for their up-to-the-minute appeal and because they receive the highest subsidies, but for their ability to survive even if subsidies are cancelled, which, as the crisis has shown, could happen at any moment. In so doing, government support is still playing a key role in choosing the location of green projects: the investor prefers countries where projects will be ensured the most supportive conditions. Government assistance is particularly important at the launching stage. However, investors are also interested in commercial stability, so stakes are placed on those projects and technology for which there are enough resources (wind, sun, bio resources) and large markets with a stable demand.

On the whole, this approach will revive the industry and make green energy more competitive.



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