In Energy

Major global disruptions, such as wars or pandemics, create an overwhelming sense of societal desperation that often leads to great inventions. During the 1973 Arab-Israeli war, OPEC imposed an oil embargo on countries that supported the Israeli army. Suddenly aware of their oil dependance, major U.S. corporations invested heavily in electric vehicle research. In fact, a lithium-ion prototype developed by ExxonMobil in the 1970s now serves as the foundation for batteries used in electric vehicles today. [1] Amidst a global pandemic, Big Oil, known as the seven largest oil companies in the world, once again finds itself in a fundamental crossroad: doubling down on their core fossil fuel assets or adapting to the imminent green-energy revolution.

Non-European oil companies have lagged in their adoption of green strategies to curb their carbon emissions. Only two companies in the Americas, Canadian Suncor and Colombian Ecopetrol, are ranked among the top ten companies in Bloomberg’s Climate Transition ranking. [2] Due to a lack of expertise, these oil companies have refrained from making major investments in renewable energies. The majority also failed to recognize the profitability behind those investments.

Fossil fuel investments are becoming harder to finance and are progressively seeing lower returns. From 2015 to 2020, investments in U.S. fossil fuel stocks generated a negative return of nine percent, while renewable stocks saw a 65% yield. [3] Looking beyond the stock market, the estimated Internal Rate of Return (IRR) for renewable power projects in Latin America is twelve percent, already slightly higher than the IRR for natural gas projects [4]. Developing green projects will not only help the environment, but it will also make Big Oil money. This is especially the case in emerging markets, where local utilities lack the financial and technical capacity to compete with foreign companies.

Source: Americas Market Intelligence research

Latin America’s volatile but manageable country risks, combined with its extremely favorable meteorological conditions, should also lead to higher-than-normal returns in a sector where margins are being increasingly squeezed. European utilities, such as Iberdrola, Enel and EDP, as well as European oil companies Total and Equinor, have already noticed this opportunity and have announced billions in additional Latin American investments. Non-European companies should act immediately to recover some lost ground. Although it is generally recommended to start small when beginning a new venture, in this scenario, size and scale should be used to Big Oil’s advantage. The oil supermajors are generally well-capitalized with strong balance sheets and massive expenditures, allowing them to develop more complex projects vis-a-vis competitors with fewer financial resources. Hybrid renewable projects that require deep pockets, such as using excess solar energy to produce “green” hydrogen, are gradually being introduced in Latin America. Scale is also fundamental in terms of cost effectiveness. In fact, giant Spanish utility Iberdrola is ordering so many wind turbines and solar panels that they have nearly a 20 percent cost advantage over its smaller rivals. [5]

Big Oil also has a tremendous opportunity to use its existing expertise to capitalize on green energy technology and carbon cutting strategies. In Brazil, after facing nearly half a billion dollars in losses in its biofuel business, state-owned Petrobras is transitioning from biofuels towards producing renewable diesel, which is made from waste or residue oils; it is chemically the same as diesel but cleaner than traditional biodiesel. Petrobras noticed an opportunity to reverse its losses and decided to optimize the use of their existing biorefinery infrastructure to produce a cleaner fuel used both in vehicles and airplanes. Big Oil’s existing knowledge extends far beyond fuels. Supermajors also have several decades of offshore rig experience that can be utilized to develop offshore wind and solar farms. Norway’s Equinor commissioned the first floating offshore wind plant in 2017 and has just recently won a bid to develop a 3.3 GW offshore plant in New York. Shell has used its 30-plus years of hydrogen research to develop a hydrogen refueling network. In the Americas, both Exxon and Chevron should also use their experience with horizontal drilling in the U.S. Permian basin to capitalize on Geothermal energy. In Latin America alone, there is a 55GW to 70GW geothermal opportunity that is severely unexplored. [6]

Despite a history of vertical integration in the oil space, Big Oil has failed to do the same in the integration of renewable power generation and distribution. Ecopetrol, the Colombian state-owned petroleum company, is one of the few companies looking ahead as it attempts to buy ISA: the country’s largest electric utility. With this acquisition, Ecopetrol will access renewable generation capacity to power its operations while gaining control of a fundamental part of delivering green energy: distribution and transmission lines. By building high-voltage lines required to transmit renewable energy, as well as developing storage and distributed generation solutions, Ecopetrol will have the unique opportunity to integrate variable renewable energy into the Colombian grid. Through strategic acquisitions, Big Oil can “green” a large part of its supply chain and find both operational efficiencies and profits along the way. Carbon capture strategies can also be implemented beyond power generation. Improving leak detection and repair programs, while implementing vapor recovery units, will significantly reduce methane leaks in natural gas projects. [7] The elimination of routine flaring, which is the burning of gas produced as a byproduct of oil extraction, is another important step forward. Operational efficiencies are the cheapest way for Big Oil to improve their carbon footprint, yet many companies in the Americas fail to allocate sufficient resources on researching and implementing these technologies.

Despite the fast pace towards green energy technologies, oil and gas demand will not peak within the next decade. Population and economic growth, coupled with the normal challenges of revolutionizing a power system in developing markets, will ensure that cleaner fossil fuels will see rising demand through 2030. This will include low sulfur, high quality, sweet crude resources discovered in places such as Guyana’s Stabroek block, as well as the development of natural gas plants with access to cheap gas and equipped with carbon capture technologies. Exxon has already reiterated its financial and strategic commitment to Guyana, while French Total plans to double its global LNG sales by 2030. Finding “cleaner” fossil fuel opportunities while heavily investing in renewable energy and CCS technologies will be the most profitable way forward for Big Oil in Latin America.

[1] Bloomberg, “Quantum Leap,” April 2021

[2] Bloomberg, “U.S. big oil lags behind greener Europe rivals,” April 2021

[3] Imperial College, “Energy Investing Exploring Risk and Return in the Capital Markets,” May 2020

[4] AMI Interviews based on 11 countries in the region

[5] New York Times, “A Bet 20 Years Ago Made It the Exxon of Green Power,” April 2021

[6] IDB, “Harnessing geothermal potential in Latin America and The Caribbean,” November 2020

[7] McKinsey & Company, “The future is now: How oil and gas companies can decarbonize,” January 2020

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