Big oil’s electric dreams could create new energy cartels

Oil companies want to become power utilities to meet rising demand from electricity in transport and from growing populations. The strategy makes sense, but would also bring risks for regulators and consumers if it were to create a new breed of gigantic energy-controlling monopolies.

On one hand, watchdogs in developed markets such as the UK should welcome the introduction of relatively new players like Shell and BP to challenge the Big Six conventional utilities. On the other, electricity markets are politically sensitive and oil majors would make easy targets for politicians keen to be seen protecting consumers if profits are put too far ahead of the public good.

The Labour Party has threatened to nationalize parts of the electricity industry if it gains power in Britain. Meanwhile, regulator Ofgem was forced last year to introduce price caps to reduce household energy costs in response to political pressure. Introducing big oil into the debate could fan the flames.

There is also the question of shareholder value for oil industry leaders to consider. Can Shell and other international oil majors afford to increase spending in their embryonic electricity businesses and still maintain adequate levels of expenditure on their conventional oil and gas divisions, which remain the main drivers of profits and investor returns?

The decline in capital expenditure in new oil production has been flagged as a major concern for policymakers seeking stable crude prices. The world could require at least another 30 million barrels per day of new crude capacity by 2040 to meet demand, replace ageing reservoirs and keep prices affordable. Diverting capital into electricity markets could be a distraction.

Despite these concerns, international oil companies such as Shell are ramping up their investments in electricity. The largest international oil major in Europe expects the market for power to be the fastest growing area of the energy industry as pressure builds to cut global pollution and carbon emissions, according to a recent Bloomberg television interview by Shell executive committee member Maarten Wetselaar.

“We believe we can be the largest electricity power company in the world in the early 2030s, because this part of the energy system is going to be the thing that grows fastest,” said Wetselaar, who also heads up Shell’s gas and new energies division.

Wetselaar’s vision is understandable given the rapid growth in electric vehicles (EVs). S&P Global Platts Analytics forecasts that plug-in EVs – including rechargeable hybrids – will account for nearly half of global auto sales by 2040, displacing some oil demand as a transport fuel and expanding the role of the electricity sector.

Shell has said it plans to avoid investing in conventional transmission and power station assets to focus instead on distributed renewables and supply, making its goal to become number one in the power sector a complex and risky bet on emerging technologies and markets. The company beefed up its UK electricity supply business by buying First Utility in late 2017. It has since struggled to compete with cheaper start-ups in a fiercely competitive market that has seen a slew of supplier bankruptcies in recent months.

Energy majors in new battleground

To become the world’s biggest renewable generator, meanwhile, would require an annual expenditure in the region of $2 billion initially, according to a report by S&P Global Platts. By comparison, Spain’s Iberdrola – a European sector leader – ploughed over $5 billion into green power generation growth last year.

Iberdrola has 29 GW of renewable electricity capacity installed worldwide. Shell has 1.6 GW of solar and will have 5 GW of wind on completion of committed investments. And Shell isn’t alone in wanting to forge into these new markets. BP claims it is now generating enough power from wind renewables to feed 400,000 homes.

Meanwhile, some international oil companies are being even more aggressive, posing a direct challenge to incumbent conventional utilities in their domestic markets. In France, Total recently acquired Direct Energie. The deal pits it against the state-owned market giant EDF. By 2022, Total aims to be supplying electricity to 6 million customers in France and 1 million in Belgium.

However, utilities can’t match the financial muscle of big oil. NextEra Energy, the world’s biggest renewable generator in the US, had a turnover of around $17 billion last year, which is less than Shell made in actual profits over the same period. Gobbling up rivals in the power sector is relatively cheap when armed with an oil company’s gigantic balance sheet.

Globally, it’s not just international oil majors going electric. State-owned fossil fuel producers are increasingly looking at the sector for growth. Saudi policymakers have for the last decade harboured dreams of the kingdom being the biggest exporter of solar-generated electricity in addition to crude oil. Elsewhere in the oil-rich Gulf, petrodollar sheikhdoms are pumping billions into renewables.

US oil companies are also coming under more pressure to diversify. Rising star US Congresswoman Alexandria Ocasio-Cortez has America’s most powerful business lobby in her sights. Ocasio-Cortez wants 100% of the country’s power to come from renewables and fossil fuels to be phased out in the world’s biggest economy, in just a decade.

In its defence, big oil is stressing that EVs are no magic bullet for climate change and won’t spell the end of petroleum. EVs still account for a small share of the total global passenger vehicle fleet. Global sales of light duty plug-in EVs saw double-digit year-on-year growth in January, but still only totalled 155,000 units, according to the latest S&P Global Platts Analytics monthly report.

Of course, declines in consumption by motorists will be compensated by growth in petrochemicals and industrial transport like shipping. Rapidly growing developing economies in Asia will also increasingly play a more important role in supporting crude demand. In tilting from hydrocarbons to electrons, oil companies will have to find a balance between serving their fossil fuel past while investing in their electric future.

This article previously appeared as a column in The Telegraph