London — Big oil companies are "completely missing the point" when they reference lower returns as a barrier to investing more heavily in the increasingly competitive world of renewables, Mark Lewis, Global Head of Sustainability Research at BNP Paribas Asset Management, told S&P Global Platts Wednesday.
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On Tuesday S&P Global Ratings said utilities were well positioned to maintain leadership in large offshore wind development in part because European oil majors "find returns are too low" in an increasingly competitive market.
"The biggest block on these companies moving into renewables is the so-called profitability gap," Lewis said.
The oil majors traditionally expect returns of 15%-20% from upstream investments.
"For renewables the return is 5% to 10%, at most 15% with clever financial engineering. Your average oil executive is saying why should I bother?" Lewis said.
The oil sector was, however, "completely missing the point in the assumption that because it made 15%-20% before, it can carry on making 15%-20%. Those returns were only possible because there was no competition," Lewis said.
Fossil plant comparison
Only now were oil analysts waking up to a comparison with the utility sector, where for a long time executives argued renewable energy projects would end up as stranded assets once subsidies were withdrawn.
"How ironic then that all the stranded assets on utility balance sheets ended up being conventional assets, impacted by renewables in terms of market share and value of electricity," he said.
Now the emerging market for electric vehicles was being fed increasingly by renewable electricity.
"The oil industry is unused to dealing with this sort of competition, I don't think they can see how quickly things might change," Lewis said.
Climate was the existential theme everyone was focused on, "but what people miss about renewables is the decentralization theme, reducing the barriers to entry," he said. "The way costs are coming down, it is really only offshore wind that remains as a capital intensive activity for big energy companies."
In 2006 wind and solar accounted for just 6%-7% of total German power production, but 100% of power demand growth, Lewis noted.
"Once renewables account for 100% of the growth component, that tells you the fossil fuel component has peaked and is going into decline," he said.
The key question for transport, then, was at what point would EVs capture all of the growth in global vehicle markets?
"Globally we are a long way from that, but in the Netherlands last year the Tesla Model 3 was the largest selling vehicle of all vehicles. Globally the vehicle fleet turns over once every 17 years. Within that there are faster segments, like company car fleet buying. Sentiment is changing quickly," he said.
From April full battery EV company cars in the UK will be exempt from tax, a saving of up to GBP1,000/month versus conventional high-end gasoline and diesel cars. Partly in response, UK home-charge market leader Pod Point has trebled its hiring capability ahead of what it sees as "disruptive, exponential growth" as EVs become cheaper to buy through the early to mid-2020s.
The profitability gap notwithstanding, investor pressure was building on the likes of BP, Lewis said.
"Brokers think one of these companies is going to be make a big step-out transaction in the next two years," he said.
Orsted was the sector leader in offshore wind and an obvious target, but the Danish government would likely block any takeover bid.
"And Orsted would argue we don't need it. We transformed ourselves. Look at the multiples. Orsted is trading over 30 times earnings, I can't see any oil companies trading at those levels," he said.
Last year Lewis wrote a report, "Wells, Wires and Wheels", that sent shockwaves through the investor community.
The economics of wind and solar twinned with electrification of transport would "crush oil" within 25 years, he said.
"While oil has a massive flow-rate advantage [over wind and solar], this is time limited. We think the economics of renewables are impossible for oil to compete with when looked at over the cycle," he said.
He sticks by this assessment today: "The basic point is an EV is three-and-a-half times more efficient than a petrol engine. You're losing 80% of the energy put into an internal combustion engine versus 20%-30% in an EV. That's only going to improve over time, and tells you everything you need to know," he said.
In January the International Energy Agency reported investment to date by oil and gas companies outside their core business areas had been less than 1% of total capital spend.
"A much more significant change in overall capital allocation would be required to accelerate energy transitions," it said.