OPINION: Oil companies, under financial pressure after a dire 2020, are receiving welcome relief with a $70-per-barrel crude price pushing up shares and strengthening balance sheets.
This should provide more financial firepower for energy groups eager for a fast transition to renewable technology.
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The only problem is that valuations in the clean tech sector have been growing even faster.
This makes it hard to find the kind of good deals that would help the oil majors bulk up on “green” energy assets.
Many oil companies are late to the renewable energy party and no chief executive, fresh from running up financial losses due to the Covid-induced oil market slump, wants to be seen making an overpriced lunge into a new and less proven sector.
BP set tongues wagging early last month when it spent £900 million ($1.25 billion) alongside a German partner on two 60-year offshore wind leases in the Irish Sea.
Bernard Looney, the UK supermajor's chief executive, insisted the three gigawatts of projects are good value and will fit with the company’s target of 8% to 10% returns.
But some analysts described the price as “staggering” and noted it was 15 times higher than that being bid in a similar US auction in 2018.
Patrick Pouyanne, chief executive of French counterpart Total, warned in February of a renewable energy “bubble” leading to “crazy” prices in the sector.
Hydrogen fuel cell maker Ceres Power Holdings saw its share price rise in London from around £2.30 this time last year to nearly £16 last month.
Plug Power in the US — another hydrogen fuel cell manufacturer — has seen its stock soar from $3 to $48 in the past 12 months.
What is perhaps particularly galling for BP and Anglo-Dutch peer Shell is that they were serious investors in the renewable energy sector over a decade ago but sold out for a variety of reasons, mainly arguing that the returns were too low.
BP actually set up its own — and now closed — BP Alternative Energy arm and promised to go “Beyond Petroleum” back in the late 1990s.
Under Looney, BP is determined to go there again, but will likely find it tougher to buy its way back into a potentially overpriced sector.
Oil companies insist they continue to see oil and gas providing important revenues for them to pivot into new areas.
A recovery in the oil price should help, though it also risks encouraging companies to slow down their move away from hydrocarbons.
There will be pressure to avoid this from some of their own activist shareholders and also from large investors such as BlackRock, which is now trumpeting its newfound determination to play a role in meeting the Paris climate agreement goals of keeping global temperature rises in check.
But will other investors move back heavily into oil and gas now that valuations are rising?
Oil majors selling their hydrocarbon assets are no panacea for climate change.
The buyers — often private equity groups or national oil companies from the Far East or Middle East — have their own priorities and are far less sensitive to Western public or investor criticism.
Oil majors have a significant role to play in the energy transition, asset bubble or not. But a meaningful reduction in global emissions demands a truly global response — not just in the West.
(This is an Upstream opinion article.)
