ELECTRICITY:

Why the oil majors are backing away from renewable energy

Chevron Corp.'s new solar and geothermal business seemed to be having a great year. In January, after just one year in operation, it had established projects with returns of 15 to 20 percent and had plans to build several geothermal plants in Europe.

Then Chevron changed its mind. In a series of transactions, it sold off the unit, as well as others that do smaller solar installations and energy efficiency upgrades, and canceled a pair of giant solar farms in Hawaii, according to reports from Bloomberg Businessweek. With that, the oil majors have beaten a near-final retreat from solar power.

Why? It is a puzzling question for those who have watched the oil majors bestow their dollars and attention on clean energy and a few years later abruptly walk out the door.

Three of the supermajors -- BP PLC, Chevron and Royal Dutch Shell PLC -- have since 2000 taken on ventures in wind, biofuels and geothermal. All took big positions in solar, sometimes more than once. They were positioned to compete or even dominate.

Now, as solar is gaining market momentum like never before, the oil majors are nowhere to be found.

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Analysts who cover the industry say it isn't that oil and gas companies want to kill their brood of adopted low-carbon children, or that they even perceive them as a threat. They have a straightforward answer: The oil business is changing, and times are tough. Projects that made sky-high profits are a little lower in the sky.

"It's not their strong suit to be spending a lot of money and time on [renewables] when they are definitely challenged in their core industry," said Lysle Brinker, an oil and gas equity analyst at IHS.

Even those depressed profits tower over the margins earned in renewables, where projects are slow, bureaucratic and hard-won. If there are any profits to be had, they are too meager to impress an oil executive.

But there is yet another explanation.

An executive who has worked with both Chevron and the solar industry says that although the oil company was happy to nurture solar power with seed money, it lost interest when the investment began to require real money -- real money for a business that, at its heart, it didn't understand.

It's all about the core

When talking to experts about why the oil industry has turned away from renewables, the word "core" comes up a lot. An oil industry buffeted by change has needed to return to the basics, even though the basics are a lot more exotic than they used to be.

In recent years, the major oil players have been absorbed with searching for and extracting fuels from a bewildering array of new places.

A growing portion of oil companies' portfolios these days is in the "unconventionals" -- the oil sands of Alberta, the natural gas formations of the Marcellus Shale, the ultra-deep waters of the Gulf of Mexico, the frigid Arctic, and the tight oil reserves that underlie South and West Texas and western North Dakota.

They require new techniques that are extraordinarily risky and expensive, and so the companies have turned their venture dollars away from "clean" technology and toward innovations in drilling, subterranean mapping and hydraulic fracturing.

The supermajors were "caught quite unaware of the potential of shale," said Chirag Rathi, an energy analyst at Frost & Sullivan. A flood of shale gas has upended America's fuel markets in recent years, and it took a lot of investment to get there. "All those trends kind of meant that it was important to focus on the core again," Rathi said.

Meanwhile, the big oil firms are finding themselves less welcome at the foreign oil fields that have been mainstays for decades. National oil companies like Aramco of Saudi Arabia and Petronas of Malaysia are renegotiating old contracts and exerting more control over their turf, Rathi added.

The Arctic Circle provides just one example of the difficulties. Shell has so far spent $6 billion on setting up drilling rigs in the Chukchi Sea between Alaska and Russia but has been beleaguered with safety and equipment problems (EnergyWire, July 18). Two weeks ago, Exxon announced it would scuttle plans to drill in Russia's Kara Sea because of Western sanctions against Russia related to its aggressions in Ukraine.

Shell is in trouble with investors for stagnant production figures and rising exploration and development costs that are eating away at company revenues. In response, the company is in the midst of a major restructuring effort, vacating much of the U.S. shale oil business and focusing investments instead on offshore exploration and production and other projects that could help the company make major gains in its global oil and gas output figures.

Meanwhile, as venture dollars have become more precious, those earlier investments in renewable energy projects often struggled or floundered.

KiOR Inc., a once-promising maker of biofuel from wood chips and switchgrass, is in severe financial trouble. In general, biofuels have labored under uncertainly about how much the federal government will mandate to be blended into fuels. The renewable energy production tax credit expired at the end of 2013, depressing the profits of all future wind farms.

Since the tax credit expired, "there wasn't much meat in the market," Rathi said.

"I have this much money to spend," said Daniel Choi, an energy analyst at Lux Research. "Am I going to use it to buy new plots of land, to develop this plot of land, or will I allot it to investing in a new renewable energy company?"

Investments in wind and solar shine, then fade

Remember a few years ago, when BP said it stood for "Beyond Petroleum" and Chevron's ads declared, "It's time oil companies get behind the development of renewable energy"?

A survey of the oil majors' holdings reveals that the investments that gave those claims a ring of truth are now mostly stalled or sold. What momentum exists is near the oil majors' core competencies: biofuels, geothermal and solar projects that make fossil fuel extraction more efficient.

Shell and BP still have significant holdings in wind but seem to hold them at arm's length.

Shell WindEnergy Inc. pulled out of a major project in California two years ago but still operates eight U.S. wind farms that comprise 720 wind turbines, said Shell spokesman Ray Fisher. The corporate parent, Royal Dutch Shell, maintains a small wind energy branch, though its future is only vaguely defined. Investors are watching for signs that Shell may move out of the wind business in the coming years.

BP invested $3 billion in wind farms starting in 2005, eventually operating 16 of them in nine states, producing 2,600 megawatts of power. In 2013, as the company struggled to pay for the damage from its Gulf of Mexico oil spill, it was determined to sell them. Then, a few months later, it decided to hold onto wind after all because no one offered a good buying price.

"Despite receiving a number of bids, the company determined that it was not the right time to sell the business," said Jason Ryan, a BP spokesman.

Investments in solar photovoltaics (PV), where the oil majors were once formidable, have vanished.

BP at one point boasted of having the most efficient thin-film solar panels in the world, and in 2001 hatched a plan to put solar on all new BP service stations. In 2009, it arranged to build solar plants on the roofs of Wal-Mart stores in California (ClimateWire, April 23, 2009). But BP shut down these operations in 2011.

"The continuing global economic challenges have significantly impacted the solar industry, making it difficult to sustain long term returns for the company, despite our best efforts," BP said in an internal letter to staff.

Shell in 2002 bought a German solar company (from Siemens AG), established it as one of the leaders in the then-tiny U.S. solar market, and then sold it back to the Germans (to SolarWorld AG) in 2006.

Chevron's exit has been the most recent. In the wake of its divestments this year, Chevron's holdings are limited to a few solar photovoltaic projects in California and a small wind farm in Wyoming. It says it is experimenting in solar technology.

The one oil company that maintains a vital interest in solar panels is Total SA, the French petroleum giant. In 2011, it spent almost $1.4 billion to buy a controlling interest in SunPower Corp., one of the U.S.'s leading solar panel makers, which it runs as a semi-independent arm.

Clean, as long as it's core

For the oil industry's other big players, though, the remaining oomph in solar power is in what is called "enhanced oil recovery." Mirrors are positioned to bounce sunbeams to a central point, where a fluid is superheated to create steam. The steam, in turn, is injected in the ground to increase the productivity of an existing oil well.

Chevron has a demonstration enhanced oil recovery plant in Coalinga, Calif., that has 7,600 mirrors, while Shell has allied with GlassPoint Solar Inc. on a project in Oman.

In geothermal power, which uses hot subterranean rocks to create steam that makes electricity, Chevron operates sizable plants in the Philippines and in Indonesia.

One vein that almost all the supermajors still pursue is biofuels, though often on a smaller scale than a few years ago, according to Bloomberg.

Chevron and Exxon Mobil Corp. both dabble in advanced biofuels research. By comparison, Shell and BP are more bullish. Shell has a deep history with biofuels that spans about three decades, said Shell's Fisher, adding that Shell is one of the world's largest distributors of biofuels and that capacity expansions are ongoing. BP's green-fuels scope includes the largest bioethanol plant in the United Kingdom, operated with DuPont, and three mills in Brazil that help convert sugar cane into ethanol. In 2012, BP scrapped plans for a $300 million cellulosic ethanol refinery in Florida.

One name that rarely enters the conversation, when it comes to renewables, is Exxon Mobil.

America's second-largest company by gross revenue showed relatively little enthusiasm for renewable energy projects and ventures in the past, even as interest in renewables grew prominently in 2008 and 2009, and the firm largely maintains this attitude today.

Exxon Mobil officials have also expressed deep skepticism of electric cars at past events, arguing that it was unlikely that advanced batteries would ever match the energy density that is contained in liquid petroleum fuels.

Exxon Mobil does, however, support renewable energy research indirectly, as a sponsor of the Global Climate and Energy Project, a research initiative at Stanford University that exists to "conduct fundamental research on technologies that will permit the development of global energy systems with significantly lower greenhouse gas emissions," according to the GCEP website.

Chevron's 2 flirtations with solar

When it comes to understanding why the big oil companies can't seem to embrace clean energy, the experience of Robert Redlinger proves instructive.

Redlinger began at Chevron in 2003, when it bought the energy contracting company he worked for, Viron Energy Services. Redlinger headed up Viron's distributed solar business and became a leader in Chevron's clean energy subsidiary, Chevron Energy Solutions. By the mid-2000s, Chevron Energy Solutions had become the second-biggest solar integrator in California. It built ground-mount systems and solar canopies, and on rooftops.

But by 2007, Redlinger said in an interview, it was becoming clear to him that solar panels were becoming a commodity and that Chevron would make tiny profits.

So at his prodding, Chevron expanded into building utility-scale plants. Redlinger headed the team that secured attractive sites for solar farms. For a brief time, it appeared that a major oil company would have been in a leading position in what is now one of the world's top utility-scale markets for solar.

Along with the budding projects came the need for letters of credit and deposits to create interconnections to the grid. It was when it began to require millions of dollars of capital investment that Redlinger's bosses started having second thoughts. "In fact, my superiors at Chevron Energy Solutions never even took it to the corporation and never asked for the funds because they knew it would be rejected," Redlinger said in an email.

By 2009, Chevron had sold its solar assets, and Redlinger left the company in 2010.

"There was always a disconnect," Redlinger said of Chevron's relationship with solar. "It never really had the buy-in of the corporation. It was always a bottom-up effort of the staff rather than a top-down strategy directed from above."

Around 2012, after Redlinger's departure, Chevron Energy Solutions again got an infusion of cash from its parent to pursue big geothermal and solar projects. And again, last month, the company got cold feet.

Do oil companies understand electrons?

Many aspects of the electricity business were unfamiliar and uncomfortable to an oil executive, Redlinger said.

One was debt. Like most equipment-intensive industries, the solar industry incurs lots of debt to build its projects. But Chevron's leaders were allergic to incurring debt and employing other financing structures commonly used to build electric infrastructure. The oil industry, with its huge cash reserves and extraordinary appetite for risk, is used to paying costs from its own pocket. One loan on an oil field gone bad can bankrupt an entire company.

As a result, Redlinger said, he could never make the case that a solar project, despite its lower returns, in the end could be as profitable as an oil project if you structured it differently.

Furthermore, Chevron executives bristled at the relationship with a solar plant's primary customer -- the electric utility.

The oil companies are used to high risk and high reward. The utilities offered low risk, low reward -- and an inferior bargaining position. Utilities are monopolies, and a monopoly defines the terms. Chevron does tango with the utilities as the operator of some big cogeneration electric stations. But when it came to building solar plants, Chevron was distressed by its lower status.

"The utility business is not a good one," Redlinger said, "unless you're a utility."

Redlinger addressed a question that occurs to many when they think of the oil companies and renewable energy. The oil majors are better than anyone at energy. Solar, wind and geothermal power are all energy. So what's the problem?

The problem, Redlinger said, is that the oil companies know molecules, and solar isn't about molecules. It's about electrons.

What the oil companies do, Redlinger said, is one part exploration -- geology, geophysics, computer simulation of oil reserves, drilling and heavy earthwork. The other part is chemical engineering, massaging chemical bonds with treatment and heat to convert crude into usable fuels like diesel and gasoline.

What solar and other electricity-generation business do, by contrast, is electronics engineering and manufacturing. "The electrons business is just not core to what the oil majors do," Redlinger said.

"It's not that the oil companies can't get good at it," he said. "They're very, very talented and have very good personnel. The question they have to ask themselves is why. If you have a business model that is profitable, and will remain profitable for 20 or 30 years, and that takes all your resources to remain profitable, why change it?"

Twitter: @DavidFerris | Email: dferris@eenews.net

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