Could France’s Total reinvent the grid?

By David Ferris, Saqib Rahim | 08/16/2016 07:00 AM EDT

For the last five years, the French oil company Total SA has pursued a strategy distinct from other supermajors that sell most of the world’s oil. It spent $1.3 billion to buy the United States’ biggest maker of solar panels and just spent a billion more to buy a big battery company.

Oil companies have made forays into producing renewable and low-carbon electricity before, mostly ad hoc and with disappointing results. But the seriousness of Total’s effort sets it apart.

The company has spent $8 billion — more than any oil company ever — on renewable and clean energy since 2011, according to Bloomberg New Energy Finance. It has tied the compensation of its CEO, Patrick Pouyanné, partly to his performance on low-carbon initiatives.


Pouyanné recently declared investments targeting greenhouse gases "a cornerstone of our strategic vision." He says the company’s investments are keeping with the global consensus goal of limiting temperatures from rising more than 2 degrees Celsius, though that might cause its core oil business to shrink. The company’s new growth, it says, will come partly from having 20 percent of its assets in renewables by 2035, up from 3 percent today.

It is a vision that stands in stark contrast to the approach being taken by other giant oil companies. In recent years, BP PLC, Chevron Corp. and Royal Dutch Shell PLC divested their renewables portfolios (EnergyWire, Oct. 3, 2014). Today, Exxon Mobil Corp. and BP say they’re confident that oil demand will continue to grow for decades.

In the company of Tesla

To get there, Total appears to be patiently assembling the pieces of what could become an integrated offering of solar, storage and "grid edge" solutions that could turn the century-old electric grid on its head.

The U.S. portion of that offering may come through Total’s American subsidiary, SunPower Corp., which "recently introduced a new service that includes onsite solar energy production for facility needs and is also planning to expand into smart energy management, storage and distribution to the grid," Total said in a report.

Disrupting the grid with a single, end-to-end solution is the dream of many clean energy companies, but almost none have the will or resources to make it happen. Total, a century-old French oil company, just might. That would put it in the rare company of Tesla Motors Inc., the Silicon Valley juggernaut that is attempting to bypass the traditional electric grid with an offering of electric cars, batteries and solar power.

"They and Tesla will be the first two to envision, ‘What does this product actually look like?’" said Cosmin Laslau, an analyst with Lux Research.

Laslau took an informed guess at Total’s strategy in a recent report where he looked at Total’s battery strategy. Along the way, he and his team assembled a graphic of Total’s clean-energy acquisitions and noticed a pattern.

"It wasn’t until we put them all on the same figure that we saw the logic of it," he said.

In addition to Total’s 2011 acquisition of SunPower and its $1 billion purchase of battery maker Saft Groupe SA in May, it has taken smaller venture stakes in companies that work at the interplay of solar, storage and the grid.

It invested $20 million in Tendril Networks Inc., an energy analytics firm, and took similar venture positions in young companies like Stem Inc. and Sunverge Energy Inc. that develop hardware and software to help batteries interact with the power grid. It has also invested in two companies specializing in off-grid power in Africa, a continent that makes up a large portion of Total’s oil business.

"Together, these three fields come together to form a robust, comprehensive vision of the future of power — with or without connection to conventional oil and gas plays like turbines for power generation," Laslau wrote.

Natural gas, however, will figure prominently in Total’s future plans. The company has said that its substantial investments in infrastructure for natural gas, which has half the carbon emissions of petroleum, are meant to intertwine with its growing role in renewables and electricity.

"The simultaneous growth of gas and renewables is encouraging us to take a broader approach to the end-to-end electricity value chain," Pouyanné said in May. "We want to develop a renewable power trading business. We are also positioning ourself in energy storage with our recently announced acquisition of Saft.

"Lastly, we will be re-examining the potential of other renewable energies, in particular onshore wind power," he said.

Diverging paths

The diverging paths of Total and the other titans of the oil business spring from their opposing assumptions about where the energy business is headed.

Faced with almost two years of slumping oil prices and ever-tighter carbon laws, most of the majors are keeping oil and gas at the center of their business models.

Exxon has stood by its fundamental argument: Oil demand is rising in the developing world; some amount of oil and gas will be needed, regardless of carbon regulation; and alternative energy isn’t ready to threaten them. And, of course, oil prices won’t stay this low forever.

Exxon is unique among the supermajors in resolutely steering clear of the electricity business. Its clean-energy investments are all in fuel: algae biofuel, biodiesel and a carbon-capture project with a fuel-cell company.

In May, Chairman, President and CEO Rex Tillerson said the company continues to sponsor research on "potential breakthroughs."

"We do that so we’re aware of whether that is something that has potential or not," he said, according to a transcript. "And should something evolve, we have the capacity to become engaged in that if we see it is in the interest of our shareholders."

Most investors buy it. When activist shareholders put up several climate proposals to a vote this year, they were thwarted. The initiative that did best — asking that the company propose a business model for a 2-degrees-Celsius world — had 38 percent support.

It’s a more conservative approach than Total’s, but the majors have their reasons.

"Every time they have diversified in the past 50 years or so, they have failed and blown billions of shareholder value in the process," Paul Spedding, a former oil analyst with HSBC, said by email.

Some examples of this diversification include when Amoco tried to get into retail with Montgomery Ward. Exxon tried to get into nuclear-fuel reprocessing; made gold, coal, and copper investments in the 1980s; and made a flight of renewable investments in the 1990s and aughts. BP and Norsk Hydro ASA once tried salmon farming. BP even bought a pet food company.

In the long run, the oil crash might be remembered as the period when Big Oil placed its bets on different futures.

Among the majors, only Total and Statoil ASA have increased their clean-energy investments since 2014, according to a recent study by Bloomberg Intelligence.

The risk, of course, is that the energy economy transitions a lot faster than that. "Getting the timing wrong can be quite disastrous," said Andrew Logan, director of Ceres’ oil and gas program, pointing to the coal sector.

But renewables have their risks, too. For one, electricity is a fundamentally different business than oil and gas, which would require a cultural shift.

Then there’s technological change, which Big Oil knows all too well: the risk of going all-in on a technology — lithium-ion batteries, for example — and then being suddenly undermined by a breakthrough elsewhere.

Instead of taking those risks, some might just choose to be "dividend without growth" companies, said Greg Elders, senior ESG analyst at Bloomberg Intelligence. They would turn into lean operations, focused solely on sending a steady check to their investors.

"What Total has done demonstrates that they have a fundamentally different view of the future," Logan said. "Talk to an Exxon Mobil or Chevron or Shell and they’ll say this is a 100-year transition, and we have plenty of time, and the world’s going to need plenty of oil and gas for the near future. … We’ll keep doing what we’re doing, and we’ll be OK."