Woodmac: Renewables a threat to oil majors, but also an opportunity

A niche energy market now, renewables will be much bigger by the middle of the next decade, and a theme not to be ignored, as oil and gas demand growth slows, Wood Mackenzie writes in its latest report.

Wind and solar energy are poised to radically reshape the energy market over the coming decades, presenting a threat to legacy oil and gas operations, but also an opportunity to diversify and future-proof portfolios, Wood Mackenzie said, adding that the Majors are starting to rethink their strategies.

According to the energy intelligence agency, the case for the (Oil and Gas) Majors to build a renewables position is increasingly compelling.

A niche energy market now, supplying some 1%of the world’s total energy needs (excluding hydro) renewables will be much bigger by the middle of the next decade, as oil and gas demand growth slows. The value proposition is also competitive versus some upstream investments, with long-life cash flow a key attraction, Woodmac said.

The Majors have taken the first steps to move beyond the core oil and gas business into wind and solar power, as well as energy storage. But most are still weighing up the options and have yet to make telling strategic moves in renewables.

A potential tipping point for the shift into wind and solar could be an anticipated decline in the Majors’ hydrocarbon production. With new resources needed to sustain volumes beyond 2025, wind and solar could step in to the breach if discovered resource commercialisation, M&A and exploration fail to deliver, or economics weigh against continued development.

In an infographic shared on its website, Woodmac sees global oil and gas revenue as 33x times greater than renewables in 2017 , but forecasts the number will be “only 13x greater in 2035.”

Although it won’t change the Majors’ portfolios materially for decades, investment in renewables presents a substantial opportunity. At current costs, achieving the same market share the Majors have in upstream oil and gas would require US$350 billion in wind and solar investment out to 2035. While this seems an unlikely scenario, renewables could account for over one-fifth of total capital allocation for the most active players post-2030.

The Majors are only just starting to sow the seeds for the radical changes that lie ahead. There are still question marks over scale. But wind and solar will be increasingly important strategic growth themes that cannot afford to be ignored as the Majors plan to 2035 and beyond, Woodmac ends.