Are Oil Companies Diversifying Into Renewables?

2GreenEnergy super-supporter Gary Tulie writes from his home in charming Buckinghamshire, England:

Hi Craig. (As discussed in this article), whilst still fairly small scale, there is a move by oil majors to diversify into renewables. The interesting part is that now unlike 10 years ago, it is driven by economics rather than investor / political pressures. Whilst returns are said to be lower than for fossil fuels, they are far less volatile – the returns on a wind farm tend to be more or less constant, whereas the price of oil can vary between $120 and $30 in a few months.

It’s funny you mention this, as it reminds me of a conversation I had when I first got into this about 10 years ago.  My brother (has MBA, knows business) asked me why the oil companies don’t diversify to hedge their risks, improve their PR, and broaden their market position from “oil” to “energy.”

I explained that, in my mind, there are four reasons:

• Maximizing shareholder value means concentrating on sucking the last molecule of hydrocarbon out of the ground as fast as possible and selling it at the highest price possible.

• Showing that there is profit to be made in renewable energy is a quick route to the end of government subsidies for oil, or at least leveling the playing field for renewables.  For instance, most of the capital that is organized for oil and gas exploration is done with a vehicle called a Master Limited Partnership, which provide investors with both tax benefits and complete liquidity at the same time.  Congress has (for some bizarre reason, wink, wink) explicitly made MLPs illegal for wind and solar, providing a substantial advantage for fossil fuels.

• All organizations do well to rely on their core competencies, and there is no business arena in which this is any more clear than oil and gas exploration. What made you a great oil company will most certainly not make you a great solar or wind company.

• At the core of oil executives’ personalities is a sneering disdain for public pressure.  They couldn’t care less about popularity; they know they’re reviled, and they’re just fine with that.  Think about the size and operating philosophy of what you’re dealing with here. ExxonMobil has its own state department and its own military.  Sure, it’s happy when the U.S. government, at taxpayers’ expense, negotiates a favorable deal for them in some foreign land, but it’s more than capable of neutralizing people/groups/regimes that stand in their way.  These quiet wars don’t make it to mainstream news, but they’re hardly an uncommon practice.

Having said all this, the time will come (perhaps it already has), when the pressures of pure market economics forces them in this direction.  No one understands this better than you, Gary, as you contributed so much great content to my most recent book on the subject, Bullish on Renewable Energy, whose central point is this exactly.

As always, thanks for writing.