Jason Switzer — March 11, 2013
At first glance, pairing renewable energy with the oil and gas sector would seem an unlikely match. But behind the curtain, romance could be blooming. From 2000 to 2010, U.S.-based oil and gas companies invested roughly $9 billion in renewable technologies (such as wind, solar, biofuels) — roughly one-fifth of the total U.S. investment in renewables over the same period. And as Canadians come to recognize that meaningful and cost-effective climate action may be the key to unlocking market access for oilsands, the appetite for an even-tighter union between these star-crossed industries could be just around the corner.
Act 1: A match made in heaven?
In many places, the economic tide is turning in favour of renewables over fossil fuels. Wind power recently beat out new coal in Australia, and it’s becoming increasingly competitive with natural gas in Texas.
Developing renewable energy plays to the strengths of the oil and gas sector, which include energy market insight, technology know-how, mega-project management excellence, rock-solid credit and community engagement experience. Renewables offer a means for diversification in the face of volatile energy input costs, and a hedge against peaking oil demand in key markets. Renewable energy investments can also earn oil and gas companies favourable political capital among climate-conscious community members and decision makers.
The oil and gas sector’s key financial partners — institutional shareholders, banks and insurers — are also demanding aggressive carbon management. As we discussed in a previous post, finding cost-effective or indeed profitable ways to shift carbon off the balance sheet is becoming urgent, threatening to strand reserves and cut into market valuations. Under the revised Equator Principles, for example, project developers will increasingly be obliged to demonstrate consideration of “cost-effective options” to reduce greenhouse gases as a condition for project finance. In short, oil and gas companies have both the opportunity and the imperative to invest in renewable energy.
Act 2: A volatile courtship
Oil and gas companies have been dabbling in the renewables business for a long time. In the wake of the oil shock of the 1970s, OECD governments established a range of incentives and subsidies for energy independence. This sparked a first wave of standalone renewable business ventures by the oil patch, focusing on solar, wind and geothermal energy. Today, Chevron is the world’s largest private producer of geothermal power, for example.
But government matchmaking proved a fickle friend. When public incentives for renewable technologies were withdrawn in the 1980s, most companies abandoned their alternative technology investment and refocused on their core petroleum business.
A second wave of oil and gas companies got into renewables in the late 1990s and early 2000s as momentum built around reaching a global climate agreement. When the global economic downturn hit and industrialized countries failed to match rhetoric with action, ventures in solar and wind by BP and Shell, among others, were sold off or quietly shuttered.
Today, ethanol blending mandates in the U.S., E.U. and Canada are driving a third wave of oil and gas ventures, with Shell now the world’s leading vendor of biofuels. But this wave too faces the possibility of reversal, given a growing backlash against widespread use of various biomass resources for fuel, and concerns about competition with food crops.
Act 3: Couples’ therapy
The chemistry between oil and gas companies and renewables ventures is likely to continue to ebb and flow with the economics and politics of the times. Yet believing these two industries have tremendous opportunity for synergy, the Pembina Institute brought a group of leading oil and gas companies together with renewable energy industry advocates last year. The objective was to better understand the dynamics at play, and to help advance the integration of renewable energy opportunities into decisions made by the oil and gas companies.
Every relationship has hang-ups, and we uncovered some significant barriers in our research and discussions, including:
Challenging economics, stemming from low natural gas prices and the comparatively high capital costs of renewable energy, coupled with comparatively low rates of return for renewable power projects;
- The lack of national political effort on climate change and renewables, including the absence of a meaningful carbon price;
- A lack of renewable energy literacy among oil and gas engineers, encompassing both technology and current economics; and
- Ad hoc and personality-driven approaches to renewable energy project development, including shifting commitment among senior corporate leadership.
Our research found many instances where renewable energy technologies are already economic for oil and gas, particularly when competing against expensive diesel- or propane-based power in off-grid applications. For this reason, a host of on-site renewable energy ‘wins’ remain largely untapped by the oil companies. Scaling these up could transform both sectors for the better.
Solar for remote applications: Small-scale solar photovoltaic (PV) systems have successfully been applied in remote oil and gas operations to power monitoring systems, compressors, pipelines, and pumping stations. Companies including Cenovus, Encana and Suncor have been using solar-powered supervisory (SCADA) control and data acquisition systems across the Canadian prairies for years, and represent the largest market for solar cells in Western Canada. In Wyoming, BP found that replacing glycol dehydrators with solar pumps paid for itself within three months.
Renewable-powered offshore platforms: In 2002, Shell began developing offshore platforms that are fully powered by solar and wind. Today, several platforms are in use in southern North Sea gas plays, reducing operating and capital costs and improving safety.
Geothermal heat and pressure energy recovery: Existing oil and gas wells (both operating and abandoned) connect to deep geothermal resources, meaning that many wells produce highly pressurized waste fluids and gases at temperatures as hot as 200°C. This energy can be economically recovered using existing technology. In the U.S., where there are more than 2 million such wells, the government is actively funding and encouraging pilot projects and mapping the available resource.
Concentrated solar thermal for enhanced oil recovery: Since many of the known heavy-oil reserves around the world have limited access to cost-effective fuel sources and are located in areas with substantial solar resources, Chevron and others are investigating concentrated solar to generate steam for enhanced recovery.
Act 4: Keeping the spark alive
Based on our research and dialogue, the Pembina Institute believes that a stronger relationship between renewable energy and oil and gas is in the interest of both sectors and of the global climate. To fan the spark, we recommend three tonics: leadership, renewables literacy and increased collaboration.
In the absence of strong climate policy, the drive for renewable energy efforts in the oil and gas sector has come from internal champions within the oil companies. These champions can be empowered by a corporate renewables target, by a strong internal carbon price, and by a mandate to conduct systematic within-fence renewable energy options assessments for major projects.
Enhance renewable energy literacy
To enhance the likelihood of success, oil and gas project design engineers need state-of-the-art knowledge on renewable energy technology performance and on best practices for integrating these technologies into operations. The sector could spur innovation by bringing engineers and renewable energy technology experts together more regularly, and by launching a technology prize (e.g. X Prize) for successful pilots.
Increase inter-company collaboration
In Canada, industry consortia such as the Canadian Oil Sands Innovation Alliance could facilitate moving sector-specific renewable energy research forward, with intellectual support from the renewable energy industry associations and non-governmental sector, and financial support from governments. Internationally, the Society for Petroleum Engineers, and IPIECA (the global oil and gas industry association for environmental and social issues), can play crucial roles in convening technical dialogue and consolidating best practices. There is an opportunity to benchmark across the sector, to build on lessons learned across multiple companies and to develop and adopt sector-wide guidelines for incorporating renewable options assessments in project design.
While many talk about a transition to a low carbon economy, few know how we will get there. Moving renewables from a side show into a core element of the oil and gas business could mark a tipping point, helping Canada compete in the estimated $3 trillion clean energy economy, while simultaneously providing a meaningful avenue for this major sector of our economy to address its social license challenges.