With climbing oil prices approaching $100 per barrel, you’re going to start hearing more about the demand for renewable and alternative energy sources. Unfortunately, most investors and media outlets are reactive, rather than proactive, and should have remained focus on renewables when oil was trading at $50. Its run back to $100 was inevitable.
Renewable energy is vital to our economy’s future and knowing who will dominate this space will pay dividends (quite literally) in the future. Breakthroughs in this domain have already been achieved by both small and large companies, both private and public. There has been renewable powered microwaves, airplanes and even villages. However, solar and wind power still remain uneconomic and (particularly in wind power) unreliable. So, in order to maintain reliable energy from renewable energy, a base-load power source is needed (such as nuclear, gas, oil etc.).
The point of this blog is to explain my thoughts on who will be the primary distributor of alternative and renewable energy sources in the future. This sector requires an excessive amount of capital, unattainable by many companies (partly why the government has subsidized so much of this sector). With that stated, there is one particular group of companies that has dominated research & development in the renewable energy sector. The oil companies.
A.) Energy is their business and a proactive strategy is always better than a reactive one. Companies such as Chevron, Shell and Exxon have money to burn and are in the business of making money off energy, no matter what kind. Let’s not pretend that they are just oil & gas companies.
B.) Big oil companies can afford to spend billions on R&D given the mass amount of profits they’ve made from oil. $1 billion annually on R&D is peanuts to the big oil companies, yet that kind of cash can go a long way in developing an economic renewable energy source.
It’s my strong belief that the big players in the oil industry will dominate the renewable energy industry the moment it becomes economic. Right now, they’re all looking for ways to make solar, wind and biofuels economic, and spending billions to figure it out. The leaders, in my opinion, will be Chevron, Shell and Exxon.
These energy companies have been wrongly labelled as simply ‘oil companies’. They are energy companies looking to make massive profits on whatever type of energy provide profits. For now, it’s oil, and the longer oil remains profitable for them (no end in sight), the more dominant they will become in the renewable energy space (because their purchasing power keeps growing).
These ‘oil companies’ are no different than Google is to the internet. They want to dominate their industry. Google’s business is the gathering of information in order to sell that information to advertisers. The more they control of the internet, the more information they can gather (about web users). This is why Google acquires sites such as Youtube. It’s not because they want the site for its cool features, they want the user information the site provides to their advertisers. It’s the same thing with these ‘oil companies’ - they want to dominate the industry they are in. These companies want energy to sell to the people of the world. They don’t care what kind of energy it is, so long as its profitable. Remember, these ‘oil companies’ have more money to blow than just about any other industry on earth and the longer oil is around, the more purchasing power they accumulate. Governments can’t continue to subsidize “green” energy sources, for example, the solar industry. Cutbacks in government spending is inevitable. When the government can no longer afford to subsidize these renewable energy programs, the oil companies will step in and accumulate ( for pennies on the dollar) the best renewable energy technologies out there, via joint ventures or outright takeovers.
Chevron’s President, Desmond King stated “We agree. We're behind renewables because we need renewables. They're part of the solution. If we're going to meet future demand, we need every molecule, every megawatt of energy that's available and viable.
The key word is "viable." We invest in energy technologies that satisfy, or have the potential to satisfy, four basic criteria: economics, scale, customer expectations and density—that is, the ability to be delivered on demand and in quantity. And we never stop looking.”
“That's why we review dozens of renewable technologies each year. That's why we're partnering with Weyerhaeuser to explore commercializing forest-based biofuels. And that's why we're the only major international oil company with an energy services company that delivers efficiency and renewable power to clients.”
In 2007, Exxon, shocked the renewable energy industry when it unveiled a super-thin plastic sheeting that improves the power, safety and reliability of lithium-ion batteries for use in automobiles. It allows battery makers to build smaller and cheaper battery systems — removing key obstacles that have kept automakers from building hybrid and electric vehicles on a mass production basis. Exxon was instrumental in putting electric vehicles on the road. Ironic!?!
R&D Spending & Green Energy Initiatives
Chevron has spent roughly $4 billion since 2002 on renewable and alternative energy and efficiency services.
Chevron is working with Mascoma Corporation to investigate plant-based fuel.
(Source: Energy API http://www.api.org/)
Chevron Energy Solutions has a contract with the U.S. Department of Energy to work with federal agencies to reduce energy and water consumption and increase the use of renewable energy at agency facilities. (Source: Energy API http://www.api.org/)
Chevron has formed an alliance with the Penn State Institutes of Energy and the Environment to research coal conversion technologies. The joint research initiative will focus on coal chemistry and conversion technology, advanced fuels, combustion, analysis methods, reactor science, separations, process technology, and CO2/greenhouse gas management and conversion. (Source: Energy API http://www.api.org/)
Chevron has started production of a 110-megawatt Darajat III geothermal plant in Garut, West Java, Indonesia. The combined output from Chevron's Darajat and Salak geothermal operations now produces sufficient renewable energy to supply approximately 3.9 million homes in Indonesia. (Source: Energy API http://www.api.org/)
Chevron has committed more than $400 million a year to renewable and clean energy projects, including projects in wind and solar energy. The company is now operating wind farms or photovoltaic installations in the Netherlands, California, Guatemala City, London and Rio de Janeiro. (Source: Energy API http://www.api.org/)
Shell has spent roughly $2.5 billion on alternative energy projects since 2004.
Shell announced six new biofuels research agreements with academic institutions around the world, including the Massachusetts Institute of Technology, the School of BioSciences at Exeter University in the UK, the Centre of Excellence for Biocatalysis, Biotransformations and Biocatalytic Manufacture at Manchester University, the University of Campinas in Brazil, and the Institute of Microbiology and the Qingdao Institute of Bioenergy and Bioprocess Technology at the Chinese Academy of Sciences. (Source: Energy API http://www.api.org/)
Shell has constructed a wind farm power generating facility in West Virginia that will make it one of the world's largest generators of wind power.(Source: Energy API http://www.api.org/)
Shell has funded research at Codexis to develop microbes to speed up the chemical reactions that turn inedible plants, such as grasses or stalks, into ethanol and diesel. (Source: Energy API http://www.api.org/)
Exxon has spent more than $1.9 billion in greenhouse gas emission reduction and energy efficiency projects since 2004.
Exxon is building a commercial demonstration plant to remove carbon dioxide from natural gas. (Source: Energy API http://www.api.org/)
Exxon is working with Pratt & Whitney Rocketdyne to develop next-generation technology to convert coal, coke or biomass to synthesis gas (i.e., CO and hydrogen), which could facilitate the use of carbon capture and storage to reduce greenhouse gas emissions from power generation. (Source: Energy API http://www.api.org/)
Exxon and the National Community Action Foundation are partnering to advance projects that will expand the scale and scope of existing training programs so workers are well-prepared for sustainable careers in the growing fields of energy efficiency and weatherization. (Source: Energy API http://www.api.org/)
Exxon has partnered with Synthetic Genomics Inc. to develop a way to turn algae into motor fuels. (Source: Energy API http://www.api.org/)
Exxon has interests in 85 cogeneration facilities at some 30 locations worldwide that, through more efficient production of steam and electric power, enable a reduction in carbon dioxide emissions of nine million metric tons a year. ExxonMobil participates in EPA’s Combined Heat and Power Partnership, a volunteer program aimed at encouraging increased efficiency and lower greenhouse emissions through cogeneration. (Source: Energy API http://www.api.org/)
These are just some of the green projects these mammoth ‘oil companies’ are working on and the money they’ve spent is only a drop in their proverbial bucket. The allocation of funds from these companies will only increase as renewable technology advances to an economic state. Mergers and acquisitions are imminent.
Saudi Arabia has committed billions to renewable energy sources. Yes, that’s correct, the epicenter of oil production has committed fortunes to renewable energy. Why? Because despite having over 100 billion proven barrels of oil in the ground, they aim to continue to dominate the energy space long after the oil has dried up. Saudi Arabia knows full well that they will not benefit for decades to come from renewables, but they are practicing (like North America’s largest ‘oil companies’) the art of being proactive, instead of reactive.
When asked why Saudi Arabia was doing this, Shaikh Ahmed Zaki Yamani, Minister of Petroleum and Mineral Resources stated, "The oil won't last forever."
I write this blog because I believe so strongly in these ‘oil companies’ future no matter where our energy demands shift. The powerhouse oil companies make more money than any other sector on earth. If you don’t have the stomach to invest in small cap, high risk, start up alternative energy companies (most fail due to lack of capital), but want to make sure your portfolio is exposed to alternative and renewable energy, stick to the same companies that are dominating the oil industry...they will dominate the renewable energy sector when the time comes.
I believe my money is best invested, over the long-term, in oil companies (with oil reserve expansion plans) proactively spending significant capital on R&D for green energy solutions.
Have a great week,
Disclosure: I am long XOM.