Oil & Gas Majors Pivoting to Renewables in Pandemic: Q&A

By Richard Stubbe, BloombergNEF. This article first appeared on the Bloomberg Terminal.

The global pandemic of 2020 has slowed down demand for oil and gas but provided a big boost for renewables, said Mona Dajani, partner and global head of energy and infrastructure at Pillsbury Winthrop Shaw Pittman LLP in New York.

Fossil-fuel companies that saw oil futures drop below zero in April are pivoting toward wind and solar in a big way, Dajani, one of the leading deal makers in the renewable energy industry, said in a phone interview with BloombergNEF in June. She is also seeing storage increasingly bundled into packages with wind and solar.

This interview has been edited for brevity and clarity.

Q: There are a lot of weird things going on in the world of energy right now. What are you seeing?

A: A lot of oil and gas majors are headed to renewables and I’m helping them in their transition. And this pandemic, weirdly, is expediting the investment in renewable energy from oil and gas majors — like BP, Enel, Total, Shell — as well as corporate purchasers. The pandemic has heightened the unpredictability of returns, and the market volatility makes the business case for renewables stronger.

I can’t tell you how strong oil and gas is just pivoting in this space. It’s amazing. BP’s chairman, Bernard Looney, made an announcement that, “Yeah, we’re taking a $17 billion hit, but then we’re investing $12 billion in renewables.” It’s like whiplash, it’s crazy.

Q: What else is driving the decision?

A: Market dynamics are continuing to weaken some of the viability for conventional oil and gas resources. And these companies’ interests in long-term contracts and better ROI now go beyond a response to shareholder activism and carbon commitments. I helped Saudi Aramco recently bid a huge deal, just like with BP, where they are really pivoting in this space, they’re buying other companies, technologies, this is Economics 101.

Q: Among renewables, who are the beneficiaries?

A: The big utilities and oil super majors are jumping into offshore wind. They need the resources and staying power to survive, and they’re jumping into this offshore wind, to build out. They’re bringing in deep pockets to capital-intensive products. We’re seeing fossil-fuel super majors repurpose some of the infrastructure needed on flagships and offshore cranes, which is great. We’re seeing very strong M&A activity and a lot of consolidation in the industry to continue in this space.

Q: What specifically are you seeing in the U.S.?

A: This summer we saw Dominion Energy building the next two offshore wind turbines in America that are off a demonstration project in Virginia. This is the first new project to come online since Block Island’s first five offshore turbines in 2017. Virginia has committed to moving beyond fossil fuels by 2030. So have other states — Connecticut, New New York, Massachusetts, New Jersey, North Carolina.

Q: Besides money, what do oil and gas majors bring to the table for a renewables project? Do they have expertise that translates?

A:
They have the money and the talent and a lot of the existing infrastructure. And if you have that and the mandate to expand in this space, it’s almost like a win-win for both the company and the renewable energy industry. They’re changing how they’re perceived and some of it is obviously very much driven by profits, but it’s a survival strategy too.

Q: What has that meant for wind power contracts? In the early days of wind, a developer needed a 20-year contract at a fixed price to justify going forward.

A: There’s a lot more creativity and flexibility because they’re bringing more money and security to the table. These majors come in with their wherewithal, their financial creditworthiness, and they’re able to take more risks. And so we don’t need to have 20-year contracts.

Q: What other sources of money are out there?

A: Sustainability-linked debt products are also helping drive capital into the market. They’re brand new, but this is going to help innovate how we finance renewable energy products to attract new capital. These SLD products have gained a lot of traction globally.

Q: How much potential do they have?

A: I truly believe that it has potential to drive new capital investments into the market to support the projected $1 trillion-a-year cost of sustainable economic recovery. I’m seeing a much greater demand for these products in London, and I’m seeing big investment houses like Blackrock, Citi and others that are starting to see this. The pandemic is just spurring it on.

Q: What else is the industry looking for on the regulatory side?

A: We can learn a lot from the success in Germany, Denmark and Japan. I’ll just focus on offshore wind. There are over 4,000 offshore wind turbines in 11 countries in Europe. And we’re hoping that if the U.S. could see 1,700 turbines installed by 2030 off the seven Eastern states that are proceeding on this now, that would be great. We can take advantage of the institutional knowledge and technology that’s already been successful there. We can’t afford to take that long. We need the jobs and the investments in the U.S. now.

Q: What do the regulators need to do?

A: We want Congress to include a five-year extension of the Investment Tax Credit, specifically for offshore wind. We want the regulatory and permitting agencies to issue permits in an efficient, transparent, and timely manner. Recently, the Bureau of Ocean Energy Management issued its draft supplemental environmental impact statement for the Vineyard wind project. And they are also scheduled to issue the final supplemental statement on Nov. 13 and record a decision on the project in December. The agency needs to stick to these deadlines. The permitting reviews are the foundation.

Q: By the numbers you just gave, if the U.S. has a really good decade for building wind turbines, they’ll have half as many as Europe has now.

A:
That’s correct. We’re supposed to be the innovators, and we are clearly behind. But one bright spot is a lot of the Europeans have already worked out the kinks in this space. They’ve gotten cheaper, more efficient, more proven. And we have so much very good space for this too. It’s going to open up the West Coast within five to 10 years. The National Renewable Energy Laboratoryis helping the International Energy Agency design a 15-megawatt turbine that could become the industry standard. And all of this adds up to 40,000 full-time jobs throughout the U.S. by the end of this decade, just with offshore.

Q: Let’s shift to storage. Batteries have been getting better and cheaper, and they’re being paired with solar and wind projects. Lithium-ion is the dominant technology now, but there are other promising technologies on the horizon. What does it take for a promising technology to start to grab market share away from lithium-ion?

A:
They have to start with a viable, tested technology; I’m amazed how many calls I get from developers that don’t have that yet. Then they need some believers that have money, and those believers can be strategic partners. The technology doesn’t have to be out there for a long time, but you need to have a pilot. And then the model needs to make sense economically. There needs to be a certain level of ROI. And they have to have flexibility to pivot quickly, which requires an experienced management team.

From the developer’s side, they need the money, the vision, the technology, and the tenacity, and to be wide open in terms of who potential strategic partners can be and how they can help. A lot of developers are like engineers: They may have a really cool idea, but unless it’s viable and you’re going to make money, it’s really hard to get something off the ground.

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