Oil companies may resist calls for renewables
By Michael Erman and Tom Bergin
NEW YORK/LONDON (Reuters) - Oil companies are facing more and more calls from shareholders to invest in alternative energy but the companies themselves may lack the profit motive, the entrepreneurial skills or indeed the will to satisfy their demands.
The chorus calling for larger alternative investments by the world's huge oil and gas companies has become louder in tandem with the growing consensus that greenhouse gas emissions are causing global warming.
Some investors and shareholder activists argue that oil companies underestimate the impact that climate change policy could have on the energy industry. They say the companies need more exposure to renewables in order to guarantee sustainable returns in the long term.
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But others say oil companies don't have the technological expertise or the correct corporate culture to succeed in such an innovative and unfamiliar industry.
"The oil industry & makes decades-long, multibillion dollar investment decisions where you have to be very certain that you are aiming at the right target," Steve Wunker, a senior partner at Innosight, a consulting firm that works to help companies grow through innovation.
"That is the opposite skill set that you need for creating entrepreneurial ventures that evolve as the marketplace changes," he said.
Many oil companies say they are better off sticking to what they do best: drilling for oil and gas. They say they are not the best people to develop wind farms, solar cells or even to move into biofuels.
But many of their shareholders -- including some of their most influential investors -- appear to disagree.
Exxon Mobil Corp posted the two most profitable years on record in 2007 and 2008 but instead of warm applause at this year's annual meeting, the company's officers had to contend with calls for change due to its lack of spending on green energy sources.
The Rockefeller family, descendants of John D. Rockefeller, who founded Exxon precursor Standard Oil, publicly backed a number of shareholder resolutions, including one advocating the split of Exxon's chairman and chief executive positions, because of the company's slight investment in green energy sources.
"Exxon Mobil needs to reconnect with the forward-looking and risk-taking entrepreneurial vision of John D. Rockefeller Sr.," said Neva Rockefeller Goodwin at an April press conference, where she pointed out that petroleum-based energy was an alternative energy when her great-grandfather started his business.
Other oil companies, including Royal Dutch Shell and BP Plc, already have renewables operations. Still, even they are being pushed to do more by investors attending their annual meetings this year who called on them to boost their investments, which currently amount to 1 percent of total capital expenditure.
PLENTY OF MONEY AROUND
With oil prices soaring to records of more than $130 a barrel, the firms certainly have plenty of money to invest.
But instead of splurging on research on new forms of energy, they are returning billions of dollars of excess cash to investors in the form of share buybacks, which help support the stock price, and dividends.
"Most oil firms seem profoundly uninterested in disrupting a business model that is delivering substantial returns," said Innosight's Wunker.
They also don't seem to feel much urgency about the issue.
Most of the world's largest oil companies are confident that there is enough oil left on the planet for them to continue drilling for decades to come. The key, they say, is to obtain access to these supplies, much of which are held by nations who have placed more onerous terms on the majors as the cost of crude has soared.
Exxon has argued that fossil fuels will continue to provide about 80 percent of global energy in 2030. And Shell's CEO said in a March strategy presentation that he would like for the company to have at least one material renewable business -- by the middle of the century.
Even BP, the oil company that has moved most prominently into alternative energy, acknowledged earlier this year that investors had not been helped by its investment in renewables.
"None of us believe that there is very much of that, if anything, in our share price today," CEO Tony Hayward said in February. He argued that the roughly $1 billion the company has spent on its renewables division should be worth up to $7 billion.
Jason Kenney, oil analyst at ING, agreed that share targets did not reflect the value of the renewable assets.
BP is now looking at a part flotation of some of its renewables businesses, although the company said it would continue to invest in green projects where they made sense.
Some analysts and investors are concerned that the push for diversification into green energy may be motivated more by environmental concerns than a focus on the companies' bottom line.
"Frankly investing in alternative energy is going into uncharted waters" for most oil and gas companies, said Joseph Tatusko, who manages around $1 billion at Westport Resources Management.
When asked a question about ethanol at an oil conference in 2007, Exxon Chief Executive Rex Tillerson downplayed the role his company could play, saying, "I'm not an expert on farming. I don't have much technology I can add to moonshine."
Tatusko has diversified his holdings by investing in companies that work in nuclear power and wind.
"There are more nimble, smaller players that might get exceptional returns on capital from alternative energy plays but they are going to have to be smaller in scale," he said.