COVID-19 Presents Opportunities For Producers To ‘Accelerate’ Energy Transition: Analysts

COVID-19 presents an opportunity for ‘Big Oil’ companies to accelerate their energy transition through mergers and acquisitions, says Gero Farruggio, head of global renewables at Rystad Energy AS.

“One of the drivers for Big Oil to get into renewables is actually to provide power to itself — to offset its own oil and gas use,” he told a recent Rystad webinar. “That’s one of the drivers for companies getting into this.”

In Canada, in its Q1 2020 release, though, Suncor Energy Inc. highlighted a significant reduction and deferral of 2020 economic investments, including the Oil Sands Base cogeneration facility and Forty Mile Wind Power Project.

Meanwhile, Enbridge Inc. is selling 49 per cent of its 50-per-cent interest in three early-stage French offshore wind farms to Canada Pension Plan (CPP) investments. Éolien Maritime France SAS will be sold to CPP Investments in return for a payment that includes a project promote and 49 per cent of all development capital spent by Enbridge since inception to the date of close. The total payment at close is anticipated to exceed $100 million.

However, Al Monaco, president and chief executive officer at Enbridge, said the transaction was purely about boosting the return on assets.

"We expect new entrants into the green industry will need to circumvent significant engineering, regulatory and operational knowledge gaps by buying brownfield assets," said Eoin Coyne, senior M&A analyst with Evaluate Energy. "Acquiring onstream renewable assets with existing and proven economics can de-risk an investment compared to entering at the greenfield level. It can also provide the chance to bring in new knowledge and service ecosystems — reducing the steepness of the knowledge curve."

According to Farruggio, 2020 commissioned renewable projects will be at best on par with 2019 figures, with pandemic impacts even more apparent next year due to delays in capital expenditures and other financial investment decisions, bringing about the first decline in annual renewable growth rates.

“Like most industries, COVID is creating a number of distressed sellers, reducing acquisition costs for assets and companies, and it presents an opportunity for Big Oil to accelerate its transition.”

Tom Heggarty, senior analyst of power and renewables at Wood Mackenzie Ltd., told a separate recent webinar that the renewables business is competitive, and it can be very difficult for new entrants to gain a foothold in the industry. Therefore, he said, the way oil and gas majors will grow scale is through M&A activity.

“There are a lot of opportunities out there for them to grow their portfolios quite materially through M&A, but that will involve spending a lot more than they have done so far in the industry.

“Having that scale opens up opportunities. And so, having scale and diversity across different technologies and across different geographies allows you to do all sorts of interesting things in terms of packaging up the power you’re producing and selling it to multinational corporations, for example.”

A majority of major oil companies have committed to emissions reductions, noted Farruggio, with BP plc and Royal Dutch Shell plc having signed up for the Energy Transition Commission — a coalition of organizations lobbying governments on green stimulus towards a net zero emissions economy, which includes accelerating the transition off fossil fuels and unleashing a massive investment into renewables.

Binnu Jeyakumar, clean energy director at the Pembina Institute, recently told the DOB that COVID-19 and low crude prices present a good opportunity to highlight the diversification oil and gas can achieve through the renewable sector, which he sees as a more stable market. He said: “It is a way for [companies] to diversify the products they put out and a way for them to secure their own investments, and also to continue to contribute to their carbon goals.”