Monday, March 05, 2007

Renewables and Big Oil

With oil prices still at historic levels, expect 2007 to be another banner year for the major oil companies. Exxon-Mobil alone took in over $3.2B per month (or over $108M per day) in profits in 2006! With such large profits available in the fossil fuel business, are any of the majors seriously investing in renewables? They are, but the amount varies across companies. The majors see themselves as not holding any competitive advantage over others when it comes to renewables, and most of their shareholders prefer they concentrate on their core businesses.

We first look at the size of their 2006 profits, relative to their market capitalization:

(To enlarge a particular image, click on it.) One thing that jumps out is how large (in terms of market cap) Exxon-Mobil is compared to the other companies. While the French company Total S.A. underperformed (profit was low for its market cap), it still took in a healthy $16.4B in profits. In fact, except for Total S.A., all the other companies have p/e ratios much lower than the S&P 500.

How much of these profits do they invest in renewables? I found estimates for Exxon-Mobil & Royal Dutch Shell, and for BP and Chevron. While I found references to investments made by PetroChina and Total S.A., I was unable to find estimates for their annual spending.

Compared to their peers, BP and Chevron are investing a decent portion of their profits into renewable energy, while Exxon-Mobil is essentially not investing anything in renewables. Exxon-Mobil's strategy is to invest minimally, but be ready to jump in when the market for renewables mature -- their lack of investment in renewables, has definitely not hurt their stock price! Some environmentalists have accused oil companies, in particular BP, of greenwashing. While BP is likely doing some amount of greenwashing, IMHO, one has to compare BP to its peers to put their efforts in the proper context. Not that this criteria is sufficient, but clearly BP has gotten the message more that its competitors: in 2006, the size of Exxon-Mobil's investment in renewables was less than the retirement package of their outgoing CEO.

Here is another view of the size of investments using a bubble chart. In the graph below, the size of a "bubble" indicates the "relative" size of investments in renewables (i.e. relative to its peers).

The next-generation, disruptive, energy technologies will not come from oil companies enjoying record level profits. Progress will depend on more funding from the Federal Goverment. R&D funding needs to be accompanied, at least for the next few years, with incentives for consumers and manufacturers. As an example of the need for incentives, the U.S. has been the leader in solar energy research for years, yet the largest market for panels are Germany and Japan. Germany and Japan nurtured their markets for solar cells through incentives. Only recently have states and the federal goverment started to offer rebates and tax breaks to encourage adoption of solar technology.

While the states and the federal goverment funds basic R&D and incentives, innovation and the next generation energy companies will need to comes from private sector. Fortunately, segments of the private sector in the U.S. have recognized the huge market for renewables. Increasingly engineers and venture capitalists in Silicon Valley have been focusing on renewable energy. A recent panel discussion on Clean Technology during the State of the Valley conference, is an interesting introduction to how some people in the Valley are tackling the energy problem.

In a future post, I will discuss the importance of energy efficiency and conservation. Interestingly, one of the leading research groups in end-use efficiency happens to be located in the SF Bay area.

UPDATE: The SF Chronicle has an article on critics of a proposed, UC Berkeley based, Energy Biosciences Institute funded by BP.

Digg It! , Bookmark to , My Yahoo! , ATOM Feed

No comments: