Investors step away from renewables.
They want earnings that match those of oil and gas sector
Despite the talk of a transition to cleaner energy, investors are pushing oil companies to focus on bigger profits now, providing few incentives for them to spend on renewable technologies that many government officials and analysts see as the industry’s long-term future.
Investors instead want energy companies to put their money into technology that streamlines, increases and lowers the costs of oil and gas production, analysts and industry executives said this week at CERAWeek by IHS Markit, an annual energy conference in Houston.
Navigating renewables such as wind and solar power, with unfamiliar regulations and technology, remains too much of an experiment for oil and gas companies with few prospects for the outsized profits that traditional energy companies can deliver, analysts said.
“A lot of investors want to be in renewables, but they want the same returns as in oil and gas,” said Marcel van Poecke, head of London's Carlyle International Energy Fund. “But we can't give them that.”
Wall Street’s hunger for profits is playing a larger role in near-term directions of oil and gas company, industry officials and analysts. Wall Street got U.S. shale drillers back on their feet in the past year, providing much-needed capital by buying some $50 billion in the shares of publicly trade companies and taking another $10 billion in stakes in private companies.
Now, these investors want to get paid.
“Last year, it was drill, baby, drill,” John Hess, CEO of U.S. oil producer Hess Corp., said Monday at CERAWeek by IHS Markit in downtown Houston. “This year, it’s show me the money.”
Investment in new technology has paid off for the oil industry, and drilling for shale oil has become cheaper as companies have been able to cut their drilling times in half. Technological improvements, including advances in gathering data, guiding drill bits underground and the ability to pump larger amounts of sand underground, have made shale wells more productive, and as a whole, the U.S. oil industry has become more resilient.
Investment in U.S. shale, which makes up just 5 percent of global oil production, has surged. U.S. production has climbed above 10 million barrels a day, surpassing the 1970 record and vaulting the U.S. ahead of Saudi Arabia to become the world’s second-biggest oil producer, just behind Russia.
“Oil and gas is obviously the reigning fuel king,” said Maynard Holt, the CEO of the Houston energy consulting and investment firm Tudor, Pickering and Holt. “We can't fund things that are so many steps ahead that you don't know if they make money.”
Analysts said investments of similar scale are needed for renewables to make a comparable leap, particularly as climate change concerns and governments around the world impose increasingly stricter regulations of greenhouse gas emissions. Renewables, including hydroelectricity, are growing quickly, but they still account for only about 15 percent of power generation in the U.S., according to the Energy Department.
Large investments in renewables are the best way to advance existing technologies and develop new ones, van Poecke said. And over the long term, he added, those technologies could shape the competitiveness and future of energy companies.
“You have to invest to learn and see where the opportunities are,” he said. “You have to in a bigger way without jeopardizing your core business. I think you have to do it.”