The evolving renewable energy partnership landscape: Implications for oil and gas majors

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Trillions of dollars are expected to be invested in new renewable generation, storage and distribution capacity between now and 2030, driven by skyrocketing demand for renewable energy solutions of all types.¹ Leading oil companies with broad capabilities and deep pockets are eager to position themselves to win in this low-carbon future, making commitments to intensify their response to the transition away from fossil fuels and defining environmental, social and corporate governance (ESG) performance improvement targets over the coming decades.

Some of the majors, like Total, Shell and BP, have declared their desire to play broadly across the new energy ecosystem; BP now refers to itself as an “Integrated Energy Company,” shifting its brand focus away from oil and gas. Others have expressed ambitions in specific segments, like Equinor (formerly Statoil), which is aiming to become a major offshore wind player and cut the net carbon intensity of the energy it produces in half by 2050.

The deal activity behind these investments will feature a heavy mix of acquisitions, venture capital, equity joint ventures (JVs), and other types of non-equity collaboration. JVs are especially critical for asset- and portfolio-level risk-sharing and capability-building. Our analysis shows that they account for many of the largest operational assets in several major renewable energy segments.

They’re also comfortable and familiar structures for oil companies, which can generate up to 90% of their upstream production from JVs. However, oil companies will face substantial challenges, as they seek to grow in renewables, both because they are latecomers to the game, and because of some unique aspects of deals in the sector.

To better understand the current state and the challenges to come, we recently conducted more than 30 interviews with leading renewable energy executives and dealmakers, and analyzed the slate of recent deals across renewable segments.
Our analysis revealed the following:

• Renewable energy infrastructure of all types is heavily dependent on JVs and partnerships, which will remain critical deal structures, as the installed base grows considerably to meet global demand
• Leading oil companies seeking to expand into renewables bring real competitive strengths, including familiarity with JVs; global presence and relationships with key regulators; strong balance sheets; expertise with large-scale infrastructure projects; and integrated operations experience
• However, oil companies also face material challenges, as they deal with a wide range of new and different partner types, integrate distinct renewable pieces, and seek to penetrate a crowded and highly competitive renewable market; they will need to adapt their dealmaking approaches to succeed.

RENEWABLE ENERGY DEALS ON RISE, FURTHER GROWTH VIA PARTNERSHIPS

Fig. 1. Among the 70 largest assets in five major renewable generation segments, a healthy majority come from JVs.

We recently conducted more than 30 interviews with leading renewable energy executives and dealmakers, and analyzed more than 500 JVs and partnerships in renewable energy in our global JV and partnership database, including the 70 largest JV assets in leading generation sectors—onshore wind, offshore wind, solar photovoltaic (PV), concentrated solar power and geothermal—along with partnerships for storage and distribution. We assessed the types of deals used by each leading player, the combinations of partners, and ownership structures. We found that among the largest 70 assets in five major renewable generation segments, a substantial portion of current installed capacity—including 70% in solar PV and 76% in offshore wind—comes from JVs, Fig. 1.

We also found a dramatic increase in the number of renewable energy partnerships formed annually by all companies over the past decade, from 76 in 2010 to over 240 in 2019. Moreover, we found clear evidence that renewable energy dealmaking, as a whole, has diversified significantly, driving new types of deals, Fig. 2. Through 2015, solar and wind power generation counted for roughly two-thirds of new deals signed each year.

Fig. 2. The authors found compelling evidence that renewable energy dealmaking has diversified sufficiently to drive new types of deals.

Since then, deals for energy storage and new mobility solutions, like electric vehicles, have increased substantially, to almost a quarter of 2019 deals. As the cost of batteries continues to decline and new grid-scale solutions emerge, the need to build additional power generation capacity for peak load gradually diminishes, whereas the emphasis on developing reliable energy storage solutions grows stronger. As a result, solar and wind deal activity has become proportionally lower, representing a minority of new deals in 2019.

The overall pace of new partnership formation is likely to continue in future years, and there are significant opportunities in renewables for those who have the risk appetite, capital and skills. Partners, who can bring capital and technical expertise, will be increasingly attractive as next-generation assets get larger and more technically complex. Additionaly, certain geographies require a local partner or local installed capacity to participate in bids for new energy projects (for instance, the emerging offshore wind markets of Japan and South Korea), which futher fuels the formation of JVs and partnerships.

The International Renewable Energy Agency (IRENA) projects that by 2030, in order to meet global electricity demand, the installed capacity of onshore and offshore wind, solar PV, and solar CSP will need to increase by roughly 400%, compared to their 2018 totals. This includes offshore wind capacity growing from 23 GW installed in 2018 to 128 GW in 2030, and solar PV capacity growing from 505 GW to more than 2,900 GW.²

Such significant growth in capacity will require a staggering deployment of capital. IRENA expects investments in solar PV, alone, could top $3.9 trillion, while investments could total up to $350 billion in offshore wind between 2018 and 2030.³ The pie is clearly large. But so are the appetites of the many players seeking a piece of it, especially those of the oil majors. They are under increasing pressure to shift into renewables, as the world seeks to reduce its reliance on their historical core businesses.

It is possible that the industry’s immediate growth could be dampened by the Covid-19 pandemic and resulting downturn, as economic uncertainty and low oil prices may lead companies to delay major capital projects or subject acquisitions to more scrutiny than usual. Yet there are signs that the renewable energy sector may be relatively less affected than others. In spite of the pandemic, for instance, the first half of 2020 saw a record $35 billion in new offshore wind financings—and among those new projects, three of the five largest are JVs.⁴

Indeed, JVs and partnerships can emerge as a bright spot in economic downturns and have historically spiked following recessions, as they offer an attractive way to grow while sharing capital needs.⁵ Existing leaders in the renewables space have embraced them already. And JVs and partnerships are already a core part of the oil majors’ business model, making it logical for them to default to familiar modes, as they seek to grow their renewables portfolios in new countries and with new types of partners. Therefore, it is likely that the pace of partnerships will only continue to grow, as oil majors join the chorus of industry participants ramping up new project development to meet forecasted demands for renewable energy.

LARGE OIL COMPANIES BRING A VARIETY OF STRENGTHS

In establishing partnerships, large oil companies bring a number of strengths:

Experience with JVs. The importance of JVs in renewable energy is good news for the oil majors, because most of them are already sophisticated JV partners with competencies built over decades of experience. Data show that 77% of upstream oil and gas production globally comes from JVs, and companies like Shell and BP each have more than 250 downstream JVs.⁶ Several have established dedicated “JV Excellence” units, with a mandate to continually refine their JV management practices and coach asset teams on their implementation. Undoubtedly, having such an established partnership infrastructure will prove helpful to these companies as they shift increasingly into renewables.

Global presence and deep experience with governments. Oil majors are also accustomed to working with governmental entities, whether in a regulatory capacity or as co-investors in projects. National and local governments play key regulatory roles and offer an evolving constellation of incentives and subsidies for clean energy investment. The ability to deftly negotiate regulatory, permitting, and licensing requirements, for instance in bidding for leases and licenses in new solar and wind projects, will serve the oil companies well.

Ability to deploy large amounts of capital. Exploding demand for renewable energy in the coming decades will require extraordinary capital expenditures, which oil companies are well-prepared for, given the even greater capital intensity of their core businesses. Annual global spending on renewable energy hovered between $300 billion and $350 billion over the past five years, according to Bloomberg New Energy Finance.⁷  Compare that to the oil and gas industry, where upstream capex, alone, has fluctuated between $400 billion and $600 billion over the same period, according to the International Energy Agency.⁸ On an individual level, the annual capex of major oil companies is significantly greater than that of their largest counterparts in the power sector. For instance, Shell and BP spent roughly $23 billion⁹ and $19 billion,¹⁰ respectively, in 2019, compared to roughly $10 billion, each, for European electricity giants Engie¹¹ and Enel.¹²

Large-scale infrastructure project expertise. Oil and gas majors have significant experience delivering energy infrastructure projects at scale. Their ability to manage complex logistical and engineering challenges can be leveraged for renewable projects, many of which require especially similar competencies, like constructing large-scale bio-refineries or developing offshore wind farms. Examples existing today include Total’s JV with Amyris to produce and market renewable diesel and jet fuel, or Equinor’s Hywind project, the world’s first operational floating wind farm, which is co-owned with Masdar.

A business model built on integrated operations. Large oil companies are used to running integrated operations, from E&P to transportation and refining, and finally to distribution and retail. A similar model is forming in the renewable industry, where oil companies are taking stakes in a variety of generation solutions, as well as adjacent areas, including energy storage, transmission and distribution infrastructure, and e-mobility technologies. Partnerships are key to entering these adjacent sectors and accessing existing distribution and storage capacity.

Fig. 3. Three firms—Shell, BP and Total—account for nearly three-quarters of new renewable energy partnerships announced in the past 15 years by a group of six major oil companies.

Figure 3 shows the percentage of renewable energy partnerships announced in the past 15 years by six major oil companies, with three of them—Shell, BP and Total—accounting for nearly three-quarters of new partnerships. These companies are making a concerted effort to develop a new energy ecosystem, including large acquisitions and joint ventures in solar and wind generation, as well as partnerships for biofuels, storage and distribution.

OIL COMPANIES WILL NEED TO TACKLE CHALLENGES

The new landscape of renewable energy poses distinct challenges to oil companies seeking to compete with established power companies and developers, who have viewed renewable energy as core to their business strategies for decades. Below is a set of challenges that oil companies are likely to face, along with implications of those challenges on how oil companies should approach the energy transition.

Challenge: Oil companies must contend with a wide range of new and different partner types across the renewable energy value chain.

As they grow their renewables businesses, oil companies face the prospect of partnering with, or investing in, companies that look very different from themselves. Depending on the sector, these could be early-stage startups, established specialized developers, utilities or independent power companies, or financial investors, Fig. 4.

Fig. 4. To grow their renewables businesses, oil companies will likely have to partner with, or invest in, companies that are different from themselves, including early-stage startups, established specialized developers, utilities or independent power companies, and financial investors.

Partnerships outside of generation—e.g., for transmission, distribution, or behind-the-meter consumer energy solutions—will involve a different set of actors than partnerships to develop new generation assets. These actors include distributors, manufacturers of specialized equipment like electric vehicles or charging infrastructure, as well as technology companies with capabilities in artificial intelligence to power smart grids.

Implication: Increased focus on strategic partner due diligence.

The oil and gas companies that are best able to understand the interests of this diverse slate of new partners – both relative to the deal at hand and to a potential longer-term relationship – will be best-positioned to succeed in a very competitively landscape. Differing incentives and strategic objectives will influence how the partnership evolves and what friction points arise over time. Effective due diligence, therefore, will require not just assessing financials and technical capabilities, but also testing for strategic fit and cultural compatibility.

To do this, oil companies should be asking themselves a number of questions in evaluating potential partners. For instance, will a smaller company have the resources and the bandwidth to be a responsive partner and co-developer? Will a financial investor with limited technical expertise be content to take a backseat in the project, or will they be aggressive in their assurance activities in order to satisfy their shareholders, and thus impose a high “governance tax” without adding commensurate value to the partnership? If a prospective partner is coming to the table with a learning agenda—e.g., a company in an emerging market seeking to build capabilities in a given sector from scratch—how much of your expertise are you willing to give away to a potential future competitor, and under what conditions?

Balancing wants and needs on both sides of a partnership can be tricky, but it’s possible. For instance, market newcomers will find value in partnering with established players, who provide leading-edge expertise that offers a way to learn while also delivering projects at competitive prices. At the same time, established players may find local firms in new markets to be attractive partners, offering advantages like relationships with local regulators, access to existing transmission infrastructure, or a large customer base.

Denmark’s Ørsted offers an example of these dynamics at work. In the offshore wind sector, it has established a formidable leadership position for itself since deciding to pivot away from fossil fuels entirely in 2009.¹³ At that point, it already had substantial in-house expertise in onshore wind, and was involved in some of the earliest offshore wind projects in the world, in Denmark and the UK. Today, it is the world’s largest offshore wind developer and the first European player to enter the emergent offshore wind markets of the U.S. and Japan. In those areas, it has attracted major utilities as partners, including Eversource in the northeastern U.S. and TEPCO in Japan.

Challenge: Oil companies need to build renewables businesses that effectively integrate many disparate pieces.

Growing renewables from their current marginal size into a highly functioning and integral part of the business will require thoughtful changes to corporate structure and process. The diversity of renewable energy deals presents management challenges distinct from a conventional upstream or downstream division. A glance at the new energies divisions of leading oil majors, like Shell, BP and Total, shows generation assets in multiple sectors (e.g., solar, onshore and offshore wind), as well as bio-refineries, energy storage assets, electric vehicle and charging infrastructure, and a constellation of venture capital investments in clean-tech companies around the world.

Absorbing such a range of entities into the corporate ecosystem is a delicate balance. If, you’re too hands-off, you risk not realizing the value that you anticipated or losing sight of your original strategic objectives for the deal. Too hands-on, and you risk crushing an innovative team or undermining the entrepreneurial spirit of a small company by imposing the corporate policies of a large organization.

Implication: Winning companies will proactively identify complementary deal types, define a set preference for each type, and build a look-back into the deal process to capture lessons learned.

For large oil companies, building a renewable energy business into a major piece of the portfolio is an enormous undertaking that will involve a high volume of deals with different partner types. Ensuring that these deals fit within a coherent strategy, rather than growing piecemeal in many different directions, will require a systematic approach. In other words, oil companies should think proactively about the deal structures and parameters that fit their objectives and risk appetite. Ideally, that guidance should be codified in a playbook or a set of principles that can be applied consistently by a large number of corporate development professionals working in different sectors and geographies.

For example, a member of the new energies division of an oil major emphasized the need for clarity on when to prioritize joint development agreements or other types of non-equity partnerships, and when to pursue more “structural” deals like joint ventures or equity investments. These decisions are based on factors like the maturity of the partner and its IP; strategic fit; and current investment needs. But, the decisions are typically ad-hoc today, she said, and codifying an approach would help enable rapid-but-smart growth.

Another of our recent interviewees mentioned that his company has made it a best practice to start a post-merger integration workstream early in the deal structuring process, and present an integration and governance plan for approval, along with the deal’s definitive agreements. Starting post-merger integration work early helps to tune the management and governance expectations on both sides to the particulars of the situation.

Managing the “deal to governance” transition will be especially important when working with partners, whose JV asset management competencies are less mature. This is likely to be most of them, given how well-developed most major oil companies are in this regard. It may be helpful for corporate development teams to take a more proactive integration role during the negotiation process for new partnerships or investments. Consider the strategic goals for the deal: if operating efficiencies or synergies with other parts of the portfolio aren’t at the top of the list, it’s reasonable to think that the investment should be left to operate more independently.

Of course, dealmaking policies or principles cannot be set in stone; they must be refined over time to reflect learnings and shifting market dynamics. By building a look-back into every deal process to capture lessons learned—whether or not the deal was closed—and applying these learnings to a periodic review of the dealmaking principles themselves, companies can ensure that their teams are following a shared playbook that is responsive and not overly restrictive.

Challenge: Oil companies are relative latecomers to a crowded and highly competitive market.

Most of the oil majors have track records characterized by episodic, marginal investments in renewables, sometimes followed by retreats. BP, once a pioneer among its peers in renewable investment, launched its “Beyond Petroleum” marketing campaign in 2000. However, following the Macondo disaster in 2010, it largely exited the renewable space to focus on higher-margin businesses.¹⁴ Chevron also invested in solar, wind and geothermal projects in the early 2000s, but exited most of them by 2016.¹⁵

More recent years have seen a shift in posture from several of the largest oil companies. A cocktail of factors seems to be pushing them to invest aggressively in new energy sectors, including shareholder advocacy, a drumbeat of regulatory changes, and new threats and instability in the global oil markets.

Fig. 5. One way to measure the increasingly crowded and competitive state of renewable energy markets is to gauge the amount of new capacity awarded via auction.

This shift in posture comes at a time when renewable energy markets are increasingly crowded and competitive. One measure of these dynamics is to look at the amount of new capacity awarded via auction, which has ballooned in recent years, according to an analysis by IRENA, Fig. 5. Auctions offer a proven way for countries to drive down prices and drive up efficiencies in project delivery, placing increased pressure on market newcomers.¹⁶

Implication: The most successful oil companies in the energy transition will take an active, collaborative, venture-style approach to managing their partnerships.

Oil companies are playing catch-up in an industry that is moving incredibly quickly on a number of levels: changing regulations, shifting market opportunities, technological step-changes, emerging competitors, and so on. All of these dynamics should have implications for how oil companies and other investors manage their growing portfolios.

In a broad sense, the implication is that portfolio governance needs to be more active and more collaborative than a traditional buy-and-hold approach. That could take a number of forms, including:

• Ensure that JV principles and practices that have been applied successfully in legacy oil and gas businesses are transferred to new energies divisions (e.g., by extending the purview of an existing JV excellence unit to include new energies, or by creating a dedicated team within the new energies division)
• Intentional and well-organized partner influencing campaigns, especially for non-operated or non-controlled assets
• Recurring assessment of JV and investment performance at the individual venture and portfolio level
• Proactive end-game scenario planning (e.g., exits or partial sell-downs) based on venture performance, corporate strategic priorities, market and competitive dynamics, etc.

Renewable energy will be a booming sector for decades. Oil companies will need to make substantial changes and build new skills to succeed in the heroic transformations that many have planned.

REFERENCES

1. IRENA, “Renewable energy benefits: Leveraging local capacity for solar PV,” 2017, page 6.
2. IRENA, “Renewable energy benefits: Leveraging local capacity for solar PV,” 2017, page 6.
3. Ibid
4. BloombergNEF, “Clean energy investment trends, 1H 2020,” July 13, 2020, page 1.
5. Bamford, James, Gerard Baynam and David Ernst, “JVs and partnerships in a downturn,” Harvard Business Review, September-October 2020.
6. Water Street Partners JV Database, based on publicly-available information, Rystad Energy.
7. BloombergNEF, “Clean Energy Investment Trends, 1H 2020,” July 13, 2020, page 35.
8. IEA, “Global oil and gas upstream capital spending, 2014-2019,” Nov. 25, 2019.
9. Shell, Annual Report 2019.
10. BP, Group Results, fourth quarter and full year, 2019.
11. Engie, 2019 Financial Results.
12. Enel, Consolidated Financial Highlights, 2019.
13. McKinsey & Co., “Orsted’s renewable energy transformation,” July 10, 2020.
14. M. J. Pickl, “The renewable energy strategies of oil majors – From oil to energy?” Energy Strategy Reviews, July 15, 2019, page 4.
15. Ibid., page 3.
16. IRENA, “Renewable energy auctions: Status and trends beyond price,” 2019, page 8.