A growing number of national oil companies (NOCs) are considering the prospect of moving “from barrels to electrons” and investing in renewable energy. NOCs based in China, Colombia and Saudi Arabia, among other countries, have begun to invest in renewables in one form or another, and executives at some smaller NOCs are considering the pros and cons of similar moves.
The idea of NOCs investing in clean energy is attractive to both these companies and the governments that oversee them. For NOCs, reallocating part of their portfolio to renewable energy investments could be an opportunity to innovate and diversify their business at time when traditional oil and gas investments are increasingly risky. For the governments of oil-producing countries, the skills, influence and capital of NOCs could serve to promote the fledgling renewable energy sector and provide citizens with cleaner and more reliable energy.
Yet NOCs’ investments in renewables may not pay off everywhere. Many skills and practices developed in the oil and gas sector cannot be easily adapted to renewables. With some notable exceptions, many NOCs have historically struggled to invest in projects that deviate from the core profitability model that characterizes extraction.
In some countries NOCs are the institutions with the greatest capacity to deliver project. But can they become part of the solution to climate change? In a severe scenario, coordination challenges or conflicts of interest could mean that NOCs simultaneously fail to generate strong economic returns and stall broader national progress to develop clean energy markets.
Given these factors, when does it make sense for NOCs to shift toward renewable energy? What policy and governance mechanisms should officials put in place to ensure such a transition is a success? On 27 May, NRGI and IISD co-hosted the second in a series of webinars to explore these questions.
Angela Picciariello of ODI led the discussion and focused on the links between nationally defined sustainability goals and the strategic choices facing NOCs and governments.
Joe Amoako-Tuffour of the Economic Management Team of the Office of the Vice President of Ghana discussed how ideas on the future of the Ghana National Petroleum Corporation (GNPC) fit in with a broader set of policy challenges around building a thriving industry, generating reliable energy and maximizing the use of petroleum revenues in a new producer economy.
Devapriyo Das of the Danish company Ørsted (majority owned by the Danish government) shared lessons learned from the company’s transition away from fossil fuels to becoming a global leader in renewable energy.
Aaron Sayne of NRGI also contributed by posing a series of guiding questions for NOCs and governments to help structure these strategic decisions.
NOCs’ activities within the renewable energy market are still in the early stages, but several key themes have emerged that point to further areas of inquiry, within and across countries.
Intra-government coordination is crucial, and decisions about the evolution of an NOC’s mandate need to be linked to a coherent cross-government strategy. In Ghana, Amoako-Tuffour emphasized that decisions about what role GNPC can play in renewable energy generation or distribution do not depend on GNPC alone. There is a whole range of actors responsible for investment, regulation and revenue in the energy sector. Without careful coordination and strategic decision-making, actions by an NOC alone could fail or disrupt energy policy coherence. Picciariello posited that a clear definition of how the NOC fits into the energy space is critical.
There are different types of NOCs, and not all face the same challenges and opportunities. Sayne pointed out that a key question NOCs and government officials should ask when considering a shift toward renewables is, “What would this NOC bring to the table?” Some NOCs are cash-rich and may be able to drive investment in the sector. Others are small and nimble but could bring their management skills to an emerging industry. Some other NOCs, however, are so deeply entrenched in a status quo approach to oil and gas investment and in oil and gas's dominance of the economy that they may struggle to engage effectively with a new business model. As Amoako-Tuffour noted, the basic notion that an NOC might be interested in renewable energy investment does not necessarily mean that such a move is in the country’s best interest.
There are different types of renewables business models. Just as not all NOCs are the same, there are different ways of defining what it means for a company to “invest in renewables,” and these distinctions are important for national decision-making. One component of this is the type of renewable energy. Ørsted’s transformation has been driven by success in offshore wind, which involves technically-sophisticated projects with heavy upfront costs that require similar capabilities to offshore oil investments. Other types of renewable energy, such as solar farms, may have less obvious links to the core competencies of many NOCs. NOCs must also consider what form of investment makes most sense. Options range from passive minority participation in renewables projects to active partnerships with utilities or other partners to full transition into an integrated energy company.
Governance can either help draw investment, or drive it away. Das shared that Ørsted has been able to serve as a stable and reliable home for a growing number of investors interested in clean energy. He said, the company’s corporate governance instilled confidence that led to growth. In contrast, Sayne pointed out that other NOCs can arouse suspicion among investors, especially when the company’s activities are opaque or subject to heavy political interference in decision-making. If a company has a dominant role without appropriate corporate governance reforms, it could discourage investment in a country’s renewable sector.
Our discussion series aims to increase learning between experts in the extractives governance and climate change fields, who have too often worked in silos. NRGI and IISD will organize the third and final session in the webinar series in the coming weeks. Watch this space for more details.
For the audio recording, please listen on SoundCloud.