Can Oil Giants and Green Energy Mix?

BP, with Royal Dutch right behind, is betting that investing now in alternatives will pay off big later.

Source: Business Week [Oct 02, 2002]

Hanging over 42nd Street in Manhattan's Times Square, where even never-look-up New Yorkers can't miss them, are huge billboards trumpeting British oil giant BP's (BP) interests beyond fossil fuels. "Bringing solar to over 160 countries," reads one block-long sign. "Solar, natural gas, wind, hydrogen. And, oh yes, oil," reads another.

Certainly, BP's overall business is dominated by oil and natural-gas production. And environmentalists are criticizing the ads as "green washing," an attempt to gloss over the large responsibility fossil-fuel producers bear for greenhouses gases, like carbon dioxide, that contribute to global warming and climate change.

Yet a closer look reveals that BP's new campaign goes beyond trying to score "green" points with consumers. BP has invested millions in green energy technology. It has set an in-house target to cut the amount of greenhouse gases it produces. Its wind business is expected to record a profit by yearend, with its solar business targeted for the black by the end of 2003. No other giant oil company comes close to BP's alternative-energy efforts -- except perhaps Royal Dutch Petroleum (RD), based in the Netherlands, which includes various companies under the Shell name.

DIVERGENT STRATEGIES. In sharp contrast, Texas-based ExxonMobil (XOM) invested some $500 million on research and commercial activity in solar and other renewable energy technology before abandoning the push 20 years ago, citing high cost and reliability disadvantages. ExxonMobil remains focused on developing fuel-cell technology and reducing carbon-dioxide emissions, a company spokeswoman says, although it doesn't set targets and timetables to cut them.

ChevronTexaco (CVX) has its own renewable-energy division, focused on hydrogen, fuel cells, wind, and solar. It's working on greenhouse-gas emission assessments and plans to develop a goal for reducing them in the near future.

These divergent strategies illustrate the ongoing debate in the energy industry about exactly when fossil fuels will play a lesser role in the world's energy consumption. One view is that there's enough oil supply at competitive rates for some 15 to 20 years, with a 50-year time horizon for natural gas.

GAINING MOMENTUM. BP and Royal Dutch are making strategic bets that renewable-energy technology will advance, grow cost-efficient, and move from niche markets to the mainstream sooner rather than later. The two companies "actually have taken forward-thinking positions on these issues," says Eric Orts, a professor of legal studies and management at the University of Pennsylvania's Wharton School.

As fears of war with Iraq deepen unease about U.S. reliance on Mideast oil and the climbing price of crude threatens an already sluggish economic recovery, the case for shifting to alternatives is gaining momentum. The game plan for companies like BP and Royal Dutch is to be ready when that changeover occurs, likely in the coming decades, and be positioned to reap a financial windfall.

"We're preparing for that transition [to alternatives] with a lot of different options," says John Mogford, group vice-president for renewables and alternatives at BP. Says Robert Kleiburg, Shell Renewables vice-president for strategy and planning: "We realize the future energy portfolio is going to be increasingly diverse for renewable sources of energy."

AHEAD OF SCHEDULE. BP's primary focus is wind and solar. It holds slightly over a 20% stake in Green Mountain Energy, a privately held Austin (Tex.) company that generates power from wind, solar, and other renewable sources. Consumers might be more familiar with BP's Connect service stations, which are partially powered by solar panels. BP is developing hydrogen-related energy technology, too. But while much research is under way in hydrogen fuel cells for cars, costs must come down before fuel-cell-powered autos become widespread.

BP also is trimming its production of greenhouse gases. Twelve years ago, it pledged to cut them by 10% from 1990 to 2010. In March, BP CEO Lord John Browne said that goal had already been achieved -- eight years ahead of schedule. The new goal is to contain net emissions at current levels over the next 10 years.

Royal Dutch's Shell is striving to be greener as well. It has invested roughly half a billion dollars in five years, says Shell Renewables' Kleiburg. Like BP, its primary thrusts are solar and wind energy. Shell, though, casting a slightly wider net, is also concentrating on biofuel derived from agricultural fibers, geothermal energy that uses the earth as a heat source, and hydrogen. Additionally, it has committed to reducing its greenhouse-gas emissions by 10% this year from 1990 levels.

GLOBAL MONIKER. A key part of BP's green strategy is an aggressive marketing campaign. In June, it launched its new branding ads. The spots highlight renewables, with scenes of average citizens contemplating the energy future. Only two years ago, BP altered its logo from a shield to one resembling a flower or the sun. It also swapped its old name, British Petroleum, for a more global moniker BP, which it says now stands for "beyond petroleum."

The ad campaign is targeted at U.S. consumers, who are more likely to recognize ExxonMobil or ChevronTexaco than BP. That's something BP -- the largest producer of oil and gas in the U.S. -- wants to change. It staked a substantial claim on U.S. soil with its acquisition of Amoco in 1998 and Atlantic Richfield purchase in 1999.

Yet environmentalists remain skeptical. Their bottom line: Carbon emissions continue to climb, with energy companies as prime culprits. "Yes, BP and Shell might be two of the greenest oil companies, but they're still oil companies, and oil causes global warming," says Anchorage (Alaska)-based Melanie Duchin, head of Greenpeace's climate campaign.

ARCTIC DRILLING? The latest available estimates from the U.S. Energy Dept.'s Energy Information Administration show U.S. emissions of carbon equivalents rose to 1.56 million tons in 2000, up more than 15% from 1990 levels. The 2000 figure represents nearly a quarter of the world's total energy-related carbon emissions, notes Tina Vital, an oil analyst at Standard and Poor's. And the 2000 level is expected to increase an average of 1.5% annually, to 2.09 million tons in 2020.

Environmentalists also argue that if oil companies really wanted to be greener, they would stop making the case for drilling in the Arctic National Wildlife Refuge (ANWR). BP has been trying to distance itself from that contentious issue, saying it doesn't want to play a direct part in the debate. BP's Mogford says if ANWR is opened to drilling, though, BP would consider production there in the context of its overall portfolio.

Still, oil executives and other energy experts caution that oil companies alone can't create a market shift for greener sources of energy. Public policy and government support of renewables also must change. At the gas pump, the average consumer still lets price -- not an oil company's green-energy record -- dictate buying decisions.

"In the U.S., people don't care whether they're buying Exxon gas or BP gas. People care about the price of the gasoline, and that's it -- until you start to have a market shift," says Wharton's Orts. That may be the case today, but BP's innovative marketing strategy could be planting the seeds for a different kind of energy world in years to come.