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Royal Dutch Shell and Total flirt with becoming utilities

Royal Dutch Shell and Total flirt with becoming utilities

IN AMERICA Big Oil remembers BP’s attempt to go “Beyond Petroleum” in the 2000s as a toe-curling embarrassment. In Europe it is seen as being ahead of its time. Once again the oil industry is experimenting with cross-dressing. Statoil, a Norwegian oil firm, is abandoning a name given to it almost 50 years ago to become the wispier Equinor. The firm formerly known as Dong, for Danish Oil and Natural Gas, is now Ørsted, a big wind firm named after the founder of electromagnetism.

Royal Dutch Shell and Total, Europe’s biggest private producers, are (mercifully) not changing their names. But they are toying with a strategy that could be far more adventurous—moving their core businesses from hydrocarbons to electrons.

Amid pressure to limit climate change, and the growth of renewable energy and electric vehicles (EVs), they expect low-carbon electricity to become a much bigger part of the world’s energy mix within the next few decades. They have already invested heavily in building global natural-gas businesses for cleaner power generation. Now they plan to take on utilities in deregulated markets to provide electricity and gas direct to homes and businesses.

Last month Shell completed the acquisition of First Utility, a midsized British gas and electricity supplier that already operates under the Shell brand in Germany. The Anglo-Dutch firm plans to make a similar move in Australia. Late last year Total launched the supply of gas and green power to households in France, through its Total Spring brand. Both have invested in renewable energy and are installing EV charging points in their networks of petrol stations. “We don’t see how we can be an energy major if we don’t become a significant player in electricity,” says Maarten Wetselaar, head of gas and new energies at Shell. A Total executive says: “Why should we limit ourselves to selling gas to a utility when we can sell to end-customers?”

At first glance the shift could be considered a shrinking of horizons. These firms are global beasts with vast balance-sheets. Customer-facing utilities are minnows by comparison. Centrica, the biggest of Britain’s Big Six, is worth £7.6bn ($10.8bn), compared with Shell’s market value of £190bn. They often operate in only one or two national markets, each a regulatory minefield. Bill-paying customers tend to loathe them far more than they do the purveyors of petrol and pain aux raisins.

Power-generating utilities have also performed poorly in recent years compared with their oil and gas counterparts. They piled on debts before the 2007-08 financial crisis and were then hit by the rise of wind and solar, which drove down wholesale electricity prices. Peter Atherton, of Cornwall Insight, a consultancy, says that whereas supermajors aim for returns on capital on big oil and gas developments of 15%, renewables provide returns of 7-9%. In Britain, the energy retailers aim for profit margins of 4-5%.

Yet Jake Leslie Melville of BCG, a consultancy, says the oil companies are right to “test the waters” in electricity. For instance, Shell’s acquisition of First Utility, reportedly for $200m, may be deemed expensive considering the latter’s 850,000 household customers. But as a way of exploring whether Shell’s prowess in natural-gas supply and energy trading can be extended to providing services to millions of customers, some of whom will increasingly generate their own electricity, it may be a small price to pay—especially for a company that invests at least $25bn a year.

Moreover, small beginnings may mask big ambitions. Mr Wetselaar says his aim is to generate electricity returns of 8-12%, which he thinks is feasible because Shell, with its energy-trading experience, can profit from the heightened volatility of power markets in the era of renewables and EVs, as well as from more flexible demand from consumers. To become material to Shell, the electricity business would need to grow to $50bn-100bn, on a par with the size of its current gas business, he says. Scott Flavell of Sia Partners, a consultancy, mulls whether, having acquired BG, an upstream producer once owned by British Gas, Shell might covet Centrica, owner of the downstream part of British Gas.

There are reasons for caution. Julian Critchlow of Bain, a consultancy, compares the risks facing the oil industry with those of Eastman Kodak when its business was ruined by digital photography and photo-sharing. It is clear that increased electrification is bound eventually to cause upheaval. “The challenge, as with Kodak, is whether you can spot where the returns will be.” Another risk is that technology firms may move into the domestic electricity market, making use of smart meters and digital devices, which would provide more alternatives to traditional energy suppliers. Yet if other oil and gas producers are not following in Shell and Total’s tentative footsteps, they probably should be. It is time to plug in.

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