Majors frontrunners in alternative energy investment

And even with numerous integrated oils migrating toward the concept of "btu convergence"-loosely, taking on a more-generic role of being energy providers vs. being suppliers of oil, natural gas, and petroleum products-the thought of delving too heavily into the realm of alternative energy is met with much trepidation.

Some oil companies, however, have taken active steps towards expanding their energy portfolios to include alternative energy sources, such as fuel-cell technology, hydrogen storage, and solar power.

While such initiatives were common on a smaller scale during the late 1970s and early 1980s, because of the then-soaring cost of energy, the restructuring and consolidation of the industry that followed the 1986 oil price collapse largely buried such initiatives.

But widely publicized concerns over the possibility of catastrophic climate change and increasing shareholder pressures on environmental concerns in general have spawned a revival in oil industry interest in alternative energy.

Majors such as BP Amoco PLC, Texaco Inc., and Royal Dutch/Shell are among the industry's frontrunners in the revived alternative energy arena. In recent months, two of these companies have forged partnerships with firms with strong backgrounds in alternative energy sources: BP Amoco with online "green" energy marketer, GreenMountain.com, South Burlington, Vt.; and Texaco with Troy, Mich.-based technology developer Energy Conversion Devices Inc. (OGJ, May 15, 2000, Newsletter, p. 7).

And Shell, in its own right, has already made great strides in raising renewable energy to a level of commercial viability through the formation of Shell International Renewables (SIR) in late 1997. Based initially on two renewables technologies-photovoltaics and biomass-SIR was formed under the company's expectations that renewables would provide 5-10% of the world's energy requirements by 2020 and potentially reaching 50% by 2050. And just to back up its conviction, Shell made the commitment to invest more than $500 million over 5 years in renewables with a clear view of their long-term sustainability and profitability (OGJ, Dec. 13, 1999, p. 127).

Nevertheless, the astuteness in timing and prudence in choice of partnerships such as these remains to be seen. Oil companies will, no doubt, cast a watchful eye toward these and subsequent moves into the alternative energy arena this decade, as a harbinger of the industry's own future.

BP Amoco-GreenMountain.com

In early May, BP Amoco purchased an 18.5% stake in the on-line "green" gas and power marketer, GreenMountain.com, for a reported $50 million. "The investment is focused on significantly extending the market for competitively priced renewable energy-including solar power-to businesses and households across America," BP Amoco said. The companies also intend to increase sales of other energy sources, such as natural gas, as both a main fuel and as gas-fueled power.

After BP merged with Amoco Corp., the world's largest solar company was formed. BP Amoco subsequently acquired the 50% interest the former Amoco didn't already hold in Solarex from Enron Corp. in early 1999, creating BP Solarex (see related article, p. 80, and OGJ, Apr. 12, 1999, p. 25). BP Amoco will market power to large industrial end-users GreenMountain's brand of electricity while promoting GreenMountain's solar energy offerings through its solar energy products and services.

"We believe green electricity is a big potential market in the US," said BP Solarex CEO and Pres. Harry Shimp. "GreenMountain is a leading developer of green energy, and we are very pleased to have this connection to what we believe will be a significant growth market segment for solar energy."

In deregulated states such as California, Pennsylvania, and New Jersey, GreenMountain is presently a leading marketer of "cleaner" electricity. GreenMountain manages its "environmentally friendly" electricity sales through the internet and other media sources, where buyers can purchase renewable solar, wind, hydroelectric, geothermal, or natural gas-powered fuel.

"We are greatly extending product availability and market presence by including large industrial customers and offering them a distinctive green choice to meet their energy needs," said Anne Quinn, group vice-president, BP Amoco's gas and power business in the Americas. "They will be able to buy greener, cleaner energy [at] close to the same cost as electricity fueled by other sources, thereby increasing the demand for renewable and environmentally responsible power-while enhancing their green credentials." This partnership, says Quinn, will serve as a model for marketing "cleaner energy" in international markets.

The investment, she says, is one of the many environmental programs BP Amoco has recently launched. "These include marketing cleaner fuels in 40 cities around the world, converting BP retail locations to solar power, using our own solar panels, and the launch of a global emissions trading program," said Quinn.

Synergies abound for the BP Amoco-GreenMountain partnership, says Gerry Braun, BP Solarex director of thin-film marketing. And, given GreenMountain's strong market presence in the US, BP Amoco envisions opportunities to take full advantage of the global penetration of the internet. "It was an opportunity to support something that was well under way rather than starting fresh," Braun said.

Also, the general public's perception of solar power could not be any higher, says Braun. "Once solar power is in the mix, it is an indicator to the market that a supply is legitimately green," he explained.

Braun says that he expects the cost of solar in the US to continue to come down with the sustained development of the right technologies. In general, Braun perceives presently that the international market for solar electricity as much stronger than that in the US, especially in countries such as Germany and Japan. In Japan, for example, the equivalent of the number of customers being added to solar grids is something like tens of thousands per year, he says.

Texaco-ECD

Around the same time as BP Amoco's announcement, Texaco purchased a 20% equity stake in Energy Conversion Devices Inc. (ECD) for $67.3 million. The interest will be managed by wholly owned Texaco business unit Texaco Energy Systems Inc. Also, Texaco and ECD will "establish joint ventures for the continued development and commercialization of advanced energy technologies." These technologies are to initially center around ECD's proprietary Ovonic solid hydrogen storage system and the Ovonic regenerative fuel cell, says Texaco.

"Energy Conversion Devices represents an exciting investment opportunity for Texaco, and this agreement reflects our commitment to developing the next generation of advanced energy technologies," said William Wicker, Texaco senior vice-president. "We intend to be a company that is responsive to the changing face of the marketplace and the energy sector.

"While oil and gas will remain the dominant energy resource for the foreseeable future, hydrogen will inevitably become part of the energy mix, and Texaco aims to be a leader in the development and commercialization of environmentally smart alternative energy technologies."

With regard to new cleaner fuel technologies, Texaco has been involved for quite some time. These initiatives include, gasification, cogeneration, renewables, gaseous hydrocarbons-to-liquids, coalbed methane, and fuel-cell technologies.

Graham Batcheler, president, Texaco Energy Systems Inc., said that, beyond wanting to develop Texaco as an integrated energy company through a partnership such as the one with ECD, the primary issue is one of creating a new business and becoming a "true" energy company.

With regard to the viability of both fuel-cell technology and hydrogen storage, Batcheler says, the world's current portfolio of fuel will change-but no one can be sure when this will happen or to what extent. "We can choose to wait, we can choose to be prepared, or we can choose to move quickly. We have chosen to be prepared," he said.

Apart from focusing on company growth, Batcheler says, Texaco hopes to weave together aspects of both companies. The important thing, he says, is that there is a market for these fuels, both for their development and the manufacturing of the parts to use such fuels.

As for why Texaco entered into such a venture: "It depends on a company's portfolio of current and future projects," said Batcheler. Having some of the elements of cleaner energy, such as its gasification plants, makes it easier to assemble a partnership like this. Texaco also has "unique access to proprietary technology," he said. Texaco's stance remains: "If we can't create a significant business, we won't," he said.

What's going on?

Those with their ears to the ground say that the rationale behind integrated oil companies embracing alternative energy ventures is relatively simple. It all boils down to wanting badly enough to evolve from integrated oil companies into integrated energy companies.

There are at least two other primary drivers, according to Tyler Dann, senior equity research analyst, integrated oils, Banc of America Securities LLC. These are:

• The substantial windfall of cash, which is being driven by the growing strength of commodity prices. (This strength is expected to continue through the next few quarters.)
• The strong desire by integrated oil companies-in the very long term-to further diversify.

Another layer, says Dann, is that an integrated energy company is looking at all forms of energy, not just petroleum-and particularly at natural gas, as it is used to generate electricity. Also, many of these firms, Dann explains, are really trying to strengthen their relationships at the retail level, with their customers, using the internet as the backbone of the "new economy."

Calvin Cobb, vice-president, Cap Gemini Ernst & Young, would agree with some of Dann's observations. Cobb explains that what is happening is that the more innovative companies are starting to think about what he calls "growth platforms." Simply put, some firms are not just considering one particular project-they are looking at their goals in a much longer-term view. These long-term development goals are being constructed upon such growth platforms.

Examples of these platforms can include seeking out and developing a cleaner source of energy, such as fuel-cell technology. Or, a platform could consist of a new processing technology, such as Phillips Petroleum Co.'s S Zorb sulfur removal technology, for example. Or, one could entail the idea of stranded gas and what to do with it, whether to develop it through gas-to-liquids technology or via other options, Cobb explains.

"Forward-thinking companies-and not just the majors-are looking at these growth platforms," Cobb said.

And although public perception is an important determinant behind a company's decision to go "greener," it is not the only one. Cobb explains that, along with tangible values of companies, such as stock value and capital spending, there are certain intangible values that are vital to a company's survival. Such intangible values will indicate a company's future performance. The public's image of a company, says Cobb, depends heavily where it stands on issues such as the environment and sustainability. And, "Not everyone has a clear view," he said. F