Chevron Retreats on Clean Energy After Renewables Hit 20% MarginBenjamin Elgin
In January, employees of Chevron’s renewable power group, whose mission was to create large, profitable clean-energy projects, dined at San Francisco’s trendy Sens restaurant. Managers applauded them for almost doubling their projected profit in 2013, the group’s first full year of operations.
The mood quickly turned somber. Despite the financial results and the team’s role in helping start more than a half-dozen solar and geothermal projects capable of powering at least 65,000 homes, managers told the group that funding for the effort would dry up, and encouraged staffers to find jobs elsewhere, say four people who attended the dinner, Bloomberg Businessweek reports in its June 2 issue.
For the past eight years, Chevron Corp. has promoted “profitable renewable energy” as a core component of its business plan. The company’s slogan, “Finding newer, cleaner ways to power the world,” is splashed across its website. And ads begun in 2010 as part of Chevron’s “We Agree” campaign declare, “It’s time oil companies get behind the development of renewable energy.” Yet Chevron recently has retreated from key efforts to produce clean energy. This includes the renewable power group, which invested in or built utility-scale solar and geothermal projects with margins of 15 percent to 20 percent or more, according to a dozen people who worked on them.
The group’s after-tax profit for 2013 was $27 million, almost double its internal target of $15 million, according to congratulatory plaques handed out to team members in January. That’s a rounding error for Chevron’s $21.4 billion in earnings last year, but the group’s proposal to expand into profitable geothermal projects in Europe was rejected last summer by top Chevron executives, who said the money was needed for oil and gas projects, say five people briefed on the discussions.
Chevron earlier this year sold the 48-person business unit that builds small solar and landfill-gas systems and energy-saving retrofits for federal agencies such as the U.S. Department of Defense. Jim Davis, president of Chevron Energy Solutions for the past 14 years and the executive in charge of many of the oil giant’s clean-energy pursuits, left the company in March. Davis didn’t respond to requests for comment.
“When you have a very successful and profitable core oil and gas business, it can be quite difficult to justify investing in renewables,” says Robert Redlinger, who ran a previous effort at Chevron to develop large renewable-energy projects before he left in 2010. “It requires significant commitment at the most senior levels of management. I didn’t perceive that kind of commitment from Chevron during my time with the firm.”
Chevron still runs a business that develops smaller solar and energy-efficiency projects for public customers such as school districts. It also remains one of the world’s largest producers of geothermal energy -- though much of this renewable power comes from decades-old plants in Indonesia and the Philippines that were obtained through its 2005 acquisition of Unocal.
The company declined to comment on specific internal profit targets or spending figures. Chevron is “pursuing technologies that leverage our strengths and can be deployed with competitive economic returns,” Gareth Johnstone, a company spokesman, said in an e-mailed statement. “These include geothermal energy, solar, and energy-efficiency technologies.”
A pullback from renewables doesn’t surprise some analysts, who say returns of even 20 percent can be bested by oil and gas projects that can generate profits of 25 percent to 35 percent. “Renewables for oil companies are sort of like the coffee shop inside Bloomingdale’s,” says Oppenheimer & Co. analyst Fadel Gheit. “On their list of priorities, it will always be at the bottom.”
While climate change is drawing public attention, oil companies have had mixed success promoting their green energy efforts. In 2000, BP Plc rebranded itself “Beyond Petroleum” and changed its logo to a green-and-yellow sunburst, but it was criticized for “greenwashing” as the majority of its business remained producing fossil fuels. In 2008, the U.K.’s Advertising Standards Authority ruled in favor of a complaint claiming Royal Dutch Shell Plc misled the public in an ad that said its carbon-intensive extraction of Canadian tar sands oil was part of a “sustainable” approach to energy.
Not every oil company has embraced green energy. In a March report on carbon risk to shareholders, Exxon Mobil Corp. argued that its laserlike focus on fossil fuels is a sound strategy, regardless of climate change, because the world needs vastly more energy and the likelihood of significant carbon reductions is “highly unlikely.”
Some analysts praise the more renewables-focused approach of a company like Total SA, Europe’s third-biggest oil company, which spent more than $1 billion in 2011 to acquire a majority stake in U.S. solar panel maker SunPower Corp. “At the very least you’d think the oil companies would want to keep a finger on the pulse of renewable energy technologies,” says Paul Spedding, a former oil and gas analyst for HSBC Bank. “I bet Kodak wished it had kept a closer eye on digital photography.”
Chevron’s renewable power group hoped to be such a conduit for the oil company. In early 2012, it won approval to spend $60 million a year on utility-scale solar and geothermal projects. Later, the commitment was upped to $150 million per year -- a tidy sum, though still less than one-half of 1 percent of Chevron’s annual spending.
After investing in more than a half-dozen projects, the group last summer pitched a more-aggressive plan to a group of Chevron executives, including Chief Executive Officer John Watson. Its centerpiece: a series of power plants in southern Germany powered by geothermal energy, which uses molten rock thousands of feet below the earth’s surface to generate steam that produces carbon-free electricity.
Chevron has considerable geothermal expertise, and generous German incentives pushed the projected profit margin to 20 percent. The renewable power group said it would need an initial outlay of about $100 million to start on the first geothermal plant, with an option to build several more.
According to five people briefed on the discussions, Watson and other executives applauded the project’s economics -- and then said they couldn’t fund the plan because capital was tight, in part due to cost overruns at Gorgon, Chevron’s $54 billion liquefied natural gas project in Australia.
“It’s not that oil companies dislike renewables,” says Oppenheimer’s Gheit. “It’s just not their core business or where they have expertise. They just don’t know what to do with it.”