WASHINGTON (Dow Jones)--As crude oil prices soar to new highs, big oil companies are looking beyond the windfall to place bets in the growing alternative energy market.
In addition to the allure of a new market, there are worries that record-high oil prices could lead to a backlash plunge in demand. But there are other reasons the petroleum industry wants to plan for a more alternative-energy future. Dwindling access to new oil reserves, which is seen constraining supplies and forcing prices ever skyward, and a global political push to both cut greenhouse gases and shift to cleaner-energy technologies, are driving oil firms to the alternative energy industry.
"We want to be one of the leaders in the trade and operations of biofuels worldwide," Jose Sergio Gabrielli de Azevedo, chief executive of Petroleo Brasileiro S.A., or Petrobras, told Dow Jones Newswires last week at an international renewable energy conference here.
As governments around the world enact new climate change laws and renewable energy directives, companies like Brazil's state-owned petroleum champion Petrobras are leveraging their finances, infrastructure and expertise to capitalize on the new energy reality.
In the U.S., Congress passed a mandate last year requiring the production of 36 billion gallons of biofuel by 2022. This year, federal lawmakers are considering proposals that would require reductions of greenhouse gas emissions and create a cap and trade system for compliance. China has established a goal that calls for 20% of all new energy sources to be renewable. Meanwhile, lawmakers from the world's largest economies are negotiating for an international climate-change agreement to succeed the Kyoto protocol when it expires in 2012.
"Right now the two biggest ethanol producers in the world are the U.S. and Brazil," said Petrobras' Gabrielli. "But we need to develop production in different countries, because we cannot rely only on Brazilian production. The Chinese, Korean, Japanese, European and U.S. demand will require an increase in supply."
Turning Gasoline Green
Increasing oil industry investment in renewable energy could dramatically morph oil firms' portfolios to include a lot more green products, analysts predict.
"Every oil company in the world may end up selling 'greenoline' instead of gasoline," said Kevin Book, a senior energy analyst at FBR Capital Markets, his term for gasoline that is offset with renewable energy production elsewhere in a company's portfolio.
Petrobras isn't alone in wanting to branch out into alternative energy.
Last week, BP PLC (BP) said it was considering an initial public offering of its alternative and renewable energy unit, with the parent company maintaining control. BP estimates the unit is worth $5 billion to $7 billion, taking into account stock market valuations of other companies. BP said it expects to spendsome $1.5 billion on alternative energy development this year, on top of the $1.5 billion the oil giant already has spent since it started its alternative energy business. Those investments are part of a longer-term $8 billion plan to expand its alternative energy unit.
StatoilHydro (STO) said this week it's considering developing offshore wind farms along the U.S. Northeast and California coasts, as well as in Norway, Spain and Portugal.
The Norwegian company's interest in wind energy started from a need to power offshore oil producing platforms. Now the company wants to develop wind farms to produce power to sell on the market.
"We're looking at areas where there's a lack of space, the lack of shallow water, the lack of transmission capacity to bring the power to market and the ability to pay for higher prices for electricity, but still near major cities," said Knut Aanstad, head of the company's wind energy program.
As electricity prices are expected to rise on the back of climate-change laws, the U.S. Northeast and California will likely pay the highest electricity prices, analysts predict.
Earlier this year at the StatoilHydro capital markets day, the company said it was going to develop a "stronger position in the field of new energy, primarily focused on energy efficiency, carbon capture and storage, biofuels and offshore wind."
From Oil To Solar Power
U.K. oil giant Royal Dutch Shell (RDSB.LN) last year announced plans to build a plant in Hawaii to convert algae into vegetable oil for biodiesel. U.S. oil major ConocoPhillips (COP) has paired with Tyson Foods Inc. (TSN) to produce renewable diesel fuel from chicken waste, and Chevron Corp. (CVX) has an interest in a biodiesel facility in Texas.
Even the world's biggest oil producer, Saudi Arabia, is investing in renewable energy. Oil minister Ali Naimi said the country plans to become a net exporter of solar power in the next two to three decades.
Only a small percentage of Saudi Arabia' oil revenue - around 0.2% of their total income -is being plowed into solar energy,said Book of FBR Capital. If the surrounding oil producing countries that have similar solar potential – the United Arab Emirates, Kuwait, Qatar and Iran - contributed similar percentages, they could produce around 1 gigawatt capacity of solar power in the next five years, Book predicted.
"If you don't burn oil for power, that's oil you can sell," Book said. He estimated that the opportunity cost of petroleum-fired generation in Saudi Arabia is about 30 cents per kilowatt-hour.
It makes sense for oil companies to use their substantial infrastructure and expertise for blending, upgrading and refining of alternative fuels, said Book.
Moving from biofuels to renewable power also makes sense for big oil, particularly as a means to offset their greenhouse gas emissions while profiting from rising electricity prices, Book said.
"Once you start to think about carbon regulation, the easiest way to verifiably and profitably offset emissions is to sell power from a green source," he said.
Source: Ian Talley, Dow Jones Newswires; 202-862-9285; ian.talley@dowjones.com