By Russell Gold
France's Total SA, one of the world's largest oil companies,
sent its top executives to Silicon Valley last summer, where they
met with tech investors and futurists. At Tesla Inc.'s Bay Area
factory, a Total executive tweeted a photo of a gleaming, red Model
S -- an electric car that burns no oil products at all.
The trip was meant to "open their minds," said Total Chairman
and Chief Executive Patrick Pouyanné.
Total, like its peers Exxon Mobil Corp. and Royal Dutch Shell
PLC, was built to service the world's massive demand for crude oil.
Betting that demand will peak in the next few decades, Mr. Pouyanné
wants to turn his company into one of the world's biggest suppliers
of electricity, or what he often calls "the energy of the 21st
century."
More than any other oil major, Total sees electricity as a hedge
against oil's eventual decline and is assembling a new business
around it. Last summer, it paid $1 billion for a French maker of
industrial batteries. It bought a small utility that supplies gas
and renewable power to households in Belgium and owns a majority
stake in SunPower Corp., a California company that makes
high-efficiency solar panels for governments, businesses and
households.
If all goes to plan, a large piece of Total's business will one
day be selling electricity to homeowners and businesses, some
generated by natural gas it has extracted and some from solar
panels and battery packs. By 2035, Mr. Pouyanné said, 20% of
Total's energy output will be low-carbon energy such as electricity
from renewable sources like wind and solar. The company recently
created a "gas, renewables and power" reporting segment, which in
2016 earned about 5% of Total's $9.42 billion net operating
income.
For decades, Total and other large oil companies have employed a
model pioneered by John D. Rockefeller over a century ago. They
find crude, pump it out of the ground, refine it into different
fuels and chemicals, then sell these products to motorists,
airlines and manufacturers. As oil prices rise and fall, different
parts of this value chain make money.
Today, a prolonged downturn in oil prices has dented revenues
and profits at the world's large producers. Oil demand is expected
to come under further pressure as auto makers improve fuel
efficiency, electric vehicles become more popular and many
countries push ahead with commitments to burn fewer
carbon-intensive fuels.
Producing and selling electricity is a very different business.
While oil is a commodity that can be extracted in one locale and
stored, shipped and sold to other parts of the world, electricity
must be produced and consumed simultaneously. Power grids tend to
be regional, so electricity generated in Europe can't be sold to
Latin America.
Most electricity is generated from coal or natural gas, and
increasingly from wind, solar and other renewable energy sources.
Burning oil currently generates just 4.3% of global electricity, a
share that has halved in the past two decades and is expected to
shrink to 2.5% by 2025, according to the International Energy
Agency, a Paris-based group that monitors energy trends.
Total is already a large producer of natural gas, a
cleaner-burning fuel that is expected to overtake coal by 2040 as a
source of electricity because of its flexibility and lower
emissions, according to the IEA. While rivals including Exxon and
Shell are also bulking up on natural gas production, Total wants to
go further and enter the power business.
Predicting and betting on shifts in energy consumption is a
notoriously tricky business. U.K. energy giant BP PLC invested
heavily in solar power in 2000, only to shut that business in 2011
after struggling to make money. Shell in 2008 pulled out of a large
offshore wind power project near the mouth of London's Thames River
after costs mounted.
"Oil companies like to talk about themselves as energy
companies, but they are not energy companies. They are commodity
companies," said Bob Lukefahr, who helped develop BP's renewable
strategy in the 2000s.
Capital budgets are beholden to commodity prices and new oil
ventures are costly, which make it difficult for companies to make
large investments into new types of power, said Mr. Lukefahr.
At the same time, companies should be ready for the changes
brought by technology, said Adam Sieminski, who stepped down as the
head of the Energy Information Administration, the statistical arm
of the U.S. Energy Department, in January. "You don't want to be
the best buggy-whip manufacturer in the world," he said.
Mr. Pouyanné said Total remains "first an oil-and-gas company,"
and that remains a lucrative business. The company's net income
last year, $6.2 billion, was second only to the much-larger Exxon
among its Western oil peers. At the same time, he said some
investors feel Total needs a diversification plan if governments
and the public increasingly demand cleaner energy.
"They have some questions about what will be the impact of
climate change on our company. We are trying to bring them some
answers," he said.
Some of the challenges are apparent in Mr. Pouyanné's own
household. He said he tried and failed to persuade his wife that
they should buy an electric car. He still drives a Renault with a
conventional engine.
Most industry forecasters expect oil to remain a major source of
energy fueling global economies. The IEA says consumer demand for
oil will keep growing for another two decades unless governments
take sharper action to curb emissions.
But electricity consumption is expected to grow faster than oil
-- 2% a year through 2040, compared with oil's 0.5% growth,
according to the IEA.
Underlying this shift is a global push to use fuels with lower
carbon emissions. Over 140 countries have ratified an 2015
agreement struck in Paris to reduce emissions as a way to tackle
climate change. Their methods generally include shifting away from
oil and coal and toward energy sources like gas, renewables and
even nuclear, which all generate electricity. The U.S. has since
said it plans to pull out of the accord.
Producing clean energy was much more expensive in the late 1990s
and early 2000s, when oil companies conducted highly public
experiments with alternative energy sources. Production costs for
solar panels and other renewable energy projects have since
plummeted.
"Sometimes you can be wrong if you are 15 years" too soon, said
Mr. Pouyanné.
Shell last year led a consortium that won a bid to build a wind
farm off the coast of Holland that could power a million homes at
prices lower than competing coal and gas projects. Norwegian
oil-and-gas company Statoil ASA recently announced plans to
increase its spending on renewables from 5% today to at least 15%
by 2030, with an emphasis on offshore wind.
Mr. Pouyanné, 53 years old, accelerated Total's expansion into
electricity after two events rattled the company. In October 2014,
Total's then-CEO, Christophe de Margerie, was killed in an airplane
crash in Russia. Mr. Pouyanné, who was running Total's refining and
chemicals business, was quickly promoted to the top job.
At the same time, a glut of oil was overwhelming demand, causing
oil prices to collapse from a high of $107.26 a barrel to $53.27 by
the end of the year. Total recorded a $5.7 billion loss in the
final quarter of 2014, its worst quarterly result in decades, and
the first quarter with Mr. Pouyanné at the helm.
"I became CEO at the worst possible moment," he said.
He took over a nearly century-old company with fossil fuel
operations in 130 countries. Like its fellow Western oil companies,
Total had large exploration, refining and chemical divisions. Mr.
Pouyanné began cutting costs including the company's capital
budget. Total returned to profitability in 2015 even as oil prices
fell further. Oil currently trades around $46 a barrel.
Mr. de Margerie, his predecessor, was outspoken about the
challenges facing the oil business. At an industry conference in
London in 2007, the former CEO surprised the crowd by declaring
that oil-production growth forecasts were too optimistic because of
depleting conventional reservoirs.
That outlook prompted Total to begin exploring alternative
sources of energy. It paid $1.37 billion for a 60% stake in
SunPower in 2011, and scooped up smaller stakes in early-stage
clean-energy startups.
Total's stake in SunPower has since lost more than half its
market value amid a sharp decline in prices of solar panels.
SunPower has posted losses for the past two years.
Unlike oil and gas, where output can be turned up or down in
response to demand, solar energy is produced only when the sun is
shining. Its value to consumers and power companies is limited
unless the energy can be stored. That thinking drove Mr. Pouyanné
in 2016 to purchase Saft Groupe SA, a French battery maker
Saft supplied high-end batteries for satellites, airplanes and
smart meters. While much of the battery industry focused on
bringing down prices, Saft specialized in long-life and durability.
When the European Space Agency sends a robotic rover to Mars in
2020, the exploration vehicle will use Saft batteries.
Saft Chairman and CEO Ghislain Lescuyer said Saft is looking for
ways to work with SunPower. While he declined to discuss details,
such a partnership could produce a solar panel-and-battery
combination that could compete with Tesla -- which recently
acquired SolarCity Corp. -- and other companies exploring similar
energy products.
Tom Werner, SunPower's Chairman and CEO, said the company
benefits from Total's focus on long-term strategy and size, even
though it can be at odds with the speed and nimbleness required of
a solar company. "There is no model to emulate," he said.
Last June, Total acquired another piece of the puzzle it is
trying to assemble when it paid about $200 million for Lampiris NV,
a gas and renewable power retailer in Belgium. After operating for
a little over a decade in the Belgian residential energy market,
the company won more than one million customers.
Now that Total controls companies that generate, store and sell
electricity. Mr. Pouyanné is trying to figure out how to fit the
pieces together.
"To be clear, these are investments," he said of Total's foray
into electricity. "We have to be patient."
Write to Russell Gold at russell.gold@wsj.com
(END) Dow Jones Newswires
June 13, 2017 11:19 ET (15:19 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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