Exxon and Ørsted: the beginning of a wider partnership?

Last month, US oil giant Exxon Mobil signed an agreement with Ørsted’s subsidiary Lincoln Clean Energy to buy wind and solar power totalling 500MW in Texas.

The deal is interesting for us not only because it is the largest renewables power purchase agreement signed by an oil company. It is also because of the combination of the buyer – the largest US oil company by market capitalisation – and seller – the Danish utility that wants to build a world that ‘runs entirely on green energy’.

Here are some more details about the agreements. They include a 250MW PPA at the 300MW Sage Draw wind farm, which is due to be commissioned in 2020, and a 250MW PPA at the 350MW Permian solar project, which is set to be completed in 2021. Exxon is set to use energy purchased from the two Lincoln schemes to power its oil production in the Permian Basin for 12 years.

There are a number of reasons we see this as significant.

First, we wonder how the decision by part of Ørsted to sign a deal with Exxon, and support its oil production, fits into its wider commitment to no longer invest in fossil fuels. Ørsted was called Danish Oil & Natural Gas (Dong) Energy until last year, but changed its name after fully committing to renewables. In this strategy, it sold off its upstream oil and gas arm to focus on sectors including offshore and onshore wind.

This is why the deal with Exxon made us think. It could be argued that selling wind and solar power to enable Exxon to produce oil more cost-effectively would count as an investment in oil, even if only indirectly.

Second, we wonder whether this indicates that Exxon could be looking to Lincoln and Ørstedto help it make broader changes across its own business. If Exxon wants to do more with renewables then partnering up with Ørsted would actually make a lot of sense: the Danish giant has plenty of experience in shifting from oil to renewables as it has already done it.

In fact, Exxon is only the latest example of other oil majors choosing to enter the renewable energy world, including Shell, Total, and Equinor. This is partly because oil companies have been feeling the pressure to become greener, but also because declining wind and solar prices have made renewables a cost-effective option to power their operations.

This appears to be the case for Exxon too. The company has been criticised by its shareholders because it doesn’t do enough to fight climate change. The largest ever renewables PPA signed by an oil company could work well to placate them, at least for a little while.

The deal also makes economic sense. Last month, investment bank Lazard showed that wind generation costs in the US range between $29/MWh and $56/MWh before subsidies, and costs for new solar power plants average $40/MWh. This compares with costs for coal-fired power of up to $45/MWh. Exxon told Bloomberg it frequently looks at ways to diversify its power supply to “ensure competitive costs”. And wind and solar would surely ensure that competitiveness.

Ultimately, the PPAs between Exxon and Ørsted could represent a different way that the US firm is using to approach renewables. Some major utilities including Shell and Equinor have used their experiences from running offshore oil platforms to invest on offshore wind farms, while others like Total have made buyouts to become greener.

For Exxon this is a first. The US firm has invested over $8bn in low-carbon energy projects since 2000, including algae biofuels, biodiesel from agricultural waste and carbonate fuel cells, but it has never made any investment in wind or solar. As Ørsted has now established its presence in both onshore and offshore wind in the US, it would represent an ideal partner for Exxon to grow its presence in the market.

We don’t see Exxon following Ørsted’s path imminently, but we won’t be surprised if the PPAs ended up leading to something deeper.