A new Dane rises: Lessons in transformation from DONG Energy

When major energy companies make headlines it is usually not with good news.  In fact, for leaders in the industry linked to such public relations disasters as Deepwater Horizon and Standing Rock, no news is often good news.  This is why the announcement made by CEO Henrik Poulsen of DONG Energy on November 8th was so striking.

The chief executive of the Denmark-based energy group had the following to say as part of DONG Energy’s Q3 2016 quarterly earnings release:

“We have decided to initiate a process with the aim of ultimately exiting from our oil and gas business. This should be seen in the context of DONG Energy’s strategic transformation towards becoming a global leader in renewables…”

DONG followed up on Mr. Poulsen’s statement in a release on January 19th stating that the completed divestment is expected by the end of 2017 and that they would in future account for their oil and gas business segment as part of “discontinuing operations”.

So why get so excited about the divestment of a business unit? Two reasons:

     1.   This marks a major milestone in DONG’s long pivot towards renewable energy

Founded in the early 1970’s by the Danish government, the company (then known as Dansk Naturgas) was responsible for the management of oil and gas resources in the waters around Denmark.  Over the next 30 years, the company picked up a new name, Danish Oil and Natural Gas (DONG), remaining largely focused on its namesake sector.  In 2006, however, DONG made a large diversification into the electricity market via the acquisition and merger of five Danish energy companies. Together they formed DONG Energy.  At the time, DONG Energy was one of the most coal-intensive energy utilities in Europe and still had their oil and gas business to boot.  Suffice to say they weren’t winning many environmental awards.

What followed was a bold commitment and one of the most remarkable transformations toward becoming a leader in renewable energy the industry has seen.  In 2006, coal power made up 60% of DONG’s energy mix.  Fast forward nine years to 2015 and this figure had dropped to 29%, while offshore wind power had risen from 6% to 39% over the same period. DONG’s website declared a “vision to lead the energy transformation” and a mission to develop “energy systems that are green independent and economically viable.”

Unlike some examples in the industry, DONG walked the talk.  Last year, three-quarters of their total capital employed was within their wind power business segment, up from just 29% in 2011.

 
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Midway through 2016, DONG reached another milestone when it made an initial public offering on the Copenhagen Stock Exchange.  While the Danish state retained majority ownership, the IPO raised some natural questions about the company’s future direction.  Addressing these questions, DONG’s announced divestment of their oil and gas assets is a strong signal that they will continue on the path to becoming a global leader in renewable energy – and that’s something to get excited about.

      2.   This marks what will likely be the first of many transitions by major energy companies

Observers have noted that DONG Energy’s success may be the result of unique political and geographical advantages that cannot be mimicked by competitors. We prefer to look at it in a different way.  We see DONG Energy’s transformation as an endorsement of what they called the “energy revolution.” DONG set out to be a “winner in European energy” and this move is a reflection of the fact that they see future commercial success in renewables, not in fossil fuels.

Traditional energy companies have increasingly been forced to consider a not-so-distant future where they will be unable to exist as they do now.  The rise of electric cars, cheapening of renewable generation and storage, and flattening global oil demand will continue to force uncomfortable conversations about diversification and survival.

Indeed, we have begun to see some movement in companies who have traditionally been one-dimensional in their energy mix.  Saudi Aramco, the national oil company of Saudi Arabia, recently announced a $5B investment in renewable energy firms as Saudi Arabia seeks to diversify away from its petroleum-dominated economy (see related feature article)

DONG Energy may have been one of the first major energy companies to make a leap away from their traditional base, but they won’t be the last.  Contemporaries should look to the story of DONG Energy for guidance, or ignore it at their peril.

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UPDATE: The day after this article was published, DONG Energy announced a plan to completely phase out coal power generation within six years.  See the full story in the Financial Times here.
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February 1, 2017 by:  Andrew Dean,  MBA 2018