an opinion editorial written exclusively for ANZMEX 

17 August 2020
By Chris Sladen

Energy matters – Blowin’ in the wind

No this is not an article about the merits of wind turbines, nor is it about 1960s pop culture. But is about oil companies that wish to change course and reinvent themselves. 

Reinventing could have been unnecessary. If today’s power plants that run on natural gas, fuel oil or coal had already been fitted with technology to capture the CO2 and other pollutants that they produce, then a large part of the climate change problem would simply disappear. If refineries stopped flaring natural gas and liquids and, where practical, reconfigured themselves to produce hydrogen and renewable fuels, then a large part of the climate change problem would simply disappear. If oil and gas producers stopped emitting methane, flaring and abandoning wells that later still leak gas then a large part of the climate change problem would simply disappear.

If midstream pipeline companies did more to detect holes and implement repair programs, and replace leaking valves, then a large part of the climate change problem would simply disappear. If the petrochemicals industry did more to make easy-to-recycle plastics and created less toxic products then a large part of the climate change problem would simply disappear. If ships fitted scrubbers that remove sulphur and particulates in their toxic exhaust fumes caused by burning sulphurous bunker fuel, then a large part of the climate change problem would simply disappear. If airlines got serious about carbon offsetting programs, for example by large scale planting of trees rather than leaving it to the passengers to think about doing it, then a large part… And so on.

All these and many more examples could have been achieved decades ago if energy producers and energy users had gotten ahead and done these things anyway; it would not now be a sector struggling to change course. But it did not. Research into the technology and processes to solve these challenges has constantly lagged behind. Investment in research and technologies has so often been sacrificed to show a better financial bottom line. 

At the same time, if governments had adopted tougher regulations on emissions and mandated more research, things today could be very different. Instead governments have often frustrated energy companies who wished to test new technologies and innovation by swaying in the political winds and withholding permits, support, delaying planning permission or changing regulations. It would have been simple for governments to send a message about moving away from hydrocarbons, for example, by limiting new exploration bid rounds but few have taken a lead. New Zealand and Ireland have stopped new exploration in certain areas but these are not highly sought after exploration hot spots. France plans to phase out all oil and gas production by 2040 but again this is more symbolic than volumetrically significant.

If governments had used a bit more of their tax and royalty income from energy producers and users to stimulate or support incremental improvements in the industry, we maybe could have avoided the urgent pace of change now called for to halt climate change. Instead many governments have changed energy policy numerous times, creating investment and regulatory confusion, flip-flopping on their preferred fuel types over a few decades. For example, from coal – to natural gas – clean coal – LNG – nuclear – ‘a dash for gas’- onshore wind, solar, hydro – unconventionals – blue hydrogen – offshore wind – and now green hydrogen.

Many oil and gas companies that profess to be changing course towards being net zero emitters recognise that the winds of energy policy have changed direction. Many have tasked themselves with navigating a new course to become providers of clean electricity, with targets of more than 100GW of new generation. Even so, power grids, especially the older ones, are not ideal to accept lots more power. At first look, it is not clear what competitive advantage an oil and gas company brings to building weather dependent wind and solar; this is traditionally for power utilities and speciality asset financiers who already have a head-start in a business that delivers comparatively relatively low returns. Many locations and markets in which solar and wind make the most commercial sense have already built solar parks or wind farms; many of the prime spots are already taken. 

More natural steps for oil companies would utilise existing skills in the workforce to deliver a deep decarbonisation. For example, geothermal wells accessing high temperatures and pressures, floating offshore wind accessing stronger wind speeds often found over deeper water, blue hydrogen produced from natural gas combined with underground CO2 storage, and the transport and subsurface storage of hydrogen.

As oil and gas companies seek to accelerate in renewables and slash CO2 emissions, many might not get it right. Some may fail completely. Time will tell. Changing course at big companies can go wrong. Remember Nokia, Motorola and Ericsson? Remember Blockbuster, K-mart, Pan Am or Swissair? Each, at some point, was thought of as a great company. Remember too that the energy transition that is being asked for is unprecedented…never tried nor achieved before.

The ability of oil companies to make large course corrections and transition into solar, hydrogen, wave energy, wind, batteries or biofuels is not a proven business model. It is built on the premise of having solid earnings from their oil and gas business, to fund their transition, at least for the next 5 years, or more likely 10 years plus. It is no slam dunk and could turn out to be a hard sell to financial markets. This could become a fatal financial flaw. Ironically companies need to be really successful at producing oil and gas so that they can stop producing oil and gas!!

Part of producing oil and gas profitably is to have experienced professionals who work hard and know what they are doing. That has always been a key reason the shareholders receive an attractive dividend continuously each quarter. But hundreds of thousands of experienced staff have been let go during the latest oil price crash and pandemic-induced slump in demand. Hopefully companies can leverage the talent of past and present employees to avoid a fatal human resources flaw.

Various oil and gas companies have recently said they are going to stop exploring for new oil and gas, and will rely on the existing portfolio they have. This too might be a fatal portfolio flaw. A core reason to explore is to find commercially attractive fields, the better fields, the best fields. This allows a company to continuously improve the quality of their portfolio, to find the better quality barrels, the best barrels, the highest margin barrels whilst driving break-even prices lower. That is what helped make them successful. Instead, by not exploring anymore, those oil companies are saying they plan to change to be net zero energy companies and start producing lots of clean electricity, which they will fund off a declining reserves base of production from older mature oil and gas fields, for which the cost of production per barrel gradually increases.

Yes, the winds of change are blowing through the energy sector. Some oil and gas companies searching for an answer plan to change quickly but a strong gust may blow them off course, or cause a dramatic capsize. Perhaps, loading up with the necessary technology and engineering first, while investing in the right research, choosing projects that can lever in-house expertise, and keeping geoscience teams strong, might help them steer a safe course.

About the author:

Chris Sladen runs an advisory service offering insights to inform, shape a decision, policy & regulation, and guide the next steps for energy ventures, acquisitions & divestments, energy transition and climate strategies. Chris has a unique global experience having worked in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, Europe and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris has published extensively over five decades. Chris’ articles for Energy Matters reflect his experience and enthusiasm and are not paid for in any way.

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