ENERGY MATTERS © VOL. 27
an opinion editorial written exclusively for ANZMEX
1 December 2020
By Chris Sladen
Energy matters – Time for a recount
If you have not yet started your end-of-year report for head office or Board of Directors, I understand. So much has changed in 2020, there was so much impact, perhaps you maybe don’t know where to start? Soon we will all be looking back and remembering this as the year in which everything changed. During 2020, every energy company on the planet reviewed their operating model one way or another. It was also the year in which a new vocabulary took hold. Here are my ‘Top 10’ energy terms and phrases that characterised 2020. This new vocabulary has become essential to know:
-demand destruction. As the pandemic took hold and spread in January and February there was demand destruction and disruption of a type never seen before. Global demand first became a concern in Asia and spread rapidly in a matter of weeks as lockdowns, travel bans and the furlough of staff began. Super-spreader became the most feared word around the planet. An all-out oil price war between Saudi Arabia and Russia crashed prices and led to the creation of OPEC+ in a global attempt to prop up oil prices albeit at much lower levels. By late February demand destruction had started to hit the USA and then Europe coinciding with schools being closed, governments issuing travel bans requiring non-essential businesses to close, and recommending shielding of the most vulnerable. The airline sector saw demand destruction in some places over 90%. Vast numbers of employees were let go and force majeure was often invoked. Gasoline sales typically fell between 20 and 70%.
In April, US crude futures plunged below zero for the first time in history with technical factors combining with fundamental factors such as a shortage of storage options and the unprecedented collapse in demand. The record-breaking economic contraction seen in most countries in 2Q was often followed by record-breaking expansions between July and September. However, many economies are still around 10% smaller than the end of last year.
As we now approach year-end, refinery outputs and product sales are still typically down 10-20% year-on-year. With fewer motorists on the road and fewer fill-ups, convenience stores lost sales too. In reality, no one knows how demand destruction will play out. Depending on the specific sector, for example air travel, passenger demand is unlikely to reach pre-pandemic levels for 2-3 years; some airlines have converted passenger aircraft to carry commercial cargo. Refinery utilisation is sitting at levels that don’t make money and four major refineries have been axed this year (Australia, USA, Canada, Philippines) with many more being scheduled. The emphasis is shifting to repurposing of refinery sites for hydrogen, biofuels, high value chemicals and as part of carbon capture schemes.
-pivot. The energy transition, carbon neutral and Net Zero has rapidly become tired old-speak. You now have to talk about the energy pivot and reinventing your purpose as an energy company. It is no longer a transition to lower emissions with resilient natural gas as the bridge to a cleaner future; it is ‘The Race to Zero’. The Race is attempting fossil free living within one generation – climate smarter living. Many dozens of countries, hundreds of states, cities and towns as well as thousands of companies committed themselves to reaching Net Zero by 2050 or before. Social media and the disruptive power of digital technology became key to advertising commitments and showcasing one’s post-pivot rebranding. Many companies were called out for marketing spin (sometimes called ‘greenwashing’ or ‘green sheen’), which is used to persuade the public that a companies products, strategy and policies are environmentally and climate friendly.
The energy pivot follows no fixed path. It is a structural shift. Some energy analysts said it is the end of business as we had known it. There is concensus that electricity demand grows ~ 80% to 2050. Oil companies, such as Shell, Total, ENI, Equinor, BP, Petronas, Repsol, and many others, pivoted into using new language that highlights power, electricity and gigawatts; they swivelled to both compare themselves to the big electricity providers as peers, and to aspire to be global customer-focussed clean energy giants.
By year-end, the Race to Zero had become highly competitive both between energy companies and countries. Many brought forward their targets for decarbonisation and achieving Net Zero; this late burst of one-upmanship seems to lack solid plans that underpin the accelerated targets.
-rebalancing. Complex fiscal issues were involved in re-setting company valuations based on much lower oil and gas prices. 2Q and 3Q saw massive write-downs which, when combined with demand destruction, force majeure and currency fluctuations saw many energy companies announce stunning losses. Big oil is still there and quietly doing what it does well – improving efficiency, applying technology, capital discipline, changing the pace of activity, producing barrels, and distributing products. However, the triple whammy of demand destruction, the fall in oil price, and increased operating costs from the pandemic hammered oil shares, often reducing stock-market valuations by 50%. Most struggled to maintain dividend payouts. Many investors sought better value elsewhere. More creditworthy oil companies rushed to take onboard low cost debt both to shore-up their balance sheet and to buy assets from distressed sellers.
Numerous analysts signalled a fast approaching twilight of the oil sector, but others see the sector in a volte-face, a rebalancing, with impacts from new vectors such as carbon pricing, and entering into a new era more focussed on cleaner products and customers. Certainly investment in field developments and LNG projects stalled dramatically. The US shale industry which had transformed the oil & gas world in recent years was savaged. The onshore rig count fell over 66% for wells targeting oil and around 20% for natural gas. A short hiatus in exploration bid rounds ended late in the year with Angola, Brazil, Canada, Malaysia, Norway, Suriname and US GoM all pushing forward with new bid events, albeit subdued. Meanwhile the explorers quietly racked up some notable new oil & gas discoveries in 2020, especially in offshore Suriname and South Africa which are set to become important future production hubs. Abu Dhabi, Guyana, Mexico, Myanmar, Russia, Turkey and Vietnam also chalked up significant new finds.
During 2020, the energy industry continued its struggles with safety incidents and disruptions. Significant oil and fuel spills occurred in Canada, Mauritius, Norway, Russia, USA and Venezuela. A gigantic oil and gas blowout occurred in Assam, India, and it took almost 6 months to extinguish the fire and kill the well. A significant blowout also occurred in east Siberia, Russia. A large fire at an LNG plant in Norway caused extensive damage.
Electricity use and safety continued to be a major issue; globally, although all data are not yet fully available, there appears to have been over 100,000 fires caused by sources of electrical ignition and over 10,000 people died from electrocution and electrical fires. Major electric power outages afflicted India, Indonesia, Lebanon, Sri Lanka and USA. During the same time, around 950 million people, ~1 in 8 of the global population, lack access to electricity, particularly in sub-Saharan Africa and South Asia. Access remained strongly related to income; poorer households and the more vulnerable more likely to lack access. Large inequalities persisted between low-income countries where per capita electricity consumption is over 100 times lower than the richest countries.
The actions of OPEC and its ability to organise supply cuts both inside and outside its membership rebalanced oil supply and demand. By July, joint action by OPEC+ had stabilised the oil price, albeit at reduced levels of US$ ~40/barrel, about a third lower than January. Towards year-end the news of positive vaccine trials and preparation for mass vaccinations that can beat the pandemic combined with extensions to production cuts helped underpin the oil price. Even so the profitability of many oil & gas companies and services companies had disappeared; they re-organised, some divested assets, or put IPOs on hold; others made equity adjustments, merged or were wiped out, and with that vast numbers of jobs too – many hundreds of thousands – were lost.
-build back greener. In 2020, carbon emissions fell dramatically due to lockdowns and travel restrictions that saw transport and industry grind to a halt. As global recession began to bite, there was a movement to build back better and build back greener. The Great Realisation was that we could have something better than before!! Focus shifted onto green energy and how to make the recovery green. Politicians were quick to seize the moment and buy into the storyline; it is no longer climate change, it is the climate emergency. A pivot towards green – green investment, green jobs, green power – is painted as a green industrial revolution. It uses an opportunity to address the climate emergency, the energy transition and the eco-anxiety of voters. Those companies at the heart of the energy transition changed the conversation from megawatts and power plants to delivering gigawatts, electrification and giant industrial cluster projects to capture carbon – they want scale and the efficiencies of scale.
Building back green is seen as a way to stimulate investment, create ‘green collar’ jobs, renovate industrial centres leading to regional regeneration, accelerate the energy transition and achieve Net Zero. Ambitious renewable power and efficiency targets introduced by many in 2020 mean that, for example, the EU/UK leads the race to a carbon-free, climate-neutral, zero-pollution economy.
Coal may never recover after the pandemic; as electricity demand fell, many utilities cut back on coal first, coal proving more expensive than power from natural gas, wind and solar. However, the financial burdens of the recession will take countries many years, perhaps decades, to overcome. Some may never recover their former financial status. Add to this the need for US$~30-50 trillion of energy investments to keep the world on a path towards a 2 Centigrade temperature rise or less, and deliver a massive scaling up of power, electrification and zero carbon technologies. This implies that a global energy transition will be messy and imperfect, with early adopters, laggards and holdouts, with little global unison or standard approach.
In 2020, climate risk was finally widely recognised as an investment risk. A rapidly growing number of financial centres are exploring green banks, in which financial institutions are dedicated to accelerating the shift to a sustainable green powered economy. Even if governments don’t act, these banks satisfy a public purpose – low-carbon, climate-resilient, sustainable investing focussing on scaling up investment in climate-friendly projects. So-called ‘carbon tracking’ became in vogue as a new branch of energy analysis investigating the impact of climate change on financial markets together with the related ESG issue (environmental, social and governance) which now represents a major risk for fossil fuel producers and investors. Tracking is a more sophisticated and vocal reincarnation of measuring one’s carbon footprint and carbon offsetting. Even so, despite all the policy talk and good intentions, energy investments in 2020 fell in every single area – upstream, midstream, renewable power, fossil fuel power, nuclear, electricity networks and energy efficiency.
-hydrogen roadmap. Hydrogen is the latest and biggest energy craze of 2020, edging out offshore wind for popularity. In mid-year the European Union opted for green hydrogen as its preferred future energy ecosystem. Green hydrogen fuel, the cleanest of all hydrogen variants, is obtained by electrolysis of water, splitting it into hydrogen and oxygen, using renewable electricity, in particular from wind or solar power, and so has no carbon emissions. Nuclear power or geothermal could also be used. Green hydrogen could be a competitive fuel by 2035. Converting the hydrogen into green ammonia would enable easier global trade and long distance distribution. Blue hydrogen can be produced by a process of steam methane reforming using natural gas with CO2 carbon capture, and storage (CCS). Significant numbers of economists believe blue hydrogen made from natural gas is essential to achieve net zero emissions by 2050. Many oil companies are familiar with producing hydrogen from their refining and petrochemicals sites; blue hydrogen with capture of CO2 at industrial hubs and underground storage in old oil and gas fields is well within their capabilities.
Many governments developed hydrogen roadmaps and began issuing permits for CCS using underground CO2 storage. Numerous new partnerships were forged to develop regional ecosystems – so-called ‘hydrogen valleys’. New speciality investment funds for hydrogen were created. The hydrogen challenge remains project costs and commerciality. Large scale projects to produce green hydrogen and blue hydrogen are well underway in Australia, China, Germany, Netherlands, Norway, Saudi Arabia, UK and USA and these will be important tests of the business models.
-offshore wind. Offshore wind power became a big big deal rivalling hydrogen as the highest profile ‘modern’ power source in 2020. Offshore wind is perfect for oil companies that can re-use their offshore engineering and operating expertise. Total, Equinor, Repsol, BP and ENI have each been getting into big wind projects in recent months. Expect to see them make a big splash at wind auctions in 2021. Their skills should match well to floating offshore wind accessing the stronger wind speeds often found over deeper water.
It’s not only about oil companies getting in on the act, but also the oil services companies too, for example, Aker, Wood, Fugro, Odfjell, Subsea 7 and Saipem all hastening the energy transition. For the first time ever, wind and solar now make up the majority of the world’s new added power generation – marking a fundamental shift in how nations get electricity. The issue of how to stabilise the electricity grid given greater and greater inputs of inherently irregular wind and solar power remains to be solved. Getting it wrong and not having a reliable baseload can cause fluctuations and blackouts. Large scale lithium-ion battery storage (battery farms) proven effective and pioneered in Australia over the last 2-3 years, continued to expand in 2020.
-lithium triangle. Battery powered vehicles could do no wrong with substantial shifts towards electric cars, e-scooters, electric bikes and electric delivery vans. This is the mobility revolution; the rate of electric vehicle (EV) penetration is growing. We are on the road to zero carbon; lithium has become the new gasoline. The Tesla business model was proven successful as car production ramped up. Tesla overtook Toyota to become the world’s most valuable auto company. By year end almost all established car manufacturers now feature at least one EV model and both electric and hybrid lorries and trucks now appear within grasp.
Electric carmakers conjoined with electric utilities became a powerful lobby group. Various countries brought forward their dates for banning the sale of new petrol and diesel vehicles. This will locally advance the timing of peak oil demand. For large companies recently committing to Net Zero, such as Amazon, changing their fleet of delivery vehicles to electric is a low-effort quick win. The conversation is already moving on to whether electricity generation and transmission systems can handle millions of customers plugging in to charge their electric cars. Power transmission grids, especially the older ones, are not ideal to accept lots more power stress.
EV owners have little interest in where lithium comes from, but for resources companies and manufacturers of lithium-ion batteries there is plenty of geopolitics as they seek to guarantee secure supplies. There is a strong business case for Tesla to buy a lithium miner to secure its battery feedstock. Projections point to soaring demand, more than tripling in the next few years, 10-fold by 2030 and exponential after then. Australia leads the way in production today, but Argentina, Bolivia and Chile make up the so-called ‘Lithium Triangle’ and account for over 50% of global reserves and resources. China too has significant resources and processing capability. Interest in lithium is booming with a need for capital, technology and infrastructure, irrespective of the unknown mid-term cost of electricity storage. No surprise then that share prices of lithium producers reached all-time highs on a bull run in late 2020.
-nature based solutions. In a sector that loves 3-letter acronyms, these are now called NBS. Carbon capture by forestry (‘rewilding’), agriculture, kelp and algae all saw significant interest and many plans to upscale progressed. NBS is a major opportunity to sequester carbon and limit global warming, whilst the additional sequestering of CO2 in buildings built from timber is a clear add-on. But this was not the Year of NBS; its time will come. Unlike CCS, NBS rarely featured prominently even though there is no doubt that NBS is a way of future-proofing economies and carbon offsetting with negative emissions. It is both simple, capable of delivering, and also lacks many ESG issues.
Sadly, in 2020, vast areas of forest and timber were lost to fires in Australia, Bolivia, Brazil, Russia, and USA. Large forest fires in the exclusion zone surrounding Chernobyl in Ukraine released deadly radionuclides from the trees, recycled relicts of the power plant meltdown in 1986. But it was not all bad news; in August, the asteroid known as 2020QG missed earth by less than 3,000 kilometres! Carrying the equivalent energy of over 20 tons of TNT and travelling at 12.4 kilometers per second, it was the closest-ever recorded near miss, and is the sort of energy we can all do without…
-electrostates. This was the year in which petrostates and petrodollars saw an emerging rival, that of electrostates and cents/kW hour. The electrostates are developing vast capability to generate fossil fuel-free renewable electricity and fuels such as green hydrogen. Their energy security (electron security) is linked to their progress with renewable power generation and electrification. Achieving electron security means they can decouple from dependance on oil, natural gas and coal. This decoupling frees the electrostates from oil & gas price fluctuations, oil wars and their accompanying geopolitical risks. The geopolitics of energy and foreign policy is thus embarked upon profound upheaval and rebalancing.
Also, attention shifted onto cities, big cities, and the need to change how energy is distributed and consumed. Population density is increasing as cities build not only outward, but upward, while gradually infilling every last remaining building site, recycling old neglected buildings, re-purposing historic sites and demolishing low-rise to build high-rise. This stacking and packing of energy consumers creates whole new challenges for zero carbon heating & cooling, and transport. Solutions to decarbonise and electrify big cities, and collect and store emissions data, became a high priority, with many big city authorities partnering with both energy companies and Big Data companies such as Microsoft and IBM.
-the new normal. During the 2008 global financial crisis, the recovery was always talked about in terms of ‘green shoots’. The conversation this year is about V-shaped, U-shaped or even W-shaped recovery. Businesses quickly adjusted by shutting down offices, stopping flying and connecting by video technology. Initially there was talk of when things would be back to normal, however once this became no longer realistic it then became a shift to a new normal and eventually a case of not being sure what the new normal is, and needing to navigate. Recovery so far has been regional and specific to certain sectors. As the world embarks upon mass vaccination programs, we still don’t know what the new normal will be, where it will take us, nor how to navigate there.
This was also a year where we all learned what ‘hopping on a Zoom call’ means and involves. We probably saw too much of the ceilings inside other people’s homes. This has been a year of adapting to virtual events, conferences and networking, accepting a virtual cocktail (or two…) or even virtual wine tasting. Taking part wearing pyjamas (PJs) became acceptable.
2020 was without doubt the year that the energy conversation changed. With it came a new vocabulary and a behavioural retread. Despite all that has happened, we began 2020 with a world heavily reliant on hydrocarbons, and we finish it that way. In 2021, the energy sector faces an uneven recovery, changes in political will, different economic policies, continuing operating challenges, a pandemic that is far from over, and presumably a new normal. It will need rational thinking in what is a fast changing energy sector. My enduring belief is that there will always be better energy solutions than the ones we have used so far!
Wherever you are spending the festive season, I hope that you are all safe and well. I hope that you have found Energy Matters articles to be informative and also hope that in some small way, they helped you get through what has been a really tough year. As always, feel free to use the content, share it, and do copy and paste if it helps enrich that end-of-year report!
Feliz navidad y próspero año nuevo,
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.
Send your feedback to:
ANZMEX ORG A.C. is a politically neutral business council with no political affiliation. The views expressed in this column are not necessarily representative of the official views of ANZMEX or any of its officers or staff.