April 2019

The last barrel

Times they are a-changing
Craig Fleming / World Oil

In mid-March, IHS Markit sponsored the 38th CERAWeek conference, called “New world of rivalries: Reshaping the energy future.” In years past, CERAWeek focused on predictable oil industry topics, including energy security and growth in boom times. However, since the 2015 bust, the consistent element has been change. Although this year’s event featured familiar companies, such as BP and Exxon Mobil, the program was upstaged by pure technology providers like Amazon Web Services and Microsoft Azure.

And BP CEO Bob Dudley issued an ominous statement: “We are operating in a world that is not on a sustainable path.” Later in the week, U.S. Secretary of Energy Rick Perry said he was interested in “having a conversation” with U.S. Representative Alexandria Ocasio-Cortez, the author of the Green New Deal, which outlines a low-carbon blueprint intended to free the country from fossil fuel dependence in a decade. This sentiment was echoed by BP’s Dudley, who said, the industry needs to engage with “those behind the Green New Deal.”

Fuels of the future: The new rivalry. During this CERAWeek session, industry leaders suggested a more symbiotic approach, rather than a competition between renewables and traditional hydrocarbon development, will help ease the transition to cleaner fuels. Shell’s Maarten Wetselaar said “the world needs to start a serious transition to electric cars, because ocean-going ships and trains are too difficult to electricify with present technology. We have a choice to stick to oil, or step-up with technologies designed to use cleaner fuels.” Equinor CEO Eldar Saetre said the fossil-fuel business is increasingly problematic. “Collectively we’re not doing enough on climate change.”

Cheniere Energy CEO Jack Fusco suggested that a more practical approach to help bridge the gap is to use the ample natural gas reserves in the U.S. “Gas will play a big role in the future—the question is how do we make the resource sustainable?” Arnaud Breuillac, Total, injected, “energy should not be competing for markets, instead, entities should work together to solve transition and usage issues. But for electricity to be viable, we must develop better battery technologies and storage systems.”

Europe’s big changes. In an unexpected move (at least to this editor), Shell announced plans to become the world’s biggest power company within 15 years, a realignment that suggests it sees climate change as a bigger threat to its business than electricity’s historically weak returns. The world’s second-largest oil explorer, by market value, is spending up to $2 billion a year on its new-energies division, mainly to grow in a power sector it sees delivering 8% to 12% annual returns, according to Wetselaar. “We believe we can be the largest electrical power company in the world, in the early 2030s,” Wetselaar said in an interview with Bloomberg. “We are not interested in the power business because we like what we saw in the last 20 years; we are interested, because we think we like what we see in the next 20 years.”

Investors are putting pressure on companies to protect their business by shifting to lower-carbon fuels, driven by new laws and consumer choices. That pressure is especially acute in Europe, where Norway’s Finance Ministry last week instructed its $1-trillion sovereign wealth fund to divest some oil and gas companies to shield it from a “permanent decline” in crude prices. Besides Shell’s move toward electric power, BP has purchased the UK’s largest car-charging company, while Total has bought electricity provider Direct Energie.

Shell’s acquisitions in power include UK electricity provider First Utility, car-charging operator NewMotion, and a stake in U.S. solar company Silicon Ranch. Even with those purchases, achieving its targets around power will probably require a “major overhaul” of its investment priorities. Approximately 50% of Shell’s capital is allocated to its upstream business, with only 5% dedicated to new energies. The company remains cautious about making big spending changes, according to Wetselaar. “We want to prove to ourselves that the hypothesis works before we scale it beyond our current commitments.” At International Petroleum Week in late February, Total said oil may only make up 30% of the company’s portfolio in 2040, with cleaner natural gas making up 50% and renewables and power accounting for the rest.

Change model. Although not specifically quantified at CERAWeek, the goal is perfectly clear. Generate more electricity with natural gas (vs coal), while updating battery technologies, then “encourage” consumers to buy electric cars. This model is being applied in China to help reduce smog in its major cities. Gasoline and diesel displacement by electric vehicles will grow by 96,000 bpd this year. That brings the lost cumulative demand since 2011 at 352,000 bpd. And, approximately 2.7 million electric vehicles will be sold in 2019, increasing the number of such cars on the road by more than 50%. By 2040, electric vehicles could displace as much as 6.4 MMbpd of oil demand (Bloomberg).

However, the cost of implementing charging infrastructure is the largest barrier to the adoption of electric cars. Analysts estimate that charging stations will cost $2.6 trillion, while capital expenditure on grids will tally $2.8 trillion. These types of infrastructure improvements will need to be financed by governments because private industry cannot assume this much risk, was a re-occurring theme at CERAWeek.

Stage is set. While these changes are projected to take decades, don’t be surprised if technology breakthroughs, combined with governmental subsidies and new business models shorten that timeframe considerably. Lyrics written by Bob Dylan 56 years ago seem to fit the current situation, “come senators, congressmen, please heed the call, don’t stand in the doorway or block-up the hall, for he that gets hurt, will be he who has stalled, for times they are a-changing.” WO

About the Authors
Craig Fleming
World Oil
Craig Fleming Craig.Fleming@WorldOil.com
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