By Geoffrey Cann
With the World Petroleum Council’s 24th Global Congress (WPC24) now behind us, it’s time to take stock of the key themes and messages from this most important event.
In case you missed it, WPC24 took place last week in Calgary, Alberta, for the second time in its history. WPC itself was established way back in the 1930s as a forum for the global industry to discuss common themes on a triennial basis. As a global event, it attracts an audience from around the planet..
The voices discussing the global energy industry’s challenges included the Energy Minister from Saudi Arabia, and the CEOs of Saudi Aramco, ExxonMobil, Repsol, WestJet, Accenture, Pertamina, KNOC, Kuwait Petroleum Corp, ONGC, NNPC (Nigeria), NOCK (Kenya), Oil India, and managing directors, presidents, vice presidents, and board chairs from Cenovus, Petronas, Petrobras, Petronet, Suncor, Deloitte, Brookfield, Platts, S&P, Shell, and many others.
You never know who you’ll meet at such a gathering. As I ascended the escalator to the event floor for the opening ceremonies, I found myself standing beside a trade ambassador from Libya, who shared some personal details of the immense tragedy stemming from the floods from his country. My fellow panelists hailed from Calgary, Houston, and Saudi Arabia. I have a collection of business cards from Tema (Ghana), St. John’s, Midland (Texas), Bogotá (Colombia), Pittsburgh, Berlin, Washington, and Uruguay.
Under the broad theme ‘path to net zero’, the range of topics under discussion were in equal parts bracing and confronting, taking in supply and demand, energy transition, decarbonization, industry growth and/or decline, financing strategies, infrastructure challenges, energy security, hydrogen developments, carbon capture and storage, net zero pathways, indigenous engagement, and talent issues.
It is impossible for one person to summarize the conference because there are multiple parallel tracks, a full poster and paper show, and dozens of talks and panel discussions. You simply can’t take it all in.
Then again, you can always form a point of view based on the dialogue you did take in, so here’s mine.
Energy is the New Internet
If ever there was a time to be in the energy industry, it is now. The scale of investment required to achieve energy transition is difficult to comprehend.
- Replace all 1 billion cars on the road with battery electric vehicles within a 20 year window, with a manufacturing capacity of just 50 million per year. Includes finding huge new supplies of copper, aluminum, nickel, lithium, rare earth metals, and cobalt.
- Replace all 300m prime movers and heavy haulers, using a manufacturing capacity of 4 million units per year.
- Develop a new sustainable aviation fuel production capability of 3 billion barrels per year for the world’s airline industry.
- Develop a market for low carbon hydrogen (which costs upwards of $200 per barrel of oil equivalent).
- Build out 100 times the current installed base of carbon capture and storage assets for all the cement, steel, and coal power plants.
- Inject digital innovations throughout all these new assets so as to reduce their cost and optimize their operations.
- Keep producing 100 m barrels of oil each year to keep the existing economies running (which means replacing 6 million barrels lost due to declines in productivity, and adding 2 million more for growth).
- Do all of this with a shrinking talent pool (as young people have been told that energy is not a great career possibility).
- Do all of this with limited financial resources as governments are telling the finance industry to avoid the risks associated with carbon industries.
The investment required certainly looks like it will rival the financial scale of the internet economy which has eclipsed all others.
There is a caution flag on the track. Energy incumbents are not investing nearly enough of their cash flow into energy transition. On average, 55% of cash flow for petroleum companies is plowed into operations (sustaining existing production), 35% is paid back to shareholders (through dividends or share buybacks), and just 10% is available for all else, including innovation and energy transition, according to ES3, a consultancy.
Why energy incumbents are sending so much cash back to their shareholders is a mystery. It could be because they sense carbon-related litigation on the horizon, so best to empty the coffers now. It could be that they are just waiting for some new energy champions to emerge that they can acquire, and until then, there’s no better use for their capital. It could be that they cannot get financing for oil projects whose positive cash flows are dated 7 years out.
If energy incumbents can’t invest in energy transition, who will?
Energy Transition is Not Working
Many presenters, from diplomats to think tanks to energy companies, argued that the current one-size-fits-all approach to energy transition is simply not working. It’s too slow, too costly, too risky, and inequitable. The orthodoxy of many countries, mine included, has been to marginalize or ignore the energy industry incumbents in the discussion about energy transition, which has led us to this flawed model.
A few countries have found themselves involuntarily dealing with energy transition. As a Japanese presenter stated, their country’s energy transition was not done in a winning way, when it shut down its nuclear fleet.
EU sanctions on Russia’s gas only impacted 4% of the global gas supply (gas pipelined to Europe), but the EU price of gas jumped 1000%, forcing Asia-Pacific (China, India, Indonesia, Viet Nam, Pakistan, Bangladesh) to revert to coal power generation. The typical German household electricity charge is now four times higher than faced by a similar household in North America. Germany has dismantled a wind power plant so that it could reopen a coal plant.
Sub Saharan Africa is home to some 600m people. Their per person annual energy consumption, from all forms of energy, is equivalent to that of a US household refrigerator. Effectively, these 50 countries are being asked to transition from energy poverty to carbon free energy, when they don’t use energy.
Many nations, including most of OPEC, and 19 small countries in Africa, are largely or almost completely dependent on the foreign currency received for selling their petroleum products internationally. As one director put it, asking these countries to stop producing oil is akin to asking a homeless person to go on a diet.
The destination in energy transition is clear enough, but nations are all starting from very different places. For example, Africa’s biggest problem is the quality of the fuels that their refineries produce. The equipment is old and inefficient, and produces dirty fuels that would otherwise be banned in the OECD. In North America, fuels are limited to 10-15 ppm of particulate matter during combustion, whereas many African refineries operate at 2500 ppm. This dirty air is creating a health catastrophe for the young. And yet many players in the wealthy OECD capital markets have withdrawn financing from petroleum projects, effectively condemning these countries from advancing.
CCS over Hydrogen
Petroleum producers have coalesced around the industrial logic that they should invest significantly in carbon capture and storage. One major producer in Asia announced that they will not sanction any new oil production in their country UNLESS that production is accompanied by an investment in CCS that results in net zero oil production (for the project’s Scope 1 and 2 emissions).
The logic for pursuing CCS is compelling:
- Alternative carbon stores, typically organic such as forests, are viewed as suspicious. Forests can be cut down or burned. Monitoring them is hard work.
- CCS is proven, with a dozen or more projects globally. Saudi Aramco even has a 10m ton per annum project already.
- CCS leverages the oil and gas industry’s competitive advantages (geological know how, reservoir access, and infrastructure capacity).
- CCS has tremendous growth potential. To achieve the Paris climate goals, CCS needs to expand by 100 times the globe’s current installed CCS capacity.
- The carbon feedstock for CCS projects is already aggregated at coal power stations, cement plants, and gas turbine power plants throughout the world.
- Moving carbon in the form of CO2 to a storage facility by pipeline is no different than moving natural gas to a customer, and may even be easier for landowners to accept.
- At scale, CCS projects are equivalent to removing millions of gasoline cars from the roads, yielding real results.
- There is a clear market for carbon based on taxation.
Hydrogen, on the other hand, feels like a pharmaceutical product. It’s made in small batches, at eye-watering costs. Aside from oil companies, who make hydrogen for refining purposes, there is no market yet for hydrogen at scale. It will require almost all new infrastructure as the steel grades used for natural gas handling are too porous for the small elusive hydrogen molecule.
It looks to me that the big oil money is going to be on CCS.
News of Oil’s Death Is Greatly Exaggerated
Despite shrill calls to halt all oil and gas development, ban combustion engines, and shut down oil refineries, the reality is that the demand for oil and gas continues to rise. At a petroleum show, you would normally expect to hear a positive message about the industry and its fortunes. The data from industry certainly reinforced the reality that the demand for oil and gas has not plateaued and looks certain to keep growing for some time.
More importantly, society needs the energy industry to be in ruddy health because without today’s energy, our existing way of life collapses.
Artwork is by Geoffrey Cann, and cranked out on an iPad using Procreate.