Ryder Scott’s annual reserves conference was held on Zoom this year. CEO Dean Rietz described the current situation in the oil and gas industry as ‘like a gut punch’. Industry has been hit by the pandemic, dwindling demand, low oil and gas prices, bankruptcies, ‘continued slander’ against fossil fuels, unrelenting pressure to reduce carbon footprints and election-year politics. Rietz traced the 12-month oil price forecasts made at earlier conferences. These revolved around a $59-a-barrel prediction last year, down from $75 in 2018. ‘No one could have predicted the events leading up to today’s $40 price’. ‘Until we start getting back to normal, perhaps after a Covid-19 vaccine, we won’t see an increase in demand anywhere close to recent years’.
As the FT’s Anjli Raval reported Shell is ‘slashing costs to shape-up for the energy transformation’. Project ‘Reshape’ sees some 9,000 job losses, making for some $2.5 billion of annual savings. Shell is to ‘slowly lift spending on low-carbon tech while sustaining its legacy oil and gas operations.’ It seems like Shell is not moving fast enough in the direction of green. The FT subsequently reported a ‘wave of resignations’ as key green executives quit over a split as to how far and fast the oil giant should shift towards greener fuels.
PwC has authored a report ‘Equinor in the USA’, a review of Equinor’s US onshore activities and learnings for the future. The review was prepared at the behest of the Equinor board. Equinor has invested over $10 billion in US shale gas and oil, notably with the $4.7 billion acquisition of Brigham. But soon, challenges in land management, production revenue accounting, joint venture accounting and procurement resulted in the company ‘losing control over critical business support processes’. ‘Between 2007 and 2019 Equinor recorded a $21.5 billion loss on its US activities. PwC found that ‘corporate oversight should have been stronger and did not sufficiently reflect the underlying risks of the business’. Today, the internal control environment in the US organization is ‘significantly improved’.
Accenture has produced a mammoth report on ‘Decarbonizing Energy, From A to Zero’, a practical guide to navigating the decarbonization process. The report has it that ‘storm clouds have been gathering over the oil and gas industry for years and it’s time to heed the warning signs. Advances in renewable energy technologies threaten the industry’s relevance’. Accenture presents ‘the only three viable options’ for oil and gas companies. These are: 1) ‘Decarbonization Specialists’ operating a ‘clean, high-margin portfolio’ of oil and gas assets, 2) ‘Energy Majors’ with a ‘broad reach’ into the energy system of the future and 3) ‘Low-Carbon Solutions Leaders’, a new type of asset-light energy company. The study warns against adopting a hybrid role in the transition, ‘as some integrated oil companies have done’. They will almost certainly fail. Industry can take some comfort from the fact that hydrocarbons will continue playing a key role in supplying energy well beyond 2050, the endgame is not an energy system without fossil fuels which provide ‘close to 50%’ of 2050 energy. There is something for everyone in this 179-page document.
Oftentimes, the IT folks like to conflate the energy and digital ‘transformations’. Cegal has spotted an opportunity here and is shift-shaping its digital future , taking its experience of working with cloud technology in the oil and gas space to other industries, renewables, ocean industry and beyond, ‘responding to the increasing need for digitalization and secure data access through the cloud’.
Covid and the industry downturn do not seem to have impacted some executive remuneration. As Patrick Temple-West reported in the FT, corporate bonus plans are being redrafted to prop up pay as ‘performance metrics are being switched and missed targets ignored’. The FT gave Schlumberger a shout-out in this context. Schlumberger shares are down 60% this year. Bonuses are no longer determined on an earnings-per-share metric. Instead, a more favorable adjusted EBITDA has been used. Schlumberger is cutting some 21,000 jobs, about a fifth of its workforce.
The FT’s Myles McCormick summarized the results of a Deloitte study of the Future of work in oil and gas and chemicals. Seemingly, ‘seven out of ten US oil and gas are not coming back as a humbled industry overhauls the way it operates’. Some 107,000 jobs were lost in US oil, gas and petrochemicals between March and August. Rystad Energy’s Matthew Fitzsimmons was quoted as saying that the crash has kickstarted digitization initiatives which ‘will lead to some of these traditional jobs not coming back.’ We checked out the Deloitte study where we also learned that ‘The trend of home-based workers shouldn’t be seen as transitory’. Deloitte, echoing Accenture, proposes ‘four levers of transformation’ for oils energy transition, integrated human-machine collaboration, recoded careers and organizational agility. All of which ‘could push operators into the future’. Deloitte also argues (somewhat unconvincingly) that ‘the consequences of the pandemic have reinforced the call for long-term decarbonization and a solid energy transition’. Something that oil and gas strategists will have to take into consideration. The 30 page Deloitte study is replete with analysis and advice on greening an industry in a ‘great compression’.
The EU is another conflater of digital transformation and the ‘green deal’ and has proposed a ‘how to spend it’ digital investment plan for Europe. Digital ‘has enormous potential to facilitate the transition to a low carbon circular economy’. A GESI* study has digital technologies as offering a potential 20% reduction of global CO2 emissions by 2030. Time to short the data center providers?
We have plagiarized the FT far too much in this piece, so we refrain from telling you too much about how the ‘Shale binge has ‘drilled the heart out’ of US reserves’ as Derek Brower reported. Let’s just say that Quantum Energy Partners’ Wil VanLoh told the FT the dirty secret of shale, ‘too much fracking has sterilized a lot of US shale’.
Speaking at the EAGE Virtual Annual Conference (report in our next issue), Jarand Rystad offered a plausible if pessimistic forecast for fossil fuels. New energy technologies are so competitive that the transformation will happen regardless. Policies will determine the speed of the transition. There will be zero carbon in the 2060/70s whatever and ‘strong support’ for decarbonization in 2040/50s. Rystad monitors global road traffic where covid has brought major disruption, with a 30% decline in the UK. A ‘huge, unprecedented decline in oil demand’. Rystad forecasts some recovery in 2021 (for road), aviation will take longer. All demand will be back in 2022/23. So, there is ‘new upside’ at that point, ‘a short but welcome’ break for the oil industry. But it will not last long. Rystad sees ‘severe downside’ in 2024 and from then on, a structural shift with EVs, and many other sectors switching to renewables and especially batteries as a backup to solar/wind. 2030 will see the full effect of the transition.
Finally, in a context where demand is down, and the industry is confronted with pressure from the environmental movement a couple of cents worth of comment from The Data Room. An article in the Scientific American included an interesting factoid which argues a little against Rystad. Today’s best electric batteries have an energy density of 250 watt-hours per kilogram. On the other hand, Avtur (jet fuel) has an energy density of 12,000 watt-hours per kilogram. This is why electric planes are unlikely to go very far any time soon. This is not quite the whole story as the energy density of hydrogen is 33,000 watt-hours per kilogram. That’s just physics and chemistry. What is a little bit more contentious is an off-the-cuff quote from an yet another article in the FT where we learn that Morgan Stanley analysts have calculated that ‘per unit of energy produced, renewables require up to five times as much capital expenditure as oil and gas projects’. Or in other words, ‘get woke, go broke!’.
* Global Enabling Sustainability Initiative.
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