Energy Innovation – part 1

Today is the first article where I explore the energy industry in a context that is relevant to this blog. It’s taken me a while to get to this point simply because I wasn’t quite sure how best to begin tackling the subject. It has been terribly tempting to write and ramble about oil price or rant in an entirely unproductive manner. So I hope today I fulfil the brief!

Historically the oil price has hit depressing lows as much as it has hit record highs. The last two years have seen sustained low prices. I assume many of my readers understand the issues surrounding why and it’s not something I want to dwell on. What is important to note is how this oil price recession feels different’. Indeed this is something I’ve discussed at length with colleagues before leaving Shell. Though we may see prices rise in the short term due to the the lack of investment over the past few years, it has given pause to think and rationalise how the energy industry will look and shape over the coming decades.

There are many external factors that are driving and influencing the energy industry. This article will explore these factors and also why we need to innovate smartly. Innovation may not be a choice but a necessity for some companies to survive.

I’ll start off with the most topical issue that could drive behaviour – climate change. Last year the Paris agreement came into force. I’ve copied the main 3 point below for completeness:

“(a) Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change;

(b) Increasing the ability to adapt to the adverse impacts of climate change and foster climate resilience and low greenhouse gas emissions development, in a manner that does not threaten food production;

(c) Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

To put the numbers into perspective, The International Energy Agency reckons we would need peak oil to be in 2020 (93m bbls/day) to stay under the 2°C target. 2020 is only 3 years away and there is an inherent mismatch in priorities between needing to meet this target and supply and demand. Left to market forces peak oil is still 5-15 years off at least.

It doesn’t matter which way you slice it, 2°C looks very hard to achieve. And there will be pressures from all sides to try and kill it. There have been some commendable actions. For instance the SEC has been investigating Exxon as to whether they evaluate their reserves on any potential climate regulations (probably a bit heavy handed as we don’t even know what sort of regulation would be put in place…). We also have activist shareholders holding oil majors to account to disclose their strategies with these new climate limits. Conversely we could just tear up the whole thing and let President Trump ‘help’ in abolishing the targets to incentivise US based companies to produce more!

Having this target should be a spur for innovation. We have seen some of the oil majors spending cash to grow in renewable technologies, but I get the sense there is a lack of vision on their part as to what they believe the energy mix will look like in the future. We also must remember these large companies deal with high risk-high return capital projects. It is unclear how the economic return on renewables will look like – it may not fit in their mode of working. Therefore It is dangerous to rely on these traditional oil and gas companies to be the ones leading the way.

We are likely to need some savvy out of the box thinking as well as a paradigm shift in how we use and rely on energy. Today we’ve set the scene, next time we’ll delve further into how we go about this.

J

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