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The Three Musketeers of the Energy Transition: The New Emerging Energy Value Chain

All- For-One; One-For-All

Musketeer 1 Big Oil: ExxonMobil, Chevron, Equinor, BP, Shell, TOTAL,  and ENI

Musketeer 2 New Energy: Enel,  Iberdrola , Engie, and Ørsted

Musketeer 3 Energy Africa

There is growing evidence of a new convergence between Musketeer 1: Big Oil  and Musketeer 2: New Energy Companies.

Perhaps not so much convergence but cross-overs and falling by the wayside of others and in the process creating new alliances.

Little attention has been paid to Musketeer 3: Energy Africa, perhaps viewed as the junior musketeer, but nonetheless playing a significant role.

Their- All- For-One; One-For-All requires a further explanation.

Musketeer 1 Big Oil

 

 

 

 

 

 

The company is not having a Merry Christmas and there’s little to cheer about in 2021. It has recently written down between $17–$20Billion in impairment charges, seen its market cap plunge to $140Billion, and is capping capital spending at $25Billion a year through 2025, a $10Billion reduction from  pre-pandemic levels.

Key questions remain: how long can ExxonMobil  afford paying its sacred dividend which is costing $15Billion annually at a time when the company is bleeding red ink? Which key projects- Deepwater Offshore Guyana,  Rovuma LNG Mozambique, or others- will see development spending slowing down or frozen until ExxonMobil can get its house in order? If it can get its house in order!

 

 

 

 

At first appearances the company seems to be weathering the storm somewhat better. The Chevron share has lost some of its glitter but has remained resilient over the last 5 years, continuing to hover in the $90 range. In October 2020, its market cap was $142Billion, surpassing ExxonMobil for the first time.

Why?  Primarily lower debt levels, a constant dividend, and an image of being in control. Spending  in the period 2022-2025 will be $14-16Billion, instead of $19-22Billion: $3.5Billion outside the USA, of which 75% will be dedicated to Tengiz in Kazakhstan and the remaining $1.5Billion elsewhere.

The Tengiz Project deserves some attention, given that it in a time of Chevron’s austerity, it is swallowing up 75% of the international oil and gas  budget. Tengiz currently produces 580,000Barrels Per Day(BPD) and is to be expanded  by some 260,000BPD. Total costing is estimated at $45Billion.

Expiry date for the Tengiz concession is 2033. Will this short timeframe allow Chevron to regain its investment costs? Will Tengiz, with its high development costs,  become a huge white elephant? Leaving Chevron with a legacy to match that of ExxonMobil?

To date Shell has abandoned two Kashagan projects in Kazakhstan because of high costs.

This is not promising for Africa where Chevron has major operations stretched across the continent:  major projects in Angola and Nigeria and interests in Equatorial Guinea, receiving very limited funding in order to bankroll Tengiz.

 

 

 

 

Equinor’s recent top management shuffle has signaled that renewable energy, offshore wind energy, will be the company’s growth engine. By mid 2021, Equinor’s Renewables Division will have its own  reporting structure. It’s the most obvious sign yet  that in the future offshore wind energy could be spun off as a separate company.

The key indicator is the development of Dogger Bank, located in the North Sea and expected to produce some 3.6 GW of energy, enough to light up 6Million households. It is the company’s showcase project.

Together with SSE Renewables, the joint partners of the project since 2017, Dogger Bank is heralded to become the world’s largest offshore wind farm.

More recently ENI has purchased a 20% stake in the Dogger Bank A & B Project. Why? So that, according to ENI chief executive Claudio Descalzi,  it can develop the skill sets needed to better understand offshore wind energy works.

Shell has recently entered a 15-year Power Purchase Agreement (PPA) for 20% of Dogger Bank A and B. With this stake, Shell will use 480 MW of the wind farm for power offtake.

Equally important is Equinor’s Empire Wind and Beacon Wind assets off the US east coast. In September 2020, it was announced that BP was buying a 50% non-operating share, a basis for furthering a strategic relationship. The two projects will generate 4.4 GW of energy.

 

 

 

 

 

 

 

 

What is BP’s current status in the Energy Transition and what can we anticipate in 2021? Two encouraging signs:

  • BP’s 50% participation in Equinor’s Empire and Beacon Wind assets off the US East coast, a strategic partnership which could grow very quickly;
  • BP and Ørsted announced that they will jointly develop a full-scale green hydrogen project at BP’s Lingen refinery in Germany. The two firms intend to build an initial 50 MW electrolyser and associated infrastructure, which will be powered by renewable energy generated by an Ørsted offshore ‎wind farm in the North Sea and the hydrogen produced will be used in the refinery.‎

Key questions remain:

  • BP announced that it will be spending $5Billion per year to green itself and by 2030 will have 50 GW of net regenerating capacity.  To date the company has a planned pipeline of 20 GW of green generating capacity. What actions can we anticipate in 2021?
  • BP has announced it wants to reduce its oil production by 2030 by 40%. Which BP  assets will become stranded  assets?  BP’s 20% share in Russia’s Rosneft?
  • What about BP’s assets in Africa where the company has a considerable footprint. Some examples:
  • In Algeria BP has helped to deliver two major gas developments at Salah Gas and In Amenas, both of which are joint ventures with Sonatrach and Equinor.
  • BP currently produces, with its partners, close to 60% of Egypt’s gas production through the joint ventures the Pharaonic Petroleum Company (PhPC) and Petrobel (IEOC JV) in the East Nile Delta as well as through BP’s operated West Nile Delta fields.
  • In Angola BP is the operator of blocks 18 and 31 and have non-operated interest in blocks 15, 17 & 20, as well as the Angola LNG plant in Soyo.
  • In Mauritania and Senegal, BP and its partners are developing  the  Greater Tortue Ahmeyim  gas field with a 30-year production potential.  The field has an estimated 15Trillion cubic feet of gas and is forecast to be a significant source of domestic energy and revenue.

Many of these projects are natural gas related and could provide the bridging fuel needed for the energy transition.

Between 2016-2019 Shell spent $89Billion in total investments, of which only US$2.3Billion was devoted to green energy. In 2019, Shell’s overall operating costs came to $38Billion and capital spending totaled $24Billion.

 

 

 

 

 

 

 

 

IEEFA(Institute for Energy Economics and Financial Analysis) recently evaluated Shell’s green progress. According to Clark Butler, the author of the report, Shell must shift at least $10Billion per annum or 50% of total capital expenditures from oil and gas and invest in renewable energy if they are to reduce their carbon intensity in line with their own stated goals.

At present Shell is undertaking a major cost-cutting operation, dubbed ‘Project Reshape’ across its three major divisions:

  • 35% -40% cuts at the Upstream division where focus will be reduced to 9 core hubs such as Gulf of Mexico, Nigeria and the North Sea.
  • Integrated gas division, which includes the company’s LNG business, deep cuts are anticipated.
  • Downstream, the review is focusing on the company’s 45,000 service stations, designed to play a key role in the energy transition.

Will this be enough? By all accounts Shell is taking an incremental, testing-the -waters approach. Expect no mega-deal such as the British Gas takeover of 2015. Instead fiscal discipline in order to be able to continue paying its somewhat reduced, but still royal dividend of 4%.

There are signs of green shoots:

  • NortH2Vision in which Shell and Gasunie have combined forces to create a mega-hydrogen facility, fed by offshore wind farms, which by 2030 could produce 3-4 GW energy and possibly 10GW by 2040.
  • Completing the largest PEM electrolyser in the world at the Rheinland refinery in Germany (10 MW).
  • Biofuels using alternative feedstocks such as forestry, agricultural and municipal wastes.

Shell’s  incremental, cautious approach may be too little too late. What is urgently required is a forward-looking strategic green roadmap.

 

 

 

TOTAL’s energy production in the period 2020 -2030 “will grow by one third, roughly from 3Million Barrels of Oil Equivalent Per Day (BOEPD) to 4MillionBOEPD, half from LNG, half from electricity, mainly from renewables”, according to  Patrick Pouyanné, Chairman and CEO.

This is the first time that a major operator has wittingly or unwittingly translated its renewables to BOE. The golden rule was that RRR(Reserve Replacement Ratio) was always used  to assess a company’s hydrocarbon reserves. According to Rystad, the RRR rate for the industry is 7%, a historic 20 year low. The norm is 100%.

This author has for some time argued that oil companies also include other fuels in their reserve count—be that wind or solar– to create a basket of energy reserves, thus increasing one’s reserve count and buttressing up one’s  fossil reserves and adding value to your offshore assets.

That the petroleum classification system  is in need of drastic repair is also reflected by the action taken by TOTAL in the summer of 2020. TOTAL took the unusual step of writing off $7Billion  impairment charges for two oil sands projects in  Canada.  Both projects at the time were listed as ‘proven reserves’. Have proven reserves become the equivalent of stranded assets?

TOTAL’s strategy is focused on the two energy scenarios developed by the International Energy Agency (IEA): Stated Policies Scenario(SPS) is geared for the short/ medium term; and Sustainable Development Scenario(SDS) for medium/long term.

Taking the “Well Below 2 Degrees Centigrade” SDS scenario on board, TOTAL has in essence taken on a new classification system.

By embracing this strategy TOTAL is the only major to have seen the direct benefit of using the Paris Climate Agreement to  enhance  the investment climate thus supporting its deepwater portfolio in Africa and expanding its renewable energy base.

 TOTAL has confirmed, on the renewables front, that it will have a 35 GW capacity by 2025, and has the ambition of adding 10 GW per year after 2025. Translated, that could mean creating an additional 250 GW by 2050. The vision is there, now the implementation.

A key to TOTAL’s success is its ability to step into projects at an early stage, some examples :

  • 50% portfolio of installed solar activities from the Adani Green Energy Ltd., India;
  • 51% Seagreen Offshore Wind project in the United Kingdom;
  • Major positions in floating wind farm projects in South Korea and France.

Total’s fiscal and technical discipline will ensure that its offshore portfolio and renewables  find traction in Africa.

 

 

 

 

 

 

 

ENI’s 20% purchase for a  stake in the Dogger Bank A & B Project is  an early indication of ENI’s green future. Why? So that, according to ENI chief executive Claudio Descalzi,  it can develop the skill sets needed to better understand offshore wind energy works.

ENI is also teaming up with Enel to develop two green hydrogen projects.The partners plan to produce two pilot projects; each pilot project will feature electrolysers of around 10MW.

ENI has confirmed that it will virtually be starting green projects from scratch.

Eni has pledged to reach 15 GW  by 2030 and 55 GW by 2050,  mainly by building its own capacity. The company’s 2050 strategic plan to reduce its carbon footprint includes the following goals:

  • Natural gas will account for 85% of upstream production;
  • 80% reduction in scope 1 emissions (from company assets) scope 2(indirect emissions);
  • and scope 3 (entire value chain).

Musketeer 2 New Energy: Enel,  Iberdrola , Engie, and Ørsted

 

 

 

 

Enel has announced that it is to invest €160Billion over the next 10 years to meet the demand for green energy and electrification. Over the next three years, about €40Billion will be spent, half of this on renewables.

Enel said almost half of its investments will be directed to developing infrastructure and networks, while the rest will be allocated to power generation. The company expects to have about 120 GW of installed capacity by 2030, almost three times more than the current level.

Expect more development projects from the international oil companies and Enel.

 

 

 

 

 

 

Spain’s largest energy group has projects in Europe(Germany, UK, and Spain), USA, and Brazil.

 

 

 

 

 

Up to 2021 the company  will spend between  €11Billion – €12Billion on investments across a broad swath of sectors including solar, wind (on and offshore), hydro plants, biogas and marine technology. Some examples:

  • Storengy, Engie’s gas storage arm, will provide hydrogen storage capacity for Europe’s future hydrogen market;
  • Construction of two solar power plants with a combined generation capacity of 30 MW in Burkino Faso;
  • Ocean Winds, joint venture between EDP Renewables (EDPR) and ENGIE are combining their offshore wind assets with 1.5 GW under construction,  0 GW under development, with the target of reaching 5-7 GW of projects in operation or construction, and 5-10 GW under advanced development by 2025;
  • 126 biomass plants by 2030 capable of producing 4TWh of power.
  • Together with ArianeGroup, developing liquid hydrogen fuel for maritime sector;

By 2025 Engie, through its affiliate Power Corner, will have installed 1000+ mini-grids across Africa reaching 2Million people.

 

 

 

 

The Danish Offshore Wind Farm giant has since 2016 seen its share price more than quadruple. In 2016 it had a stock price of $35 and has now climbed above $140.  It has a market cap of approximately €65Billion.

Currently the company has an installed capacity+ FID(final investment decision) of almost 20 GW and a build-out plan for new awards to reach 25-30 GW in the coming 15 months.

The company has projects in Taiwan, Japan, South Korea, throughout Europe (UK, Germany, Netherlands, Denmark, France, Poland, and Belgium) and the USA.

Musketeer 3 Africa

The increased speed of the Energy Transition is not necessarily good news for Africa. The greening of Europe, for example, could in the short and medium term have a boomerang affect .

The greening of Europe by the  majors could  mean reducing oil and  gas activities in Africa. Are  Africa’s oil and gas assets competitive and worthy of development, compared to other global projects?

The oil and gas majors are choosing  low carbon prospects and natural gas projects on a massive scale  leaving many potential prospects in doubt.

Energy scenarios released by both BP and TOTAL are predicting a sharp decrease of oil production, adding to the view that exploration budgets of the majors will not be a priority item. Instead as TOTAL has explained low cost, high value projects are the goal. Squeezing more value out of its various African assets to ensure a prolonged life cycle.

How will oil and gas prospects in Africa be judged? Do the various governments have the management skills to properly assess their energy scenarios?

Many of Africa’s new fledging  state oil companies, have been proxies to the international oil majors. In the process not developing technical knowledge, capability and expertise to manage and implement oil and gas projects.

Being hostage to the whims of the oil majors is no formula to ensure that a country’s oil and gas assets are to be developed. Certainly when the window of opportunity to develop oil and gas assets  could be closing within the next 20-25 years.

Rystad, the Norwegian energy research  company has recently reminded the investment community that the oil and gas majors are actively pruning their oil and gas assets and that the world’s largest oil and gas firms could sell or swap oil and gas assets of more than $100Billion in order to adjust and transform to cleaner sources of energy.

The Rystad Energy Study covers a wide geographical spread  and includes  ExxonMobil, BP, Shell, TOTAL, ENI, Chevron, ConocoPhillips, and Equinor. The eight companies may need to divest combined resources of up to 68Billion barrels of oil equivalent (boe), with an estimated value of $111Billion and spending commitments in 2021 totalling $20Billion.

The key criteria for determining whether a major would benefit from staying in a country are the company’s cash flow over the next five years, the potential growth in its current portfolio, and its presence in key E&P growth countries towards 2030. Based on this, Rystad claims that majors may seek to exit 203 country positions and, as a result, reduce their number of country positions from 293 to 90.

Conclusions

  1. Sustainable Development Scenario(SDS) based on a  well below 2C is   the new  classification norm, replacing the Hydrocarbon Classification System  which instead of measuring provable reserves is now  synonymous for stranded assets.
  2. Musketeer 1 Big Oil is a house divided: Exxon Mobil having to finance major projects in Angola, Mozambique and Guyana and facing its own financial meltdown; Chevron using most of its international funding to prop up Tengiz in Kazakhstan, leaving little future funding for Africa.
  3. Shell is clustering its upstream activities in nine hubs, which includes Nigeria and the Gulf of Mexico; BP is reducing by 40% its oil production. This does not bode well for Africa.
  4. TOTAL and ENI with their African operations could play key roles in further developing Africa’s Green Transition. Their oil and gas operations will be extended and no doubt their host governments will be demanding green solutions.
  5. Equinor, with its increased offshore wind portfolio, could see the start or emergence of new players: A combination of Equinor/BP and Musketeer 2 New Energy players such as Enel,  Iberdrola , Engie, and Ørsted.
  6. Many of Musketeer 2 New Energy players have limited or no African experience. Certainly It is imperative that both Eni and Total, together with host African governments introduce New Energy companies to these African markets.
  7. Additional practical measures for Musketeer 3 Energy Africa:

Developing a mini-Norwegian system of having a Sovereign Wealth Fund and ensuring that the state be a participant in all concessions.

Clear definitions  of regulatory power: does Government’s  regulatory regime  give the Ministry of Natural Resources a clear mandate as opposed to the goals of state oil company?

Improved fiscal and tax incentives to encourage new exploration companies to participate.

High on the list of priorities should be knowledge transfer and development of local talent, which the majors should provide.

To date the international multilateral agencies- be that the World Bank, African Development Bank, or the International Monetary Fund- were reluctant to throw new petro-economies a life line, based on oil and gas potential.  This should be re-evaluated so that both oil and gas and renewables can be used to evaluate a country’s financial needs.

  1. There is mounting evidence that the Energy Transition is showing a trend break: the western industrialized countries such as Western Europe, Japan, South Korea, and Taiwan where the Musketeer 2 New Energy Companies are finding lucrative markets; and developing countries of Africa where few of the Musketeer 2 companies are found.

 Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise.  He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe.  Kreeft has Dutch and Canadian citizenship and resides in the NetherlandsHe writes on a regular basis for Africa Oil + Gas Report.


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