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Can Wael Sewan Transform Shell into an Energy Company?

 

By Gerard Kreeft

Can we anticipate a radical new course for Shell when Wael Sewan, Shell’s newly announced CEO, takes over the helm in 2023? Sewan is young and ambitious and by all accounts robust and ready to take on this important challenge. Yet there are certain simple truths that transcend the man and his office. The most obvious that Shell is not an energy company but an oil and gas company.

Oil company vs Energy Company

Shell and the other oil majors must face a significant paradigm shift: an oil and gas company becoming an energy company. Their previous strategy of high risk = high returns is being replaced by high risk = low/no returns. The real litmus test is the contrast between the performance of the share price of the oil majors and the Dow Jones Industrial Index: between January 2018 and June 2022 the Dow rose 23%(25,295 to 31,097) while the oil majors, with the exception of Equinor and Chevron, have under-performed dramatically. Shell, for example, in the five-year period January 5 2018–July 1 2022 has decreased 25% (from $69 in 2018 to $52 in June 2022). Will Sewan’s leadership change this?

 Table 1: Stock market prices of  majors 2018-2022(NYSE)

Year Repsol       BP       Shell Eni Total

Energies

Chevron ExxonMobil Equinor
2018 $18 $43 $69 $35 $58 $128 $87 $23
2022 $13 $29 $53 $28 $49 $157 $88 $34

Note: Values based on January 5 2018 and June 30 2022

During this 5-year period the share price of the oil majors is as follows:

  • BP is down 32%
  • Repsol is down 28%
  • Shell is down 25%
  • Eni is down 20%
  • [1]TOTALEnergies is down 16 %
  • ExxonMobil remained flat
  • Chevron’s stock up 23%, and
  • Equinor up 48%.

By contrast, new energy companies—ENGIE, Enel, Iberdrola, Ørsted, RWE, and Vattenfall—all are low risk, and their dividends are competitive with the oil majors. Iberdrola had a 5% dividend in 2021, Enel provided a dividend yield of 6.6% in 2020, and ENGIE dividend yield 6.23% in 2021. Their stock prices are steady and positive. Their green strategy has been delivered in place and accepted by the investor community.

For new energy companies there is only good news: With the exception of Enel, the Italian power company has seen its share price remain flat and most of the major power companies have seen their share price increase, some very substantially. Engie, the large French energy giant, has seen its share price increase by 17%. Iberdrola, the Spanish power company, has had an increase of 30%. The two big winners are RWE, the German utility giant, which has seen a stock price increase of 111% and Ørsted, the Danish power company, which has seen its stock soar by 132%.

 Table 2: Stock market prices of new energy companies 2018-2022

Year Enel Engie Iberdrola Ørsted RWE  
2018 $5 $17 $7 $47 $18
2022 $5 $20 $10 $109 $38

Note: Values based on January 5 2018 and June 30 2022

 Shell’s Present Situation

Annual capital expenditures in the near term, according to Shell, could be in the range of $21-23Billion. The company has stated that its renewables and energy solutions will be $2-3Billion compared to previous targets of $1-2Billion. This pales in comparison to the $3Billion earmarked for marketing, $4Billion in integrated gas—its LNG arm, $4-5Billion in chemicals and products as well as $8Billion in upstream investments consisting of upstream exploration and production.

While its competitors—BP and TOTALEnergies—are busy buying and creating gigawatts of new energy, Shell maintains that it wants to focus on the value it generates for shareholders across the entire value chain. While the company is eager to proclaim value generation, there is little indication to shareholders what this means. For the period 2025-2030, Shell lumps together the capital budgets devoted to three categories:

Growth which entails renewables and marketing, will receive 30% of Shell’s capital budget;

 Transition which entails Integrated gas (read LNG) and chemical & products will receive 30-35% of Shell’s capital outlay; and

Upstream will get 30-35%.

Predicted IRRs (Internal Rates of Return) per category, vary between 10-25%.

Will this strategy placate shareholder unrest?

Shell has a target to become a net-zero-emissions energy business by 2050. The company plans to transform its refinery footprint to five core energy and chemical parks, reducing the production of traditional fuels by 55% by 2030.

Does Shell’s goal for its energy and chemical parks fit within the verdict brought down by the Dutch courts that ordered Shell to cut its CO2 emissions by 45% by 2030 compared to 2019 levels? Is Shell still in charge of its energy transition scenarios or is it desperately playing catch-up to ensure that its influence and strategy has an impact on the swiftly changing energy landscape?

In Shell’s latest energy scenario update, four conclusions are stated:

  • Energy needs will grow.
  • Energy systems will be transformed; speed is the issue.
  • Transformation will have costs and benefits.
  • Action accelerators are necessary to meet climate aspirations.

In its Sky 1.5 Scenario, Shell anticipates a rapid and deep electrification of the global economy, with growth dominated by renewable resources. Global demand for coal and oil will peak in the 2020s and natural gas in the 2030s. In the sectors that are more difficult to electrify, liquid and gaseous fuels will be progressively decarbonized through biofuels and hydrogen.

Shell’s energy prognosis is certainly in line with other sources who are sounding the alarm about global warming and the need for rapid decarbonization. But how will this affect Shell? Is the company nimble and dextrous enough to ensure it will be a force for good in the next phase of the energy transition? The signs are not encouraging.

In 2020 the IEEFA (Institute for Energy Economics and Financial Analysis) 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 its total capital expenditures from oil and gas and invest it in renewable energy if they are to reduce their carbon intensity in line with their stated goals.

Shell’s Lazarus Moment

Was Shell’s second quarter results of 2022 a Lazarus moment?  The company announced adjusted earnings of $11.5Billion in the second quarter of 2022 and adjusted EBITDA (earnings before deduction of Interest, Tax and Amortisation) of $23.1Billion. Also included was a post-tax net impairment of $4.3Billion. Translated meaning that $4.3Billion previously identified as stranded assets is now seen as an energy asset that can be developed profitably.

The prestigious Dutch Financieele Dagblad(Financial Times) correctly asked whether Shell’s increased asset value is now positioning the company to do a  takeover of a major renewable energy company? Or will it continue to plough more of its investments in fossil fuels? Shell’s last major investment  was the takeover of British Gas in 2015  for $70Billion. With $100 per barrel of oil predicted for the short-to-medium term there is sufficient motivation to continue down the current hydrocarbon path and pay scant attention to even think about a dominant renewable energy future.

Yet Shell’s post-tax net impairment strategy has a precedent. In the summer of 2020, French oil and gas giant TOTALEnergies announced a $7Billion impairment charge for two Canadian oil sands projects. This might have seemed like an innocuous move, merely an acknowledgement that the projects hadn’t worked out as planned. However, it opened a Pandora’s box that would change the way the industry thinks about its core business model—and point the way toward a new path to financial success in the energy sector. While it wrote off some weak assets, it also did something else: TOTALEnergies began to sketch a blueprint for how to transition an oil company into an energy company.

The heart of the oil and gas industry is knowing how it measures its value: learning to understand the petroleum classification system, which provides the heartbeat of the industry. In the trade this is called the RRR (reserve replacement ratio), the annual amount of oil and gas reserves that a company must replace on an annual basis to maintain its portfolio.

The Paris Agreement of December 2015 was a sharp warning to the oil and gas industry that it was no longer business as usual.

But it was during the summer of 2020 that the seeds that eventually transformed the oil and gas industry, as we know it, were planted. Patrick Pouyanné, TOTALEnergies’ chairman and CEO, now says that by 2030 the company “will grow by one third, roughly from 3 million BOE/D (Barrels of Oil Equivalent per Day) to 4 million BOE/D, half from LNG, half from electricity, mainly from renewables.”(TOTALEnergies Strategies and Outlook Presentation, 9/30/2020, TOTALEnergies.com/media/news).

This was the first time that any major energy company had translated its renewable energy portfolio into barrels of oil equivalent. So, at the same time that the company had slashed proven oil and gas from its books, it also added renewable power as a new form of reserves.

Each of the oil and gas majors spilled red ink in 2020, and most took significant write-downs, but TOTALEnergies’ oil sands impairments were different. The company wrote off reserves, or oil and gas that the company had previously deemed all but certain to be produced. Proven reserves long stood as the holy of holies for the oil industry’s finances—the key indicator of whether a company was prepared for the future. For decades, investors equated proven reserves with wealth and a harbinger of long-term profits.

Because reserves were so important, the reserve replacement ratio (RRR), the share of a company’s production that it replaced each year with new reserves, became a bellwether for oil company performance. The RRR metric was adopted by both the Society of Petroleum Engineers and the US Securities and Exchange Commission. An annual RRR of 100% became the norm.

Now Shell has concluded that because of high energy prices,  its post-tax net impairment strategy—a role reversable—the company can reclaim a portion of its stranded assets. Will other companies follow? Will these claims lead to more investments in the oil and gas sector, or in renewable fuels?

 The Emissions Issue

Scope 3 Emissions

Under pressure from its shareholders and public opinion, Shell may be forced to move its zero emissions deadline forward to 2030 instead of 2050. At the AGM(Annual General Meeting)  in May 2022, shareholder climate resolutions did not carry the day but still is a major issue which the company cannot ignore.

Greenhouse gas emissions are categorised into three groups or ‘Scopes’ by the most widely-used international accounting tool, the Greenhouse Gas (GHG) Protocol. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company.

Scope 3 includes all other indirect emissions that occur in a company’s value chain. Scope 3 emissions, most of the oil majors claim, are difficult if not impossible to control. Shell has on this basis argued that it can only react to client reactions and not predict or anticipate their reactions. This is why the court decision of May 2021 in the Netherlands ordering Shell to cut its CO2 emissions by 45% by 2030 compared to 2019 levels was a rude awakening to Shell management. Suddenly Scope 3 emissions have been declared a societal duty.

Re-inventing Shell

How will Shell’s rebranding affect the company’s three major divisions—upstream, integrated gas, and downstream? Could Shell’s post-tax net impairment strategy be a smaller part of a major Shell renovation?  Not in the first place any takeover of any renewables company but a serious reallocation of its resources—both financial and technical. A Good Bank vs Bad Bank Scenario: Spinning off its huge Upstream Division to possibly merge with other upstream divisions;  thus, freeing up funding needed to transform its Integrated Gas and Downstream and Renewables Divisions for the energy transition.

Shell indicated that it will reduce its upstream division to nine core hubs—Permian, the Gulf of Mexico, United Kingdom, Kazakhstan, Nigeria, Oman, Malaysia, Brunei and Brazil– and it will do no frontier exploration after 2025. If the rush to the global exploration exit continues to pick up speed, Shell may well have to reconsider its upstream strategy, perhaps going so far as to spin off the upstream division as a separate entity or do a joint venture with other partners.

Shell’s integrated gas division, translated Shell’s LNG division which is the largest of the oil majors,  could prove to be its star asset. For example, Wood Mackenzie’s AET-2 Scenario (Accelerated Energy Transition Scenario) predicts that in the following decades, market power will shift from OPEC to the giant gas producers, such as the USA, Russia, and Qatar.

According to AET-2, the “Era of carbon-neutral gas is born. AET-2 would require $300Billion to support Liquified Natural Gas growth globally and $700Billion to support dry gas development in North America.”  Given that Shell is the global leader of LNG (liquid natural gas)this is certainly a sweet sound for Shell’s LNG business.

Downstream could also prove to be a key energy transition asset. Shell’s REFHYNE Project, the Rhineland Refinery in Germany, could well become the precedent that the company needs to ensure it becomes the leading supplier of green hydrogen, where hydrogen production is powered by renewable energy for industrial and transport customers. Could the REFHYNE Project be duplicated many times over to ensure that green technology becomes a key ingredient in the energy transition?

Shell must make some key strategic choices. The time for small incremental steps to meet the goals of the energy transition is over. Currently renewables and energy solutions account for only $2-$3Billion or approximately 10% of the company’s total expenditures. Will Shell use its post-tax net impairment of $4.3Billion as a first step to drastically expanding its renewable energy division or will it be utilized to explore for more oil and gas?

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.  Gerard has Dutch and Canadian citizenship and resides in the Netherlands.  He writes on a regular basis for Africa Oil + Gas Report, and contributes to IEEFA(Institute for Energy Economics and Financial Analysis). His book The 10 commandments of the Energy Transition is now on sale at  Bookstore

Note: This article is an updated and modified version to reflect Shell’s change at the top.

 

 


Kreeft’s “Ten Commandments” Call for Out of the Box Thinking on Energy Transition

By Ken Seymour

Where does one begin to achieve global net zero by 2050 through energy transition?

A proposition of biblical proportions involving not the twelve tribes of Israel but the one hundred and eighty-four nation states of our planet.

Gerard Kreeft suggests that you start with “The Ten Commandments of Energy Transition.”

He takes us through his proposed commandments and applies them to a series of essays based upon his values and areas of expertise.

There is repetition and at times his eloquent literary prose collapses into bullet point lists that would be more at home in a presentation. However, he raises issues that must be addressed in the board rooms and cabinet offices of the world.

His values are clearly hard working, frugal Christian fairness and his areas of expertise are those of the oil and gas business in Canada, Europe and Africa.

He analyzes and challenges the major oil companies, who fail to see that their one-hundred-year-old value proposition no longer works. He also questions the fairness of big oil in their attitudes to Africa and the future of Calgary. He opens the Pandora’s box of energy transition.

Gerard is clearly an out of the box thinker and his book is a thought-provoking collection of observations worthy of study to all of those facing the challenge of net zero through energy transition by 2050. Gerard suggests that without radical change that hope no longer remains in the box.

Ken Seymour, of England registered Seymour Oilfield Solutions www.seymouroilfieldsolutions.com, is an experienced engineer with a proven track record in the oil & energy industry. Skilled in Negotiation, Operations Management, and Well Engineering (Drilling). Strong engineering professional with a MBA focused on Information Technology from University of Aberdeen and a PhD in Rock Mechanics from the University of Leeds.


With Lekela in the Bag, Infinity Transits  to the Summit of Africa’s Renewable Sector

With the signing of an agreement to acquire 100% of Lekela Power, the Egyptian power developer Infinity Group and Africa Finance Corporation (AFC) have moved to the very peak of the continent’s renewable power market.

The two describe the deal as Africa’s largest renewables acquisition.

That statement is not unfounded. Dow Jones has indicated that Lekela was valued at $1.5Billion.

The transaction was between the two owners of Lekela Actis, with 60% stake in Lekela Mainstream Renewable Power, with 40% of the company on the one hand and Infinity and AFC on the other.

The transaction hands to Infinity and AFC a 2,800MW portfolio of wind projects across the continent.

Does that make Infinity the largest renewables company in Africa?

Infinity and AFC say so, but Africa Oil+Gas Report’s annual listing of Africa’s largest renewable energy developers states that Scatec, with a portfolio of over 3,500MW solar and wind projects, is the largest renewable energy enterprise focused on the continent.

“Lekela is Africa’s largest independent power producer (IPP) and has >1 GW of installed capacity at projects located in Egypt, South Africa and Senegal. It has another 1.8 GW of projects in the pipeline that are expected to close “in the near future,” Infinity and AFC said. The company brought online its 250-MW wind farm in West Bakr in November 2022.

The acquisition is expected to close in the 4th Quarter 2022 subject to regulatory approvals and customary closing conditions.

Infinity and AFC plan to more than double the capacity of the company’s operating assets between 2022 and 2026.

Infinity is keen on integrating Lekela into the company. “We will assess with Lekela’s management how we structure this new integrated company to achieve our aggressive plans for future growth,” Infinity said.

Actis spoke with quite a number of willing buyers before settling to sell to Infinity and AFC. Bidders included Old Mutual, Masdar (of the UAE), CNIC (a Chinese state fund) as well as (South African owned Mainstream Renewable.

Actis is looking to sell its South African business BTE Renewables for around $1Billion and has hired Citigroup as advisors, according to Bloomberg.

 


ABO Wind sells two 100 MW solar projects in South Africa

The German Renewable power developer ABO Wind, has sold the project rights to two photovoltaic solar farms in South Africa, each with a capacity of 100 megawatts.

The buyer, the South African SOLA Group, has already concluded a private Power Purchase Agreement (PPA) for the projects with the mine operator Tronox. According to the investor, these are Africa’s largest renewable energy projects financed through a corporate PPA to date. Most renewable energy projects in South Africa receive a government-subsidised tariff, which is awarded through tenders.

The switch from coal to solar energy for the energy-intensive mining of mineral sands is ground-breaking. In the long term, solar power from the two 100-megawatt projects will reduce the mine operators global CO2 emissions by approximately 13 percent compared to the 2019 baseline. Construction is about to start and SOLA plans to have the projects operational in 2023.

“These project sales are our first major success in South Africa,” says Robert Wagener, the Head of Department at ABO Wind who is responsible for the country. “They are the first projects with which we had started our development activities in South Africa.” The sale agreements had already been signed in 2021. Now that the buyers have reached financial close, the contracts have become binding.

“We are proud that the projects are now fully South African owned and financed, built, operated, and managed here in the country,” says Chris Haw, Co-founder and Executive Director of the SOLA Group. The SOLA Group is a vertically integrated Independent Power Producer and a supplier of clean energy solutions to private companies in Africa.

ABO Wind has a 16 man-strong personnel in the Cape Town headquarters of its South African operations. The company has been active in Africa’s most industrialized country since 2018 and is currently working on a pipeline of wind and solar projects with a total capacity of 4,000MW.

South Africa leads the African continent with 2,100MW of installed solar and 2,900MW of wind power capacity. In 2021, 515MWs of wind energy capacity were added – despite the restrictions of the pandemic, which hit the country particularly hard. The government is aiming for further rapid expansion of renewables. Significant growth is also on the horizon for photovoltaics. To counter the energy crisis, President Ramaphosa recently doubled the volume of the upcoming tender for wind energy to 3,200MW, and another 1,000MW will be tendered for photovoltaic projects. ABO Wind is preparing several projects to participate in the upcoming tenders.

 


Scatec & EDF, to Develop Malawi’s 350MW Hydro Plant

Scatec & EDF, to Develop Malawi’s 350MW Hydro Plant

The Government of Malawi (GOM), IFC, Scatec and EDF have signed a binding commercial agreement to undertake the co-development of the Mpatamanga hydropower project.

The 350-megawatt (MW) facility, located on the Shire River, will double the installed capacity of hydropower in Malawi, and improve power supply security, provide opportunities for increased renewable energy generation capacity in the country and contribute to controlling the flow of the Shire River downstream of the power plant.

The agreement, signed under Malawi’s Public-Private Partnership framework, concludes the selection process undertaken by the Government of Malawi to competitively select a private sector partner to finance, build, and operate the Mpatamanga hydropower plant. The signing officially awards the role of project lead developer to a consortium composed of Scatec and EDF.

IFC (International Finance Corporation, an arm of the world Bank) “worked closely with the Government of Malawi to support the early-stage project development and provided funding for activities that allowed the government to launch the competitive tender process”, the Bank says in its report.

The generation facility is composed of two plants – a 309 MW peaking plant and a 41 MW downstream plant. The project is expected to contribute to reducing energy shortages and enhancing energy security in Malawi. The 309 MW plant with its reservoir storage is designed to provide much needed energy during peak demand hours of the day and overall grid stability with its ability to ramp up or down production to meet actual demand.

Scatec, and its venture partners British International Investment (BII) and Norfund, and EDF are majority shareholders in the project and will own 55% of the project, split between them. EDF will own 27.5%, while Scatec has an ownership of 14%, and the venture partners the remaining 13.5%. The Government of Malawi will own 30%, and IFC 15% of the total project shareholding.

“Mpatamanga will deliver electricity to approximately two million people and save 520,000 tons of COemissions per year”, IFC explains. “The Mpatamanga hydropower plant has the potential to grow Malawi’s electricity infrastructure and connect thousands of rural and remote households while also spurring green, inclusive, and resilient growth in the country,” ssys Jumoke Jagun-Dokunmu, IFC Regional Director for Eastern Africa.

 

 


TOTAL in a Consortium for Green Hydrogen Feasibility in Mauritania

There’s a potential of up to 10,000MW of Electrolysis to be Installed

TOTALEnergies’ renewables subsidiary, TOTAL Eren, is in a consortium with Chariot Limited to launch feasibility studies to    co-develop the “Nour Project”, a large-scale green hydrogen project to be located in Mauritania.

“Through the Nour Project, the Consortium will contribute to a sustainable economic development in Mauritania, including potentially providing baseload power to the national grid, diversifying industrial activities, promoting job creation and developing local infrastructure”, Chariot says in a release. “It will also be providing a cost-effective, transportable energy solution to replace CO2 emitting fuels for exportation to the European market”.

The consortium is equally owned (50%/50%) partnership between Chariot and TOTAL Eren. It will benefit from the dedicated expertise of TOTAL Eren’s teams, holding a wide range of experience and knowledge in solar, wind, hybrid and green hydrogen projects globally. Chariot will co-lead on project development and permitting, local content, and stakeholder engagement. The consortium will seek to progress on the in-depth feasibility study and offtake for the green hydrogen; and

“Mauritania has proved to be exceptionally well-placed to implement Power-to-X solutions, providing Nour Project the possibility to produce among the most competitive green hydrogen in the world”, Chariot says. With a potential reaching up to 10 GW of electrolysis to be installed, it could become, once fully implemented, one of the most significant green hydrogen projects in Africa.

 

 

 

 


Nigeria’s $410Billion Energy Transition Plan Will “Manage” the Expected Job Loss in Hydrocarbon Sector

A key deliverable of Nigeria’s close to half a trillion-dollar energy transition plan, is “managing the expected long term job loss in the oil sector due to global decarbonization”.

The country has been run as a hydrocarbon economy for most of its 62 years of independence.

Through the plan, launched on August 24, 2022, the government hopes to achieve a carbon neutral economy (so-called ‘net zero’) by 2060, that is 38 years from now and a hundred years after independence.

In the course of that journey is a target for universal energy access by 2030, that is eight years’ time., the Vice President said the plan was designed to tackle energy poverty and climate change crisis, as well as deliver sustainable development goal seven (SDG7), which is: “ensure access to affordable, reliable, sustainable and modern energy for all” by 2030.

It’s a tall order. The government’s own Rural Electrification Agency (REA) estimates that nearly 50 percent of Nigerians (or about 105Million people) do not have access to grid electricity, while millions of those connected to the grid have less than 12 hours of electricity every day.

The plan envisions vibrant industries powered by low carbon technologies, streets lined with electric vehicles, and livelihoods enabled by sufficient and clean energy. And it presents a unique opportunity to deliver a true low carbon and rapid development model in Africa’s largest economy, the government said.

There’s a nod to natural gas: as Nigeria takes ownership of “the transition pathways” out of the fossil fuel era (dominated by diesel, charcoal, diesel, kerosene, firewood), “and designs climate-sensitive strategies that address peculiar growth objectives”, said Yemi Osinbajo, the country’s Vice President and the designated overseer of the road map. “the plan recognises the role of natural gas in the short term to facilitate the establishment of this low energy capacity and address the nation’s clean cooking deficit in the form of LPG”.

Osinbajo said the transition plan requires a significant scale of resources which includes $410Billion above business as usual spending to deliver a transition plan by 2060 which translates to about $10 Billion per year. At the launch, the World Bank and the US Export-Import Bank (EximBank) pledged a sum of $3Billion to boost the implementation of the plan.

The plan envisages a lifting of 100Million people out of poverty, reducing Nigeria’s carbon footprint, drive economic growth and create jobs.  “The plan has the potential to create about 340,000 jobs by 2030 and 840,000 jobs by 2060”.

 

 


Solen Commences Installation of a 120MW Solar Plant in Gabon’s Estuire Region

Solen Renewable has commenced the installation of a 120 MWp photovoltaic solar power plant, in Ayémé Plaine, located some thirty kilometres from Libreville, capital of Gabon.

The Dubai headquartered company will construct 60 MWp of the solar plant in the first phase, equipped with a 15-hour battery energy storage system.

The second phase of 60 MWp of solar photovoltaic panels, will also be equipped with a 15-hour battery energy storage system.

This will create a 120 MWp solar power plant, spread over a 251-hectare site in the locality of Ayémé Plaine.

The project’s primary objective is to enhance the electricity mix in the Estuaire region, the most populous of Gabon’s nine provinces.  The project will also mitigate the problem of load shedding.

The construction of the Ayémé Plaine solar photovoltaic power plant commences almost six months after the signing of the related framework agreement (in March 2022) between Alain-Claude Bilie-By-Nze, the Gabonese Minister of Energy and Hydraulic Resources, and Praveen Pai, Solen’s Operations Manager.

Solen, which will finance, install and operate the plant, has until July 2023 to deliver the facility.

The company will sell its output to the Gabonese Water and Energy Company (SEEG) for 25 years under a power purchase agreement (PPA). In the long term, the Gabonese government aims to increase the share of renewable energy in its electricity mix to 80% by 2030.

 

 


Morocco Calls for Expressions of Interest for EPC for Seven Solar Parks totalling 260 MW

The Moroccan Agency for Sustainable Energy (MASEN) has launched a call for expressions of interest for the signing of engineering, procurement, construction (EPC) contracts for seven solar photovoltaic plants with a combined capacity of 260 MW.

Procurement engineering and construction (EPC) service providers have until 30 October 2022 to apply.

The European Investment Bank (EIB) is financing the programme to the tune of €129Million.

The seven solar photovoltaic plants are divided into two lots and they are part of its Noor Atlas solar programme.

The first (larger) one is for the construction of five plants in Ain Beni Mathar (42 MW) and Bouanane (30 MW) in the Oriental region, in Outat el Haj (36 MW) and Enjil (42 MW) in the Fez-Meknes region, and in Boudnib (36 MW) in the Drâa-Tafilalet region.

The second is the Tan-Tan solar photovoltaic plants in the Guelmim-Oued Noun region and the Tata plant in the Souss-Massa region. The two solar parks will each have a capacity of 36 MW.

Morocco’s Law 38-16 provides for the transfer of the renewable assets of the National Office of Electricity and Drinking Water (ONEE) to MASEN. It is within this framework, that the call for tenders launched today by MASEN will enable the selection of the constructor(s) (EPC) from among the eight pre-qualified companies/consortiums”, the Moroccan public body states.

Companies interested in MASEN’s call for expressions of interest have until 30 October 2022 to submit their bids. The Noor Atlas programme implemented by Onee aims to develop solar energy in remote areas of Morocco, in line with the kingdom’s objective of increasing the share of renewable energy to 52% by 2030.

The EIB says the Noor Atlas solar programme will help to reduce energy dependence on fossil fuels. The construction of this infrastructure will also create new jobs in a very dynamic sector. Above all, the programme will enable Morocco to diversify its electricity mix. According to MASEN, this North African kingdom has an installed capacity of 10,627 MW. Only 37% of this capacity comes from renewable sources, i.e. 3 934 MW.

To access the tender, click here.

 

 


The Odd Couple of the Energy Transition: The Case of Chevron and ExxonMobil

By Gerard Kreeft

An early depiction of John D. Rockefeller, founder and president of Standard Oil.

Standard Oil, founded by the world’s first oil tycoon, John D. Rockefeller, was broken apart in 1911 by the Supreme Court of the United States, guilty of having captured too much of the country’s oil market. Today, Rockefeller’s company has two heirs, ExxonMobil and Chevron, who stand unrepentant and sullen at the back of the courtroom of international opinion. Shareholders have found the company’s executives guilty of mismanagement of and of squandering assets—a far cry from Rockefeller’s business genius. My, how the mighty have fallen!

Both ExxonMobil and Chevron continue to maintain their blind faith in oil. Meanwhile, other oil majors have moved on. Yes, those companies’ books are still filled with oil and gas projects. But their future, they have determined, will be greener, more innovative—and highly profitable, which is certainly in the best tradition of John D. Rockefeller. They will profit from the new market demand and the new market greed: green solutions. The direction of the energy transition is not in doubt. Only the timing is uncertain.

Yet is there a business case to be made for ExxonMobil and Chevron? Has the Russian-Ukraine conflict, which has driven oil and gas prices to an all-time high, given both companies a reprieve and a get-free card? A pyrrhic victory or a new business opportunity?  Will $100 oil and exhaustion of spare production capacity give the industry a new lease on life?

The share price of both companies is of critical importance to the world’s investors. Whether a company is an oil company or an energy company seems to matter little to the investor community. Instead, the clarity of the message is key.  That is why only Chevron, with the exception of Equinor, is on track to make 2022 the 35th consecutive year with an increase in annual dividend payout per share, maintaining its value. Of the oil majors, BP, ENI, ExxonMobil, Shell, Repsol, and TOTALEnergies, have been industry laggards between 2018 and 2022. Among that crowd Chevron and especially Equinor stand out very positively.

 During this 5-year period the share price of the oil majors is as follows:

  • ENI down 20 percent
  • BP is down 18 percent
  • Repsol remains flat
  • Shell is up 2 percent
  • TOTALEnergies up 4 percent
  • ExxonMobil up 10 percent
  • Chevron’s stock up 41 percent, and
  • Equinor up 106 percent.

These results highlight the importance of projecting a clear corporate message. The worst performing share prices are the European supermajors—BP, ENI, Shell, Repsol and TOTALEnergies—who have tried to leaven their massive interests in hydrocarbons with a dash of renewables. There is sufficient evidence to illustrate that renewables are only a second-tier after-thought.

TOTALEnergie’s capital expenditures for the period 2022-2025 is anticipated to be between $13Billion-$16Billion per year: 50 percent  ($6.5Billion-$8Billion) on hydrocarbons and only 25 percent ($3.25Billion-$4Billion) on renewables.

Shell’s capital expenditures follow a similar path. Of a total of some $21-$23Billion at least 35 percent is devoted to hydrocarbons. Renewables and energy solutions $2-$3Billion or approximately 10 percent of the total expenditures budget.

Yet Chevron’s New Energies division, established in 2021, is pledging to spend $10Billion through 2028—about $2Billion per year, or 12.5-14 percent of Chevron’s projected capital budget. Certainly within the range of what TOTALEnergies and Shell are spending on renewables.

Yet the best performer by far is Equinor, the company that has executed the most dramatic pivot away from hydrocarbons and towards new energy technologies. By 2030 the company will have more than 50 percent of its capital spending dedicated to renewables.

Should European energy companies make their pivot to low carbon solutions a major priority much in the tradition of Equinor? Would Chevron be a willing participant or would it simply double down to ensure its hydrocarbon future?

A key scenario could be a good bank/bad scenario in which the oil companies—BP, ENI, Shell, Repsol and TOTALEnergies — create separate entities in which renewables and hydrocarbons are spun off to create real shareholder value. This will also create real business opportunities for both Chevron and ExxonMobil. Will $100 oil and exhaustion of spare production capacity be enough to hasten such a scenario?

The real litmus test is the contrast between the performance of the share price of the oil majors and the Dow Jones Industrial Index: between July 2017 and June 2022 the Dow rose 44 percent (21,414 to 30,775) while the oil majors, with the exception of Equinor, have under-performed dramatically.

 Chevron: the present situation

Mike Wirth, Chevron’s Chairman and CEO recently revealed that two-thirds of Chevron’s total production of 3Million barrels of oil will in  2025, come from just two projects: Tengiz in Kazakhstan and the Permian Basin in the United States will each yield 1Million BOEPD. Not exactly diversity of supply.

The company’s market cap is approximately $290Billion. Chevron’s positive image is largely because of its dividend track record: the company has increased dividend payouts for 35 consecutive years.

Chevron management, nonetheless, has suffered important setbacks  at the company’s Annual General Meetings in both in 2021 and 2022.  Over the objections of management, 61 percent of shareholders voted in 2021 for a proposal to encourage the US company to reduce its emissions.  At the 2022 annual shareholders meeting, 39 percent  of shareholders voted for a resolution asking the company to provide quantitative information how a net zero by 2050 will affect key components of Chevron’s financial position, including potential impairments, remaining asset lives and asset retirement obligations.

The company’s new energy division is focusing on the following areas:

  • Renewable natural gas products;
  • Renewable fuel products;
  • Hydrogen production;
  • Carbon capture and storage.

Will Chevron shareholders see Chevron’s new energy division as a new direction or mere symbolism? Certainly, Europe’s supermajors-BP, Shell, and TOTALEnergies-who have a dash of renewables, have seen their share prices remain stagnant. Is the alternative simply to double down and follow the hydrocarbon route? And hive off their renewable divisions?

The company has indicated that over the next 3 years it will spend some $10.5-$12.5Billion yearly in the USA, mostly in the Permian Basin and Gulf of Mexico. This means that at least 75 percent of Chevron’s total capital budget over that period is pledged for the U.S. market.

Outside the USA, Chevron will spend $3.5Billion, or 70 percent of its international budget, to develop its Tengiz asset in Kazakhstan, with the remaining $1.5Billion spent elsewhere. This is not promising for Africa, where Chevron has major operations stretched across the continent, including major projects in Angola, Equatorial Guinea, and Nigeria that have received limited funding in order to bankroll Tengiz. Putting so many of its eggs in the Tengiz basket could be a strategic vulnerability: if Tengiz output falls short, Chevron’s market performance will suffer, potentially dramatically.

 ExxonMobil: the present situation

Once seen as the oil and gas industry leader, ExxonMobil is now in uncharted waters. Its biggest challenges are legal, not the search for oil and gas. ExxonMobil’s management has been forced to accept three new board members, nominated by Engine Number 1, a small but very influential investor, and court challenges that have the potential to derail its deep-water Guyana projects.

Surely, the court decision in the Netherlands ordering Shell to cut its CO2 emissions by 45 percent by 2030 compared to 2019 levels is a decision being followed closely by the courts in Guyana and the boardroom of ExxonMobil. After all, ExxonMobil’s upstream activities in the Netherlands and the UK are joint ventures with Shell.

ExxonMobil has written down between $17–$20Billion in impairment charges and is capping capital spending at $20-$25Billion per year through 2027, a $10Billion reduction from pre-pandemic levels. Its market capitalization is now $360Billion, up from its October 2020 lows of $140Billion.

Researchers from the IEEFA (Institute for Energy Economics and Financial Analysis) recently reported that ExxonMobil invested $61.5Billion on US upstream capital projects from 2013 through 2021, only to report $5.3Billion in cumulative losses (see below).

To meet the green challenge, ExxonMobil has unveiled a plan to build one of the world’s largest carbon capture and storage (CCS) projects along the Houston Ship Channel in Texas. The project would cost $100Billion and would capture and store 100Million tons of CO2 per year. The emissions saved would be equivalent to removing one out of every twelve cars on US roads, the company says. ExxonMobil is proposing to build infrastructure to capture its own CO2 emissions as well as those from power plants, oil refineries, and chemical plants in the Houston area.

To succeed, the project requires major public funding and the introduction of a price on carbon in the US. ExxonMobil says the project could be fully operational by 2040.

ExxonMobil has recently unveiled its energy transition strategy. Some 150 measures were announced, including hydrogen and biofuel initiatives. Over the next six years, the company plans to invest more than $15Billion in lower-emission initiatives, including large-scale projects to lower greenhouse gas emissions, a significant share of which will be directed toward its low carbon solutions business.

The Business Case for ExxonMobil

 Hiccups in the energy transition—particularly spiking prices due to the war in Ukraine—have given ExxonMobil and Chevron a reprieve with shareholders and an opportunity to re-evaluate their strategies. They have responded by dumping low return assets and consolidating others. ExxonMobil has for example sold many of its African operations. Seplat Energy PLC has in Nigeria now has taken over the assets of Mobil Producing Nigeria Unlimited (MPNU), formerly owned by ExxonMobil, for a purchase price of $1.2Billion. Savannah Energy has taken over all of ExxonMobil’s upstream and midstream assets in Chad and Cameroon.

Instead, the company is focusing on high value assets. Two examples:

 Guyana:ExxonMobil has sanctioned four projects in the 26,800 square km Stabroek Block off the Guyana coast. Discovered in 2015, Stabroek boasts reserves of more than 11Billion BOE. The Liza-1 well, the first well on the Stabroek Block, was drilled to 5,433 m in 1,742 m of water.

Liza Phase 1 is producing approximately 130,000 barrels oil per day; Liza Phase 2 is steadily ramping up to its capacity of 220,000 barrels oil per day; and the third project, Payara, is expected to produce 220,000 barrels oil per day. The fourth project, Yellowtail, is expected to produce 250,000 barrels oil per day.

This adds up to 820,000barrels of oil per day. ExxonMobil has a 45 percent share in the project, so it will be accruing 369,000BOPD from Guyana which will be one of its largest sources of crude oil from its portfolio of oil production. ExxonMobil must pray that Guyana stays politically stable and not decide to make substantial changes in terms of their production sharing agreements.

Mozambique:The Rovuma LNG project contains more than 85 TCF (trillion cubic feet) of natural gas. ExxonMobil will lead the construction and operation of all future natural gas liquefaction and related facilities, while ENI will continue to lead the Coral floating LNG project and all upstream operations.

ExxonMobil and its partners are jointly optimizing development plans and determining technical milestones such as final investment decision (FID) and startup timing accordingly.

 The Business Case for Chevron

Tengiz

The Caspian Region, particularly Kazakhstan, has been a key frontier for Chevron since the break-up of the Soviet Union. Tengiz, Kashagan and Karachaganak were all major projects taken on at great risk, but they garnished great financial wealth which in turn generated cashflow for the majors to develop projects around the globe, including Africa.

This is about to change. WoodMackenzie is predicting that, by 2030, annual capital spending on upstream oil and gas projects in the Caspian Region will drop 50 percent from its 2018 peak of $20Billion.

Most of the largest pre-FID (Final Investment Decisions), both brownfield and greenfield, do not generate an  IRR(Internal Rate of Return) above 20 percent, Woodmac explains. Tax issues, cost overruns and project delays are key constraints. Add carbon neutrality to the mix and you have the ingredients for a perfect storm.

When the Soviet Union broke up in the early 90s and Kazakhstan emerged as a new oil province, Chevron was seen as an ambassador of US goodwill. Chevron’s prize was operatorship of Tengiz (50 percent) and ExxonMobil gained a 25 percent share. Chevron also has an 18 percent share in the large Karachaganak Gas Field. ExxonMobil has a 16.81 percent share of the troubled Kashagan Project.

What once was a sign of great wealth—Kazakhstan’s oil riches—could turn sour very quickly. Both Chevron and ExxonMobil, key developers of Kazakhstan’s prosperity are also the two key oil majors lacking any serious decarbonization and energy transition plans. While this is most relevant for the Caspian, it is also a warning for Africa where both companies have major projects.

Expiry date for the Tengiz concession is 2033. What will happen then? Given the huge costs, highly sulfur-based oil and low chance of carbon neutrality, Tengiz could become a vast stranded asset.  To date Shell has abandoned two Kashagan projects in Kazakhstan because of high costs. Tengiz was for most of its duration Chevron’s crown jewel, providing cash to developing assets elsewhere including Africa. Given Chevron’s current strategy it can only hope that Tengiz can continue to squeeze out more oil.

 Permian Basin

What assurances do we have that Chevron’s Permian Basin adventure will fare better than that of past shale operators?

In a 2021 March report, the Institute for Energy Economics and Financial Analysis (IEEFA), found that 30 producers generated $1.8Billion in free cash flows in 2020 after slashing capital spending by $20Billion from the previous year.

“Last year’s positive free cash flows were only possible because shale companies cut their capital spending to the lowest level in more than a decade,” said Clark Williams-Derry, IEEFA energy finance analyst and co-author of the report. “Restraining capital spending could help the fracking sector generate cash, but low levels of investment also undermine the industry’s prospects for growth.”

Since 2010, the 30 companies examined by IEEFA had reported negative free cash flows totaling $158Billion.

“The positive free cash flows pale in comparison to the industry’s accumulated debt loads.”

The 30 shale producers owe almost $90Billion in long-term debt, and the reductions in capital expenditures are unlikely to ensure that the industry grows[1].

What can we anticipate?

Both Chevron and ExxonMobil will continue looking for ways to cut exploration and development costs. Consolidation and cost saving measures could be much more drastic as both companies are increasingly worried about decreasing asset values at a time when shareholders are demanding an increase in their share price and steadily growing dividends.

How long can Chevron afford to keep increasing its dividend while its assets continue to dwindle in value? Will Chevron’s New Energy budget be drastically increased to offset the decreased value of its hydrocarbon assets or will its renewable division simply remain window dressing?  Chevron could borrow a page from Equinor’s new energy strategy. Equinor will be spending more than one-half of its capital spending on low carbon energy by 2030 to become a leader in offshore wind technology. This message is not lost on the investor community and it benefited the Equinor share price which has enjoyed a surge of 119 percent in the last 5 years.

Can ExxonMobil get its house in order so that its share price will not continue to flounder? Will its projects in Mozambique and Guyana continue to support and help develop the company’s strategy in the future? The company’s low carbon solutions are at present ill-defined and lacking clarity.

Oil companies face a growing paradox: the need to merge their activities because of the diminishing value of their asset base; and a reluctance to do so because of huge regulatory hurdles. Instead, at the project level, we can anticipate combined project services such as joint drilling campaigns and operational matters. A pertinent example is the creation of  Azule Energy, a joint venture in Angola in which BP and ENI have combined their operations.

If European companies can get their houses in order in a good-bad bank scenario, Chevron and ExxonMobil could see a merging of sorts, certainly at the project level.

What scenario would John D. Rockefeller follow? No doubt he would follow the money, examining critically the energy scenarios of both companies and would find their plans wanting. No doubt he could unveil green solutions that would be the envy of the rest of the sector, both because of their innovativeness and profitability.

 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 Netherlands.  He writes on a regular basis for Africa Oil + Gas Report, and contributes to IEEFA (Institute for Energy Economics and Financial Analysis). His book The 10 Commandments of the Energy Transition is being published this July.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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