By Gerard Kreeft
The Clash of Two World Views
Will the oil and gas world ever fully understand the DNA of New Energy?
RRR (Reserve Replacement Ratio) vs GWs(Gigawatts), seismic vs electrolysis, drilling and completions vs wind parks and solar installations.
Two parallel worlds, for at least now, seeming to co-exist. Oil and gas have seen its apex but is still a force to be reckoned with; New Energy is just now starting to expand its footprint but there are already signs of what to expect.
Below a summary of what New Energy will bring and at the same time a summary of big oil’s thinking. To understand the two worlds better also gives you an appreciation of the enormous complexity of what the energy transition really entails.
The Case of New Energy
With the hydrogen network in the Netherlands, Gasunie (The National Gas Company), is building a national network that will link up the carbon-free hydrogen supply and demand. Five industrial clusters will be linked to each other, to international countries and to hydrogen storage facilities. This will be done mainly with existing infrastructure and partly with new infrastructure that has yet to be built. This national network will be ready by 2025.
A key element is the building of a hydrogen supply chain. Industry in the Netherlands is responsible for about 25% of national carbon emissions, and electrification makes sustainability possible only to a limited extent. Carbon-free gases are a must when it comes to making industry more sustainable. Using carbon-free hydrogen as a feedstock and as a fuel makes it possible to reduce emissions from industry, and to make a major contribution to the energy transition.
A key innovative cornerstone of this hydrogen supply chain innovation is Battolyser Systems, which has developed and manufactures the world’s first integrated battery/electrolyser system. A Battolyser can produce hydrogen from solar and wind when power prices are low and provide electricity to the grid when prices are high. The system is extremely flexible, efficient and robust. It can alleviate grid congestion, enable the build-out of more solar and wind energy developments, and offer the lowest cost green hydrogen. The Battolyser technology is deployable at scale using abundant and conflict free active materials: nickel and iron.
The world’s first large scale Battolyser factory will be constructed in the port of Rotterdam to meet soaring demand for green hydrogen and electricity storage.
“This partnership will develop the first industrial green hydrogen equipment manufacturing facility in The Netherlands,” said Mattijs Slee, CEO, Battolyser Systems. “With our offshore wind potential, strong infrastructure and world class heavy industry, The Netherlands can now develop a sustainable and resilient energy system.”
The 1 GW per annum Battolyser factory will be located in an industrial site in the heart of Rotterdam. The cost of developing the 14,000 m2 production site, complete with new office and laboratory facilities, is estimated to be about €100Million. Once fully operational it will require some 700 directly employed staff plus create up to four times as many indirect jobs with supply chain partners.
“This partnership with port of Rotterdam to develop our first large scale manufacturing facility together is a big step forward in our commercialization. The factory allows us to deliver Battolysers at industrial scale and affordable prices. We are in constructive conversation with the Dutch government and EU institutions, and we are confident that together we can secure the required funding,” said Slee.
“A net zero world will require between 5,000 and 10,000 GW of installed electrolyser capacity. The electrolyser supply chain is a huge opportunity for The Netherlands to develop new sustainable industries that can support our energy transition needs and offer export products to world.”
Creating a new industry
Battolyser is creating a new industry which will include functions such as data scientists, electrochemical engineers, finite element modelling engineers, design engineers, and research scientists.
What has set a company as Battolyser apart is creating a huge competitive advantage which will be hard to challenge for newcomers. Battolyser has moved well beyond simply dabbling in green energy; it’s a specialist entity which is now moving on to the next level: creating a new industry sector which is still in its infancy and will grow very quickly in the coming years.
Battolyser is a company that will be closely aligned with the green energy companies– Enel, Engie, Iberdrola, and Ørsted. To summarize:
Enel: committed to achieving CO2 neutrality by 2040 instead of 2050, achieving 75% of electricity from renewables and 80% digitalization of its customers on the grid by 2025. and having an installed generating capacity of 75GW by 2050.
Engie: pledged to reduce to CO2 neutrality by 2045, 45% of investments is focused on renewables and by 2030 will have 80GW of installed generating capacity.
Iberdrola: in the period 2023-2025 the company will invest $50Billion and achieve net zero for Scope 1, 2 and 3 before 2040. By 2030 the company will have installed capacity of 100GW, valued at $70 billion.
Note: Essentially, scope 1 and 2 are those emissions that are owned or controlled by a company, whereas scope 3 emissions are a consequence of the activities of the company but occur from sources not owned or controlled by it.
Ørsted: the Danish wind energy pioneer, continues to set new records. Ørsted share price in May 2023 was $90; five years earlier in 10 June 2016 it was $37. By 2030 the company’s goal is to have an installed capacity of 50GW. Ørsted is also involved with the building of two energy islands– Bornholm and North Sea– which will deliver 10GW of power.
How will shareholders react to these companies in 2023? To date there is good news and bad news for green energy companies.
Table 2: Stock market prices of new energy companies Jan 2018- May 2023
| Year |
Enel |
Engie |
Iberdrola |
Ørsted |
| 2018 |
$5 |
$16 |
$7 |
$49 |
| 2023 |
$7 |
$15 |
$12 |
$90 |
Enel, the Italian power company has seen its share price increase by 40%. Engie, the large French energy giant has seen its share price remain flat. Iberdrola, the Spanish power company has had an increase of 71% and Ørsted, the Danish power company, has seen its stock soar by 84%.
The DNA of Big Oil
One of the most basic fallacies of Big Oil is the belief that their upstream assets will provide them the necessary cash-flow to invest in low carbon solutions. In their narrative upstream provides excellent cash returns, new energy not. The evidence is otherwise.
Table 1: Stock market prices of majors Jan 2018- May 2023(NYSE – New York Stock Exchange)
| Year |
Repsol |
BP |
Shell |
Eni |
TOTAL
Energies |
Chevron |
ExxonMobil |
Equinor |
| 2018 |
$17 |
$43 |
$69 |
$35 |
$58 |
$128 |
$87 |
$23 |
| 2023 |
$14 |
$36 |
$58 |
$28 |
$60 |
$154 |
$106 |
$2 |
In the January 2018-May 2023 period the Dow Jones Industrial Index rose 31%: increasing from 25,295 to 33,093. Yet the European oil majors(with the exception of Equinor), have seen their share prices underperforming badly: Repsol down 18%, BP down 16%, Shell down 16%, ENI down 20%, TotalEnergies was up 3%.
The European majors have a sticky problem: wanting to portray themselves as both energy and oil companies. For example:
Equinor in the period 2018- May 2023 was up 17%. Why? Because the company is pledged to spend more than half of its capital budget on new energy by 2023. Its capital budget is currently $17 billion. Yet it has had to delay its Bay du Nord Project, off the coast of Newfoundland, Canada because the project has a price tag of $12 billion. Given Equinor’s intensions to have more than 50% of its capital budget dedicated to new energy by 2030, the company has some hard choices to make. Then there is the matter of its offshore wind portfolio which remains operating at a loss and lacks economies of scale. Will this be hived off to one of the new energy players or consolidate its offshore wind portfolio with BP?
TOTALEnergies is anxious to protect its green image. The company has recently stated that it has already committed 50% of its exploration budget for 2023 to its Namibian assets. Given that it has outlined its strategy to be CO2 compliant by 2050 and the company’s desire to develop its prize assets in Southern Africa, analysts will be closely following what will happen. One option is closer co-operation with Shell to ensure duplicity of services such as rig-sharing or a more comprehensive co-operation. Or will the squeeze on TOTALEnergies exploration budget be adjusted internally?
Shell meanwhile, under the leadership of CEO Wael Sewan, is anxious to portray itself as a hydrocarbon company, much in the tradition of ExxonMobil and Chevron. With the firm intension to see a sharp rise in its stock price which in the period January 2018-May 2023 was down 16%.
In its latest forecast Shell is predicting that 80% of its capital budget will be devoted to hydrocarbons and 20% to new energy. This is exactly the same range that Chevron and ExxonMobil maintain. New energy policies including CCS (Carbon Capture and Storage) and other new energy initiatives make up only between 15-20% of their capital budgets. In the case of Chevron some $3Billion per year based on a capital budget of $15-$17Billion; ExxonMobil’s new energy comes in at $3 billion per year based on a capex of $23- $25Billion.
Yet Chevron and ExxonMobil should not gloat. Chevron’s Tengiz Project in Kazakhstan represents one-third of the company’s reserves. If the war in Ukraine continues Putin could well leverage or block oil transportation that must go through the Caspian Pipeline Consortium which transports Caspian oil from Tengiz field to Novorossiysk-2 Marine Terminal, an export terminal at the Russian Black Sea port. The CPC pipeline handles almost all of Kazakhstan’s 1.3Million barrels per day (BPD).
Already on July 6, 2022, a Russian court ordered a 30-day suspension of the pipeline because of an oil spill. The CPC appealed the ruling and the suspension was lifted after a week. Instead, the company was fined 200,000 rubles ($300). Was this a precedent of things to come?
A final sour note for Chevron’s could be its Permian Basin assets, which represents one-third of its reserves. 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 IEEFA (Institute for Energy Economics and Financial Analysis) found the 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.
Tengiz and the Permian Basin represents approximately two-thirds of the company’s reserves. High risks and high rewards: Chevron’s share price up 20% between January 2018-May 2023 as long as it lasts!
ExxonMobil’s share price is also up 22% in this same period. Yet the company’s asset base is vulnerable and is more pre-occupied with court cases than the search for oil and gas. True its Guyana project continues to set new production records but court cases there could prove to undermine the long-term feasibility of this offshore basin.
Then there is the case of Rovuma LNG in Mozambique which is planned to have an eventual capacity of up to 18Million tons/yr. The project has stalled for security reasons…yet ENI in the meantime has shipped its first LNG cargo from its Coral-Sul FLNG, Mozambique, much to the embarrassment of both ExxonMobil and TotalEnergies. Eni’s pole position that the company has achieved with its Coral-Sul project will no doubt exact a price from both ExxonMobil and TotalEnergies. What effect will this have for the development of Rovuma LNG?
ENI’s dexterity will no doubt help buoy up the company. Aside from its Coral-Sul FLNG triumph the company’s development strategy will ensure its role at the energy transition table. A key ENI strategy is developing a series of joint-ventures to ensure that ENI can achieve maximum leverage for its current oil and gas assets and at the same pursuing new strategies as part of its energy transition plan. One example:
Azule Energy, Angola, a 50-50 joint venture between ENI and BP formed in 2022 to include both companies’upstream assets, LNG and solar business. Azule Energy is now Angola’s largest independent equity producer of oil and gas, holding 2 billion barrels equivalent of net resources and growing to about 250,000 barrels equivalent per day (boed) of equity oil and gas production over the next 5 years. It holds stakes in 16 licences (of which 6 are exploration blocks) and a participation in Angola LNG JV. The company also participates in the New Gas Consortium(NGC), the first non-associated gas project in the country.
BP key strategy in 2020 was to build a green investment structure, which would require only a few skilled accountants. The company has either sacked employees or delegated BP’s headcount to its joint ventures. The goal was to become lean and mean, reducing costs and, hopefully, increasing margins.
Oil production would decrease by 40% by 2030. Now BP has backtracked. Its capital budget for 2023 is in the range of $16-$18Billion; divided evenly between oil and gas and renewables.
BP has entered into a joint-venture with Equinor to become a non-operating partner in the Empire Wind and Beacon Wind assets off the USA’s 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.
Both BP and Equinor have insufficient budgets and economies of scale to be competitive with the Green Alliance. Therefore, do not be surprised if Equinor and BP fully merge their offshore wind assets in order to become a global offshore wind company. Guaranteed the green competition is following the outcome of this poker game.
Final Remarks
Big Oil’s transition politics is in various stages of denial:
ExxonMobil and Chevron continue, without abatement, to pump oil;
Shell, under its new leadership, has also wrapped itself in the mantel of hydrocarbons;
BP is still under the notion that it can pump oil and be green;
TOTALEnergies has given us a 2050 energy transition roadmap which will require much deciphering;
Eni is skirting around the energy perimeters in search of more energy bargains;
Equinor, unfortunately, will only remain Europe’s gas champion.
For New Energy— Enel, Engie, Iberdrola, and Ørsted— and the accompanying supply chain start-ups such as Battolyser, their story must still to be told. A story moving at an incredible speed which will have global ripple affects throughout the globe including Africa.
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 is a guest contributor to IEEFA(Institute for Energy Economics and Financial Analysis). His book ‘The 10 Commandments of the Energy Transition ‘is on sale at https://books.friesenpress.com/store/title/119734000211674846/Gerard-Kreeft-The-10-Commandments-of-the-Energy-Transition
