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8 December 2016

Remember to look up...

Remember to look up...

The following blog is my own personal view of the energy industry over the coming decades.

Anyone working in the oil industry over the last couple of years has witnessed a fight of epic proportions, on one side the mighty Saudi T-Rex and on the other the more nimble Velocifrackers have been slugging it out in an epic “winner takes all” battle over territory. Other dinosaurs who share the same plains are doing their best to hide out in the undergrowth and hoping that if they are patient and careful things will eventually return to the better days. For obvious reasons this fight has everyone’s attention after all the outcome may even be a matter of life and death for some of the dinosaurs so what could be more important………? Meanwhile hurtling out of the sky getting closer and closer is the renewables meteorite, and no-one is looking up.

Consider the following:

Solar costs have fallen 99% since 1976 and 90% since 2009 (Bloomberg)

  • Wind costs have fallen 50% since 2009 (Bloomberg)
  • In 2015 investors poured $161 Billion of capital into solar the largest amount for any single power source (McKinsey)
  • In 2015 $349 Billion was spent on clean energy investment (McKinsey)
  • In May 2016 the Masdar Consortium in Dubai signed a deal to supply 800MW of Electricity (from Solar) at $29.9/MWh (Bloomberg) in contrast Hinkley Point the new Nuclear reactor for the UK has a guaranteed strike price of $115.70 / MWh (BBC).
  • By 2040 35% to 47% of new cars will be fully Electric requiring 13 million less barrels of oil a day by 2040 (Bloomberg). An imbalance of around 2 million barrels caused the 2014 oil price crash.

Whatever your view of solar, wind and electric cars it is difficult not to admire the scale of their cost reductions, efficiency improvements and speed of their inroads into traditional hydrocarbon territory. Although at some point the cost reductions and efficiency improvements will begin to slow the overall trends are set to continue for some time yet and I would agree with several commentators who contend that we are at the cusp of a new era, a major energy transition is about to take place, disruption of the trillion dollar kind, “our meteorite”.

Ok so the world is about to change, what do those of us in the Oil and Gas business do. If like me you have also been standing on the side lines watching the big fight it is time to look up and see the real threat and take action. The good news is that this change isn’t about to happen overnight massive transitions take time. In 1904 there were 61,306 people employed making horse drawn wagons and carriages in the US but by 1921 the figure was 8,025 thanks to Henry Ford. The transition from horse to car took 15 to 20 years and our energy transition is likely to have a similar timescale. In fact there is a good chance of higher prices in the short term due to underinvestment in Oil and Gas due to the current crisis. There will also be bumps along the road to de-carbonising our energy supply for instance some of the choices made by the new administration in the US. However the underlying trends are unstoppable, economics will trump special interests and in the end low cost clean energy will overcome.

So given a 10 to 20 year horizon this makes it more important than ever for Oil and Gas companies to produce efficiently at the lowest cost possible to extract value from our investments as soon as we can. Oil and Gas contractors should begin to focus some energy and resource on new low carbon opportunities and find ways to add value. Essentially companies should begin conversations on how they will react to a Low Carbon World and plan for how they will transition perhaps a decade from now when world demand for oil peaks and then starts to fall, beyond that point “lower for longer” is likely to be “lower forever”.

But despite being an existential threat, huge disruptions creates massive opportunities for companies with enough foresight to grow and adapt and become major new players in the new world. Many of the new companies formed to build renewables infrastructure lack the project management and investment decision experience that are core skills to Oil and Gas companies and in the end the key to success is not how many solar technicians a company hires but comes down to leadership, organisation, drive, understanding risk and reward and return on investment. Some will win the day and others will lose, but I would contend that not doing anything remains the biggest risk of all.

So take a moment to look up and ask the billion dollar question, what should your company’s approach be to the coming renewables meteorite?....



Originally posted on Linkedin