Shell is revolutionizing LNG project design, based on reviewing 40 of the company’s gas-focused patents from 2019. The innovations can lower LNG facilities’ capex by 70% and opex by 50%; conferring a $4bn NPV and 4% IRR advantage over industry standard greenfields. Smaller-scale LNG, modular LNG and highly digitized facilities are particularly abetted. This 16-page note reviews Shell’s operational improvements, revolutionary greenfield concepts, and their economic consequences.
Pages 2-3 outline Shell’s rationale for radtically re-thinking LNG project designs, and how we have assessed its progress, across c300 patents from 2019.
Pages 4-6 outline operational improvements, described in Shell’s patents, which can reduce opex by up to 50% and uplift IRRs by c3%.
Pages 7-13 outline novel LNG plant designs, based on Shell’s patents: including advanced materials, alternatives to cryogenics (which can abet small-scale LNG) and next-generation modularization. Thether these can cut capex by c70%.
Pages 14-16 outline the economic opportunities, describing how Shell’s patented innovations affect our project NAVs at LNG Canada and the US’s Lake Charles.
Investors may suffer if they do not consider the energy transition. But they may suffer more if they consider it, and get the answer wrong. We argue that the best way to drive the energy transition will be to maximise carbon-adjusted investment returns.
Our starting point is the chart below, which focuses on the power of compound interest, “the most powerful force in the universe” (the quote has been ascribed to Albert Einstein). This is not our usual tack — which focuses upon energy technologies, economics or quantifying CO2 — but purely mathematics…
The difference is enormous between compounding at, say, 4% and 12%. It may not sound material in any given year (“it’s just 8%”). But over a thirty year investment horizon, it makes the difference between a $100 initial investment rising to c$300 and $3,000 of value (i.e., a factor of 10x).
How this applies to the energy transition is that we currently observe institutional investors backing away from high-return (10-20% per year), industrial asset classes, which are feared to be high-carbon, towards low-returning asset classes (4-6% per year), which are perceived to be low-carbon.
For oil companies, the spread of opportunites is charted below (note here). Measured over any single year the difference may be imperceptible. But over 30-years it is vast.
By down-shifting from high-return assets to low-return assets, the costs of mitigating climate change end up falling upon the shoulders of institutional investors: endowments, foundations, hopeful retirees; as a hidden cost.
It is not for us to say whether this kind of hidden cost is morally right or wrong. But we can say that it is sub-optimal, in economic terms, because unlike a visible cost (e.g., a direct “carbon price”), it will not change behaviours in ways that actually drive decarbonisation.
No “incremental” energy transition occurs when investors divest from traditonal industrial sectors; and instead, outbid each other to finance the same renewable energy projects. A better alternative is needed.
Investment firms understand the challenge. This week, Blackrock’s CEO, Larry Fink, published a letter to CEOs, stating how climate change will “fundamentally re-shape finance”. What is not being reshaped, of course, is the maths of compound returns. Mr Fink’s letter begins by highlighting “we have a deep responsibility to institutions and individuals … to promote long-term value”. So how can this happen?
Three better alternatives for investors in the energy transition
In order to drive incremental energy transition, it is necessary to attract incremental capital. It must flow towards high-returning technologies and projects, which can drive decarbonization. This is our central tenet on investing for an energy transition. And it underpins the opportunities that excite us most in 2020 (chart below), which should all seek double-digit returns. Seen this way, climate change is not a cost to be passed on to investors, but a positive investment opportunity, to help meet a societal need.
A second alternative is to allocate more capital to companies that offer attractive returns and also have lower carbon contributions than their peers: such as lower-CO2 oil and gas producers, shale producers, refiners, midstream or chemicals companies. On any decarbonized energy model that we can construct, demand for gas will rise and demand for low carbon oil will not collapse. We have reams of data to help you with this screening. Often it is due to superior technologies.
A third alternative could be to offset CO2directly, as you continue investing in high-returning, industrial companies. This still leaves investors paying for the cost of climate change out of their future returns. But the cost is much lower than if investment returns are sacrificed by divesting from industrial companies and funding renewables.
For example, we recently tabulated the costs of carbon credits, being offered by 15 separate offset schemes. Based on the data, we calculate that an investor could buy a SuperMajor oil company with an average distribution yield of 7%; offset their investment’s entire Scope 1&2 emissions for a drag of just 0.5pp; leaving their “zero carbon cash yield” at 6.5%. (It will be interesting which forward-thinking Super-Major is first to apply this logic and offer up such a “carbon-offset share class”).
The end point is that high carbon companies will see higher capital costs (and our survey work indicates this is already occurring, chart below). But how much higher? In an efficient carbon market, there is an easy answer: high enough so that the extra yield of Investment X (vs Investment Y) can be re-invested in carbon credits to offset the extra CO2 of Investment X (vs Investment Y).
These ‘carbon adjusted returns’ are directly comparable. The higher carbon- and risk- adjusted return equates to the better investment. The higher the carbon price, the higher the relative cost of capital for high-carbon companies; and the higher the relative incentive to lower emissions.
This system, we believe, will be much more sophisticated and effective in driving a full-scale energy transition that the blunt-force strategy of “divest from oil and buy renewables”. It will also not leave investors short-changed, by up to 90%, when they come to meet their budgeting or retirement needs in 2050.
Please do contact us if you have any observations, questions or comments; or would like to discuss some of the “long-term value” opportunities, which we think can help drive the energy transition…
Last year, we appeared on RealVision, advocating economic opportunities that can decarbonize the energy system. The “comments” and reactions to the video surprised us, suggesting the topic of energy transition is much more polarized than we had previously thought. It suggests that delivering an energy transition will need to be driven by economics, whereas polarized politics are historically dangerous.
The fist 50 comments from our RealVision interview are tabulated below. 17 were positive and enthusiastic (thank you for the kind words).
But a very surprising number, 16 of the comments, attacked the science of climate change. It is perhaps not a fully fair represenation, as those with extreme views are more likely to post comments in online forums. But 30% dissent is still surprisingly high. Read some of these comments, and it’s clear that fervent opinions are being expressed. Even moreso on our youtube link.
6 of the comments also challenged the politics behind energy transition, expressing concerns that some politicians are evoking fears over climate change in order to justify policies that are self-serving and only tangentially related to the issue.
These attacks are from an unusual direction. Living in New Haven, CT, we are more used to being criticised for seeing a continued, strong role for lower-carbon and carbon-offset fossil fuels in the decarbonised energy system (chart below).
Indeed, another sub-section of the comments argued that our views did not go far enough. 6 of the comments called for a greater emphasis on nuclear or hydrogen and continued vilification of traditional energy companies. Our economic analysis suggests economics will be challenging for hydrogen, while nuclear breakthroughs are not yet technically ready. But one commentator, for example, dismissed this analysis and said our views must be “ideologically driven”.
Mutual animosity was also clear in the comments section of the RealVision video. One comment reads “you are completely delusional..sorry that you got fed the wrong info by these fraudsters in suits and their little girl puppet. You’ll wake up to reality one day.” Another reads “let our kids and future generations figure it out like we had to from our forefathers!”. At last year’s Harvard-Yale football game, the protesters met any such criticism from the crowd with a chant of “OK boomer”.
Deadlock? Others in the comments section tried debating the climate science. One statement was criticised as a “typical ‘we know better’ argument”. Another commenter opined that all peer-reviewed scientific literature is “fraudulent”. The most sensible comment in the mix noted “very little space left between ‘Greta Evangelists’ and equally fanatical ‘haters'”. This appears right. It is a polarized, poisonous, deadlocked debate.
Historical parallels? Over the christmas break, I enjoyed reading James McPherson’s ‘Battle Cry of Freedom’, which described the gradual polarization of ante-bellum America, in the 25-years running up to the US Civil War. One cannot help seeing terrifying similarities. Animosity begat animosity. Eventually the whole country was divided by an ideology: abolitionists in slave-free states versus the unrepentant slave economies.
Ideological divides are also deepening in the energy space. 40% of world GDP has now declared itself on a path to zero carbon. What animosities will emerge between these carbon-free states and the unrepentant carbon economies?
Economic opportunitiesin energy technologies remain the best way we can see to deliver an energy transition without stoking dangerous animoisities. They will remain the central theme in our research in 2020, and we are aiming to stay out of the politics(!). Our RealVision video is linked here.
EOG patented a new digital technology in 2019: a load assembly which can be built into its rod pumps: to raise efficiency, lower costs and lower energy consumption. This 8-page note reviews the patent, illustrating how EOG is working to further digitize its processes, maximise productivity and minimise CO2 intensity.
Satellite-based analysis is gaining momentum, and features in three of our recent research reports. A step-change in resolution is helping to mitigate methane leaks and scale up low-carbon gas. It is possible to track Permian completion activity from space. We also suspect renewable growth may slow, as small-scale solar brings heartland markets closer to saturation. Satellite images should continue finding its way into commercial research, as data improves and costs deflate.
The Spy Who Loved Methane
If 3.5% of natural gas is “leaked” as it is commercialised, then it is debatable that natural gas may be a ‘dirtier’ fuel than coal, because methane causes 25-120x more radiative forcing than CO2. Hence it is crucial for the scale up of natural gas – and for the energy transition – that methane leaks are mitigated. Our recent note, ‘Catch Methane if you Can‘ outlined five breakthrough technologies to help, based on screening 34 companies and 150 patents (chart below).
Satellites were among the breakthrough technologies, with the capability to find methane leaks from space. This matters as c5% of super-emitting leaks comprise c50% of leaked methane volumes. But pinpointing these leaks – and who is reponsible for them – has not previously been possible. The current satellites in orbit have had spatial resolutions of 50-100 sq km and detection thresholds of 4-7Tons/hour. By 2022, this will improve to <1sq km spatial resolutions and c100kg/hour. Full details are contained in the note and data-file.
Tracking Shale Completions from Space?
Another debate in 2020 is whether the shale industry is slowing down, in activity terms, in productivity terms, or whether it is staring to re-accelerate. Based on reviewing 650 recent technical papers, we know the best companies are continuing to improve underlying productivity; while they can also re-attract capital and growth by touting low carbon credentials, with some ever potentially becoming “carbon neutral” .
Satellite imagery shows how the industry is consolidating. Below, using data from Terrabotics, we can count the number of completions in the Permian, by operator and by county, in 3Q19. The ‘Top 10’ companies now comprise half of all completion activity. For an introduction to Terrabotics, and their data, please contact us.
Renewables slow-down: Could it be soooner?
Another theme for 2020 is whether renewables growth will slow down, as heartland markets reach grid saturation. This was the precedent when Spain and Portugal reached 25% penetration of renewables in their grids. The UK, Germany and California could follow suit this year, as explored in detail here.
What is not quantified in our data-set of large-scale utility plants is small scale renewable penetration, such as rooftop solar. However, satellite are also starting to unearth these smaller-scale systems, finding them to be more extensive than expected. For example, Stanford’s “Deep Solar” project, has used machine learning to identify over 1.5M solar installations from 1bn satellite images. 5% of houses in California are found to have rooftop solar systems, suggesting renewables are even closer to their threshold.
How do you use satellites in your process?
We are incorporating satellite imagery into more of our research, as evidenced by the three examples above. We write about technologies in the energy space, but these technologies are also changing the commercial research space. We would be very interested to hear from you, if you have observations on the topic, or would like to discuss useful data sources.
Energy transition is maturing as an investment theme. ‘Obvious’ portfolio tilts are beginning to look over-crowded. Non-obvious ones are over-looked. This 26-page note outlines the ‘top ten’ themes that excite us most in 2020, among commodities, drivers of the energy transition, market perceptions and corporate strategies.
Theme #1 is that investors are seeking non-obvious ways to drive the energy transition, as obvious opportunities start to look over-concentrated.
Theme #2 presents an example of an ‘obvious’ renewable energy theme, which is on the cusp of slowing down.
Theme #3 outlines the maturation of the ESG movement, as new sectors and new opportunities come into its purview.
Theme #4 explains how leading oil companies are likely to present their low carbon credentials in order to re-attract capital and potentially re-rate.
Theme #5 is our outlook for the US shale industry in 2020, following on from Themes 2-4.
Theme #6 is our outlook for the downstream industry as IMO 2020 finally arrives, with a focus on second-order consequences and opportunities.
Theme #7 finds a new up-cycle beginning to form in the global gas industry (LNG), a theme that increasingly excites us, to drive the energy transition.
Theme #8 is our oil outlook, where we expect markets may be re-shaped (perhaps even surprised) by the shedding of “unwanted” and high-carbon barrels.
Theme #9 outlines which companies we expect to lead the industry with growth and acqusitions.
Theme #10 argues the case for new, technology-focused investments.
Scaling up natural gas is among the largest decarbonisation opportunities on the planet. But this requires minimising methane leaks. Exciting new technologies are emerging. This 23-page note ranks producers, positions for new policies and advocates developing more LNG. To seize the opportunity, we also identify 23 early-stage companies and 10 public companies in methane mitigation. Global gas demand should treble by 2050 and will not be derailed by methane leaks.
Pages 2-4 explain why methane matters for climate and for the scale up of natural gas. If 3.5% of methane is leaked, then natural gas is, debatably, no greener than coal.
Pages 5-8 quantify methane emissions and leaks across the global gas industry, including a granular breakdown of the US supply-chain, based on asset-by-asset data.
Page 9-10 outlines the incumbent methods for mitigating methane, plus our screen of 34 companies which have filed 150 recent patents for improved technologies.
Pages 11-13 cover the best new developments in drones and robotics for detecting methane emissions at small scale, including three particularly exciting companies.
Pages 14-15 outline next generation satellite technologies, which will provide a step-change in pinpointing global methane leaks and repairing them more quickly.
Pages 16-20 covers the changes underway in the oilfield supply chain, to prevent fugitive methane emissions, highlighting interesting companies and innovations.
Page 20-21 screens methane emissions across the different Energy Majors, and resultant CO2-intensities for different gas plays.
Pages 22-23 advocate new LNG developments, particularly small-scale LNG, which may provide an effective, market-based framework to mitigate most methane.
The growth of renewables has been revolutionary, with wind and solar emerging towards the bottom of the global cost curve, scaling up at a pace of 270TWH pa. However, we find unsettling evidence that the market could slow by c15% from 2020, plateauing in heartland geographies such as California, Germany and the UK. The rationale, and all the underlying data, are included in this 6-page PDF research report and associated Excel file.
Shale growth has been slowing due to fears over the energy transition, as Permian upstream CO2 emissions reached a new high in 2019. We have disaggregated the CO2 across 14 causes. It could be eliminated by improved technologies and operations, making Permian production carbon neutral: uplifting NPVs by c$4-7/boe, re-attracting a vast wave of capital and growth. This 26-page note identifies the best opportunities.
Pages 2-5 show how fears over the energy transition have slowed down shale growth in 2019.
Pages 6-10 disaggregate the CO2 intensity of the Permian, by source and by operator, based on over a dozen models we have constructed.
Pages 11-15 argue why increased LNG development is the single greatest operational opportunity to reduce Permian CO2 intensity.
Pages 16-18 summarise advances in methane mitigation technologies and their impacts.
Pages 19-23 outline and quantify the best opportunities to lower CO2 from digital initiatives, renewables, lifting and logistics.
Pages 24-25 quantifies the sequestration potential from CO2-EOR, which could offset the remaining CO2 left after all the other initiatives above.
Our conclusion is to identify three top initiatives that companies and investors should favor. Industry leading companies are also suggested based on the patents and technical literature we have reviewed.
This short note outlines our top conclusions about the energy consumption of the internet, which now comprises c2% of global electricity and 0.7% of global CO2. In the next decade, remarkably, the CO2 footprint of powering the internet could surpass that of producing oil or gas.