Technology leadership is crucial in energy. It drives costs, returns and future resiliency. Hence, we have reviewed 3,000 recent patent filings, across the 25 largest energy companies, in order to quantify our “Top Ten” patent leaders in energy.
This 34-page note ranks the industry’s “Top 10 technology-leaders”: in upstream, offshore, deep-water, shale, LNG, gas-marketing, downstream, chemicals, digital and renewables.
For each topic, we profile the leading company, its edge and the proximity of the competition.
Companies covered by the analysis include Aramco, BP, Chevron, Conoco, Devon, Eni, EOG, Equinor, ExxonMobil, Occidental, Petrobras, Repsol, Shell, Suncor and TOTAL.
More information? Please do not hesitate to contact us, if you would like more information about accessing this document, or taking out a TSE subscription.
2019 has evoked resource fears in the shale industry. They are unfounded. Even as headline productivity weakened, underlying productivity continues improving at an exciting pace. These conclusions are substantiated by reviewing 350 technical papers, published by the shale industry in summer-2019. Major improvements are gathering momentum, in shale-EOR, machine learning techniques, digitalization and frac fluid chemistry.
What if there were a technology to sequester CO2, double shale productivity, earn 15-30% IRRs and it was on the cusp of commercialization? Promising momentum is building, at the nexus of decarbonised gas-power and Permian CO2-EOR…
First, this week, we finished reviewing 350 technical papers from the shale industry’s 2019 URTEC conference. The biggest YoY delta is that publications into EOR rose 2.3x. CO2-EOR is favored (chart below). Further insights from the technical literature will follow in a detailed publication, but importantly we do not see underlying productivity growth in shale to be slowing.
Second, we re-read Occidental Petroleum’s 2Q19 conference call. More vocally than ever before, Oxy hinted it could take the pure CO2 from decarbonised power plants and use it for Permian-EOR; with its equity interest in NetPower, 1.6M net Permian acres, and leading CO2-EOR technology. Quotes from the call are below:
On CO2-EOR: “We are investing in technologies that will not only lower our cost of CO2 for enhanced oil recovery in our Permian conventional reservoirs, but will also bring forward the application of CO2 enhanced oil recovery to shales across the Permian, D.J. and Powder River basins”
On decarbonised gas power: “What it does is, it takes natural gas combines that with oxygen and burns it together, and that’s what creates electricity and it creates that electricity at lower costs… one of our solutions is to put that in the Permian… for use in our enhanced oil recovery… It will utilize our gas that that if we sold it would make nearly as much”.
On the opportunity: “We are getting calls from all over the world, with people wanting our help to — figure out how to capture CO2 from industrial sources, and then what to do with it and oil reservoirs”.
Our extensive work on these themes includes two deep-dive reports linked above. Our underlying models can connect c10% IRRs on oxy-combustion gas plants (first chart below) with 15-30% IRRs at Permian CO2-EOR (second chart below). On these numbers, the overall NPV10 of an integrated system could surpass $10bn.
EOR remains one of the most exciting avenues to boost Permian production potential. So far, our shale forecasts assume little direct benefit (chart below). But an indirect benefit is implicit, as we assume 10% annualized productivity growth to 2025, which would underpin a very strong ramp-up (chart below). 2023-25 currently look well-supplied in our oil market model, due to falling decline rates, but this could be compounded by CO2-EOR.
We are more positive on the ascent of gas, stoked by increasing usage in decarbonised power. We see potential for gas demand to treble by 2050.
The super-giant Mero field in pre-salt Brazil is not like its predecessors. While prolific, it has a 2x higher gas cut, of which c45% is corrosive and environmentally unpalatable CO2. Hence, Petrobras, Shell, TOTAL and two Chinese Majors are pushing the boundaries of deepwater technology. Our new, 16-page note assess four innovation areas, which could unlock $2bn of NPV upside. But the distribution of outcomes remains broad. $4bn is at risk if the CO2-challenges are not overcome.
Page 2 provides background on pre-salt Brazil, especially the flagship Lula project, which a new super-giant, Mero, is trying to emulate.
Page 3-4 contrast Mero to Lula, based on data from flow-tests. Mero has a 2x higher gas-cut and c8x higher CO2.
Page 5 reviews Petrobras’s own internal concerns over CO2-handling at Mero, and how they are expected to sway the decline rates at the field.
Page 6 outlines our valuation of the Mero oilfield, testing different CO2-handling scenarios. Our full model is also available.
Pages 7-8 review Mero’s FPSO design adaptations, to handle the field’s higher gas and CO2. These will be 2-2.5x larger FPSOs than Lula, by tonnage.
Pages 8-10 illustrate pipeline bottlenecks facing pre-salt Brazil. After considering alternative options (re-injection, LNG), we argue more pipelines may be needed.
Pages 10-12 describe riser innovations, which may help handle the risks of CO2-corrosion at Mero. One option is overly complex. The other is more promising.
Pages 12-16 cover the holy grail for Mero’s CO2, which is subsea CO2 separation. This would be a major industry advance, and unlock further billion-barrel resource opportunities. Upcoming hurdles and challenges are assessed.
Pages 15-16, in particular, cover Shell’s industry-leading deepwater technology, which may be helpful in maximising value from the resource, longer-term.
Technology drives 30-60% of energy companies’ return on capital. This is our conclusion after correlating 10 energy companies’ ROACEs against 3,000 patent filings. Above average technologies are necessary to generate above-average returns.
For the first time, we have been able to test the relationship between oil companies’ technical abilities and their Returns on Average Capital Employed (ROACE).
In the past, technical capabilities have been difficult to quantify, hence this crucial dimension has been overlooked by economic analysis in the energy sector.
Our new methodology stems from our database of 3,043 patents, filed by the Top 25 leading energy companies in 2018. The data cover upstream, downstream, chemicals and new energy technologies (chart below) . All the patents are further summarised, “scored” and classed across 40 sub-categories.
The methodology is to correlate our patent-scores for each company with the ROACE generated by the company in 2018. We ran these correlations at both the corporate level and the segment level…
Results: patent filings predict returns
Patent filings predict corporate returns. In 2018, the average of the Top 10 Integrated Oil Majors generated a Return on Average Capital Employed (ROACE) of 11%, based on our adjusted, apples-to-apples calculation methodology. These returns are 54% correlated with the number of patents filed by each Major (chart below).
Technology leaders are implied to earn c5% higher corporate returns than those deploying industry-average technologies, which is a factor of 2x.
Upstream patent filings also predict upstream returns, with an 85% correlation coefficient. The data are skewed by one Middle East NOC, which earns exceptionally high returns on capital, but even excluding this datapoint, the correlation coefficient is 65% (chart below).
The curve is relatively flat, with the exception of two outliers, implying that it is hardest to improve general upstream returns using technology. This may be because upstream portfolios are vast, spanning many different asset-types and geographies.
Downstream patent filings predict downstream returns, with an 80% correlation coefficient (chart below). However, our sample size is smaller, as we were unable to dis-aggregate downstream ROACE for all the Majors.
The curve is very steep, indicating that downstream technology leaders can surpass c20% returns on capital, versus c10% using industry-standard technologies.
Chemical patent filings predict chemical returns, with a 57% correlation coefficient (chart below). Again, our sample size is smaller, as we could only estimate chemicals ROACEs for some of the Majors.
The curve is also steep, with technology leaders earning c10-20% returns, versus low single digit returns for less differentiated players.
Overall, the results should matter for investors in the energy sector, for capital allocation within corporates, and for weighing up the benefits of in-house R&D. We would be delighted to discuss the underlying data with you in more detail.
Petrobras has patented next-generation riser designs, to handle sour-service crude from pre-salt Brazil. This is needed after prior cases of riser-failure, e.g., at Lula. Its new solution could also support development of higher-CO2 fields, such as Libra. But complexity is an order of magnitude higher. A simpler alternative is the growing potential from thermo-plastic composite pipe, which resists corrosion and is 45% more economical than conventional risers.
We are positive on the opportunity to de-carbonise gas-fired power generation using next-generation combustion technologies, such as oxy-combustion, which is reviewed in our deep-dive note, ‘Decarbonising Carbon‘. Could the same technology be used in automobiles? It is more difficult. But the world’s largest oil company is nevertheless trying.
Equinor is deploying three world-class technologies to mitigate Johan Sverdrup’s decline rates, based on reviewing c115 of the company’s patents and dozens of technical papers. Our new 15-page note outlines how its efforts may unlock an incremental $3-5bn of value from the field, as production surprises to the upside.
Pages 2-3 provide the context of the Johan Sverdrup field, its implied decline rates and how their variability will determine the field’s ultimate value.
Page 4 re-caps the concept of decline rates and how they should be measured.
Pages 5-7 recount the history of Digital Twin technologies, the cutting edge of their application offshore Norway and evidence for Equinor’s edge, as it deploys the technology at Sverdrup.
Pages 8-11 illustrate the upside in Permanent Reservoir Monitoring, comparing Equinor’s plans versus prior achievements deploying the technology off Norway.
Page 12-14 show the cutting-edge technology that excites us most: combining two areas where Equinor has established a leading edge. This opportunity can improve well-level production rates by c1.5x.
Page 15 ends by touching upon other technologies that will be applied at Sverdrup, quantifying Equinor’s offshore patent filings versus other listed Majors’.
E-scooters can transform urban mobility, eliminating 2Mbpd of oil demand by 2030, competing amidst the ascent of “electric vehicles” and re-shaping urban economies. These implications follow from e-scooters having 25-50x higher energy efficiencies, higher convenience and c50% lower costs than gasoline vehicles, over short 1-2 mile journeys. Our 12-page note explores the consequences.
Page 2 charts the meteoric ascent of e-scooters. In their first year of deployment, they matched the peak growth rate of taxi-apps (e.g., Uber) and overtook ride-sharing bicycles which have been under commercialisation for quarter-of-a-century.
Page 3 assesses the leading companies, all of which launched in late-2017 or early-2018, and have since raised $1.5bn.
Pages 4-5 compares the energy-economics of electric scooters with fourteen other vehicle concepts, explaining the physics of e-scooters’ 25-50x higher efficiencies.
Page 6 compares the relative benefits of e-scooters versus electric cars, which are clearest when comparing the relative strain on grid infrastructure.
Pages 7-8 show how e-scooters displace oil demand, outlining our projections for 2Mbpd of demand destruction globally by 2030. This oil demand is not “replaced” by electricity demand. c95-98% of it is simply eliminated.
Pages 9-11 model the per-mile costs of e-scooters, as a function of multiple input variables, showing the most competitive contexts relative to cars and taxis.
Page 12 ends by exploring potential consequences for urban economies. Most of all, we expect economic growth to be supported, particularly for retail; conversely e-mobility may embolden policymakers to ban gasoline vehicles from cities.
We see enormous opportunity from CO2-EOR in the Permian. It can double well productivity, generate 15-20% IRRs (at $50 oil) and uplift production potential from the basin by 2.5Mbpd. The mechanism and economics are covered in detail in our deep-dive note, Shale-EOR, Container Class.
But what is happening at the leading edge, as companies try to seize the opportunity?
To deploy CO2-EOR, operators must be confident in the technology. It must be predictable, with well-calibrated models informed by field-tests and laboratory studies.
Excitingly, Occidental Petroleum is developing such models. Its laboratory analysis into CO2-EOR has been published in a new SPE paper, in partnership with CoreLabs.
Oxy is at the forefront of CO2-EOR, according to our screening of patents and technical papers. It has conducted 4 x field trials, with further ambitions to lower decline rates from 2020 and drive value through its Anadarko acquisition.
This note profiles our top five findings from Oxy’s recent technical paper. CO2-EOR’s deployment is supported.
(1) CO2 was found to be “the best solvent” for huff’n’puff in the Permian, after laboratory-testing Wolfcamp cores, with CO2, methane and field gas. Under simulated reservoir conditions, around 3,600psi, bubbles of CO2 immediately began dissolving into the oil, helping to mobilise it.
(2) CO2 swelled the oilby 15-76% under the reservoir conditions tested in the study (below, right). Swollen oil is more likely to dissociate from the reservoir rock and flow into the well.
(3) Accurate ‘Equation of State’ models have been developed, matching the pressure, viscosity and well data from the laboratory study.
(4) Multiple Cycles. Huff’n’puff works by sequentially ‘huffing’ gas into a depleted shale well to entrain residual oil, then ‘puffing’ back the mixture of gas and oil. Ideally, this cycle can be repeated multiple times, recovering more oil each time (illustration below). Oxy’s laboratory study continued recovering material volumes of oil over six cycles. Lighter fractions were recovered in earlier cycles, followed by heavier fractions in later cycles. The authors concluded: “The multi-cycle incremental recovery – even at the small core plug scale – suggests the significant potential for multiple HnP EOR cycles for a future unconventional EOR project design”.
(5) Huge Recovery Factors. What slowed the eventual recovery of oil in the study was the high volume of oil already recovered. Initially, these shale samples contained 10.3% oil (as a percentage of the initial pore volume). By the end of the huff’n’puff trial, they contained just 2.4%, implying c77% of the oil had been drained: an incredibly high number, when compared with c 8-10% recovery factors in most analyst models. The result matches other lab tests we have seen in the technical literature (chart below). The field-scale implications of these studies are discussed in our deep-dive research.
Source: Liu, S., Sahni, V., Tan, J., Beckett, D. & Vo, T. (2019). Laboratory Investigation of EOR Techniques for Organic Rich Shales in the Permian Basin. SPE.