Category: Commentary

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Disrupting Agriculture: Energy Opportunities?

Disrupt Agriculture Energy Opportunities

Precision-engineered proteins are on the cusp of disrupting the meat industry, according to an exceptional, 75-page report, published recently by RethinkX. The science is rapidly improving, to create foods with vastly superior nutrition, superior taste and superior costs, by the early-2020s.

The energy opportunities are most exciting to us, after reading the report. If RethinkX’s scenarios play out, we estimate: direct CO2 savings of 400MTpa, enough to offset 10% of US oil demand; 2bcfd of upside to US gas demand; and enough land would be freed up to decarbonise all of US oil demand, or increase US biofuels production by 6x to c6Mbpd.

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RethinkX Re-Thinks Food and Agriculture

ReThinkX argues “we are on the cusp of the deepest, fastest, most consequential disruption in food and agricultural production since the first domestication of plants and animals ten thousand years ago”. The disruption is producing proteins via precision fermentation (PF), which programs microorganisms to produce complex organic molecules in a fermenter.

It is a classic “tech disruption”. Individual molecules are now being engineered by scientists and uploaded to databases. Constant iteration is improving the process. Hence as Impossible Foods’ CEO has said: “unlike the cow, we get better at making meat every single day”. Eventually this will result in a superior product at a far lower cost than today’s cow-based meat industry.

Precision engineered proteins “will be superior in every key attribute – more nutritious, healthier, better tasting, and more convenient, with almost unimaginable variety”. Every aspect can be optimised, in a way impossible with animal-based meat, to yield better taste, more nutrients, higher purity, yet less salt, fat and no need for antibiotics. You could even, in principle, replicate meat proteins from extinct animals, if you want to eat mammoth or giant moa burgers.

The cost of producing PF molecules is deflating: from $1M/kg in 2000 to $100/kg today, on course to hit $10/kg in 2025. The descent matches genome sequencing, which now takes a few days and costs c$1,000, compared with 13-years and $1bn in 2000; and it matches computing, which now costs $60 per teraflop, down from $50M per teraflop in 2000.

The cost of producing meat. Today, animal beef costs c$4.5/kg. PF beef costs $7/kg. RethinkX expects cost parity in 2021, $2/kg pricing in 2024 and $1/kg pricing in 2030. The same trend holds for milk, where just 3.3% of the content is protein, the rest water and sugar. PF production times are also likely to be 100x faster than rearing animals.

More recent context. The number of new US food products with added protein doubled from 2013 to 2017. Protein-enriched milk is becoming popular with baristas as it’s easier to froth.  Halo Top was the most popular new consumer product in 2017, an ice cream with 2x more protein than normal. Soylent’s breakfast-replacement costs $3.25 and has the equivalent of a grande latte’s caffeine, three eggs’ protein, 6 Oz tuna’s omega-3s and all 26 essential nutrients. $17bn has been invested in plant-based foods in 2013-18. Disrupting agriculture is already on the ascent.

The consequences. It is argued that “product after product that we extract from the cow will be replaced by superior, cheaper, modern alternatives, triggering a death spiral of increasing prices [for the cattle farming industry], decreasing demand, and reversing economies of scale”. RethinkX’s report explores potential savings of $100bn for families across the USA by 2030; and potential downside for the $1.25 trn per annum US livestock industry. We recommend the report. It is linked here.

Thunder Said Energy Re-Thinks Food and Agriculture Energy

PF energy economics are transformative. The rumen of cow is a 40-50 gallon reactor, with c4% feedstock efficiency, responsible for 70-120kg pa of methane emissions per year, which is in turn, a 23-36x more potent greenhouse gas than CO2. However, an industrial fermenter is a 50-10 thousand gallon reactor, with 40-80% feedstock efficiency and no methane emissions.

Implication 1. 400MTpa of Direct Decarbonisation. The US currently contains 93M cattle, which in turn account for 530MTpa of CO2-equivalent emissions, or c8% of total US greenhouse emissions. RethinkX sees cow numbers reducing 50% by 2030, as the US needs 70% fewer cow products (90% less dairy, 70% less ground beef, 30% less steak); rising to 80-90% by 2035. By 2035, the data imply 400MTpa of CO2-equivalents could be saved, which is equivalent to offsetting c2Mboed of oil consumption.

Implication 2. Incremental Gas Demand of 2bcfd? Although fermentation reactors are c10-20x more thermally efficient than cows, they will still require incremental energy. We believe natural gas is emerging as best placed to provide heating and electric energy for industrial processes. Modern foods in the US could require c2bcfed of incremental gas consumption, 2.5% upside on current US demand, and stoking our expectations for the long-run rise of gas.

Implication 3. Decarbonising US Oil? We recently analysed seven major themes, which could eliminate 45Mbpd of global oil demand by 2050 (note here). But even on this aggressive scenario, we foresee US oil demand at 16Mbpd in 2035 and 11Mbpd in 2050. How can we decarbonise this oil? One solution is provided by re-purposing the 835M of land acres currently associated with US livestock farming: 655M for grazing, and 180M to grow crops. 60% will be freed for other uses by 2035, equivalent to 485M acres, or the entire Louisiana Purchase of 1803. If all of this land could be repurposed to grow forests, at a yield of c5.4T CO2 sequestation per acre, then we estimate enough CO2 could be absorbed to decarbonise 14Mbpd of oil demand. It is unlikely that all of this land can be repurposed in practice, but CO2 offsets could nevertheless be very large.

Download the data: https://thundersaidenergy.com/2019/09/20/2050-oil-demand-opportunities-in-peak-oil/
Download the data: https://thundersaidenergy.com/2019/06/17/lost-in-the-forest/

Implication 4. 5Mbpd of incremental biofuels. Another possibility is that some of the liberated land could be diverted into producing biofuels: Let us assume 250M acres can be devoted to growing corn, at a yield of c120 bushels per acre, and 2.8 gallons of ethanol per bushel. Multiply through and the total ethanol production would be 80 bn gallons per annum, equivalent to c5Mbpd of oil: 5x larger than current US biofuels production. Here is a positive opportunity for the energy industry, including the companies with the leading biofuels technologies.

Implication 5. Venture Opportunies? Finally, we have noted leading Energy Majors’ diversification into new energy technologies in their recent venture investments (chart below). Natural partnerships may emerge in PF companies. Indeed, we already saw BP deploy $30M investing in Calysta in June-2019, an alternative protein producer, for the aquaculture industry. Companies in the space are numerous: Beyond Meat went public in 1Q19. Impossible Foods is private, but valued at $2bn, having sold 13M units since 2016, and Burger King is introducing an Impossible Whopper in 2019, initially costing $1 more than the conventional Whopper. In March 2019, Geltor announced HumaColl21, the first human collagen created for cosmetics. We will tabulate other companies in a future screen.

Download the data: https://thundersaidenergy.com/downloads/ventures-for-an-energy-transition/

References

Tubb, C. & Seba, T. (2019). Rethinking Food and Agriculture 2020-2030. RethinkX Sector Disruption Report. Full report linked here.

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We would be delighted to introduce clients of Thunder Said Energy to the reports’ authors, Catherine Tubb and Tony Seba. Please contact us if this is useful.

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Drone Attacks on Energy Assets?

Drone Attacks on Oil Supplies

Over 100 attacks on global energy assets made major news headlines in the past decade. The majority were small-scale, targeting pipelines in conflict-regions, because this was the infrastructure most accessible to aggressors. However, a new and devastating wave of drone technologies could place the world’s largest and most vulnerable facilities into the firing line, threatening multiple millions of barrels per day. This short note outlines the latest in drone technologies and why they concern us.

Historical attacks on energy assets

Supply disruptions have been a feature of oil markets over the past ten years. For example, in the chart below, we have counted 100 violent attacks on energy infrastructure from major news stories. However, the majority were small-scale and located in active conflict-zones. Most oil infrastructure has heretofore been safe.

Here are the numbers: 90% of the prior attacks in our sample were low impact, when we assessed their severity. c60% were concentrated on pipeline infrastructure, which is relatively easy to repair. 70% of the upstream attacks were on wells or small processing units. 80% were localised within active war-zones such as Libya, Nigeria, Iraq, Yemen and the Sudans, rather than in stable countries. These attacks were nevertheless numerous. They shuttered 1Mbpd of Nigerian output between 2006 and 2016, 1Mbpd of Libyan output in 2011 and c0.5Mbpd of output in Yemen and Syria.

The more dangerous and worrying attacks have been full-scale assaults on large industrial assets. The worst example, many will remember, was Al Qaeda’s January-2013 attack on Algeria’s 9bcm pa In Amenas gas facility. 39 hostages were killed, as well as 29 terrorists. In addition, it took until June-2016 to bring production back to full capacity. The impacts of such incidents are hard-felt and long-lasting. Another legacy is that security measures have been escalated in high-risk regions.

On 14th September 2019, another industry-changing attack took place, on Saudi Arabia’s Abqaiq and Khurais oilfields. 5.7Mbpd of oil production was curtailed, constituting the largest supply-disruption on record. Repairing the damage will cost hundreds of millions of dollars. The latest suggestion is that the damage was inflicted by 20 drones, plus additional cruise missiles, which may have been guided to their targets by the drones. Unfortunately, this attack raises the spectre of further incidents, owing to the rise of drone swarm technology.

Ten Characteristics of Drone Swarms

Drone swarms could emerge as the most devastating weapon of 21st century warfare, outflanking large, high-speed, high-cost military vehicles of the past (Hambling, 2015; chart below, data here). They pose much greater risk to high-value infrastructure than prior weaponry that was available to aggressors. To understand why, it is necessary to review ten properties of drone swarms.

(1) Easy to access. Most military equipment is not openly available for purchase on the internet or in consumer electronic stores. However, hundreds of models of drones are now available in the consumer sector. They can be modified and retro-fitted to inflict violence or damage. Similarly, in the military sphere, one expects large super-powers such as the US, Russia and China to develop leading military technologies, but advanced drones are also being developed in smaller countries such as Israel, Iran, Turkey, Korea. The technology is not always closely contained. In particular, Iran has been found to donate its Ababil drones and Quds missiles to allies such as the Houthis; and Islamic State was able to use drones to drop grenades in Northern Iraq in 2016-17.

(2) Easy to fund. These drones have price points in the thousands of dollars, rather than the millions, which makes them accessible to small groups of aggressors rather than just to nation-states. Out of 15 high-spec consumer drones that we reviewed recently, the median cost was $10,000 (chart below, data here). Half-a-dozen priced below $2,500. This not only makes them accessible, compared to cruise missiles costing $150k to $1.5M; but also expendable, compared to fighter jets costing $30-150M.

(3) Easy to launch. There is no need for runways, special hangers or refuelling facilities. Drones can launch from any terrain and travel tens or hundreds of miles. The fact that drones can be launched and travel to their targets brings a much wider array of assets into the firing line. This will include facilities deep within protected territory, such as Abqaiq and Khurais; or offshore assets, which have repeatedly been considered as targets by Nigerian militants, but have been protected by their offshore locations.

(4) Increasingly large swarms. In 2015, the largest drone swarms being flown numbered 30-50. However, China’s CETC flew drone swarms numbering 100-200 in 2018 (chart below). Israel is developing technologies where a single operator could fly an entire swarm of drones, in a single, controllable formation. This matters because the larger the swarm, the harder it is to neutralize. Using a swarm of 20 drones may be one reason why the latest attack on Saudi infrastructure succeeded, while dozens of prior attacks from 2017-18 were thwarted.

(5) Increasingly autonomous swarms. The most effective counter-measure against military drones in the past has been to “jam” the controllers used for steering them. This tactic was used, for example, against Islamic State, in Northern Iraq. But now, some of the leading commercial drones use neural network algorithms to auto-navigate. Thus they cannot be “jammed”. For example, the Skydio R1 uses a NVIDIA Jetson processor with 192 processing cores, which is less power hungry than prior chips. Qualcomm is also making ‘simultaneous location and mapping’ hardware the size of a credit card, allowing drones to navigate by sight alone.

(6) Potency. A large drone may carry a warhead or missile; smaller drones can carry grenades, IEDs or firearms and small drones may illuminate targets (e.g., with lasers) in order to direct larger incoming missiles. Any of these could do very significant damage to facilities that contain live hydrocarbons.

(7) Precision. Autonomous drones can attack very specific targets. This level of precision was seen in the recent Saudi attacks, where individual missiles hit each spheroid tank at Abqaiq, in almost the same identical location (US satellite images below). Another example in the civilian sector is being used at beaches in Australia, where ‘SharkSpotter’ deep learning software is used to identify sharks with 90% accuracy, compared with 30% for human operators. Training a drone to identify sharks versus dolphins is computationally similar to identifying vulnerable versus non-vulnerable processing units at energy infrastructure.

(8) Hard to predict. Because swarms of drones are created with standard electronics equipment, much of it available in the civilian sector, “manufacture [of drone swarms] would be relatively hard to spot—compared to the production of traditional military hardware such as manned aircraft, ships or ballistic missiles—as it would resemble any other consumer electronics assembly” (Hambling, 2018).

(9) Hard to stop. The challenge of stopping a large swarm of drones is that there may simply be too many units to neutralize, especially when they are moving quickly. Laser cannons may stop a few units. A battery of missiles may stop many more. However “shooting down a $1,000 drone with a $5,000 missile is not a winning strategy” (Hambling, 2015). Assuming similar budgets, the drone attackers may outnumber the missile defenders. Acknowledging this challenge, the US has budgeted $1.5bn over the next year, to investigate potential solutions. But outside the military, and back in the realm of energy assets, we doubt that any of today’s onshore or offshore processing facilities have the capacity to stop drone attacks.

(10). Hard to retaliate. Drone attacks are very different from prior cases where armed insurgents attacked oil infrastructure, risking their own lives in the melee. Drones are by their nature remotely operated. Furthermore, reading through the history of recent drone attacks (e.g., in Yemen and Syria), it has often been impossible even to identify the culprit. In some cases, their identity still remains disputed. Failure to pinpoint the perpetrator makes it difficult to strike back. In turn, this removes the usual deterrent to attacking an enemy.

Implications for Oil Markets and Companies

Our latest oil market forecasts point to 1-2Mbpd of over-supply each year in the 2020s, assuming steady demand growth of 1.3Mbpd per annum. However, these base case forecasts do not incorporate any impact of supply disruptions from further attacks, which could sway the balance, and cause significant price spikes.

For energy companies, we think it will be crucial to mitigate against the risk of drone strikes, to the best extent possible. This may include diversification, counter-measures, and a growing preference to operate in lower-risk countries. We would be very happy to introduce clients of Thunder Said Energy to our contacts in the military drone space, who may be able to provide further observations.

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References

Hambling, D. (2018). Change in the air: Disruptive Developments in Armed UAV Technology.

Hambling, D. (2015). Swarm Troopers. How Small Drones will Conquer the World.

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Do refineries become bio-refineries?

Refineries become bio-refineries

What will happen to oil refineries during the energy transition? On our numbers, liquid oil products will be needed past 2100, long after demand plateaus in the 2020s. Cleaner, more efficient technologies are therefore required in the downstream sector. This note considers whether refineries could increasingly be converted to bio-refineries.

Refineries become bio-refineries

Our evidence comes from the patent literature, as we have reviewed 3,000 patents from the leading 25 Energy Majors. 8% are focused on new energies (chart below, full details in our deep-dive note). Eni screens as the leader for converting refineries to bio-refineries, hence this note summarises its relevant patents on the topic.

Refineries become bio-refineries

Historical Context. Use of vegetable oils in diesel engines goes back to Rudolf Diesel, who, in 1900, ran an engine on peanut oil. Palm oil and peanut oil were both used as military diesel in Africa in WWII. However, vegetable fuels were abandoned due to high costs and inconsistent quality, compared with petroleum fuels.

Today’s vegetable oil fuel-blending components primarily contain Fatty Acid Methyl Esters (FAME). However, they cannot be blended beyond c7% without causing problems in auto engines. For example, FAME has a low energy content (38kJ/kg vs diesel at 45kJ/kg), a -5 – 15C cloud point, causes pollution in tanks, polymerises to form rubbers, causes fouling, dirties filters and contaminates lubricants.

Regulation is nevertheless stoking demand for more dio-diesel, going beyond the 7% threshold. Europe Directive 2009/28/C mandates 10% renewable material in diesel by 2020, up from 5% in 2014.

Eni is therefore converting refineries to bio-refineries, to upgrade renewable materials into “green diesel”. A 0.36MTpa facility started up at Porto Marghera, Venice in 2014. A larger, 0.7MTpa facility started at Gela in 2019. Both convert vegetable oils into diesel.

Patents indicate how they work. The starting point is a conventional oil refinery, with two sequential hydro-desulfurization units. For the conversion into a bio-refinery. these units are re-vamped into a hydrodeoxygenation reactor (HDO) and a subsequent hydro-isomerization reactor (ISO), shown in the schematic below.

  • HDO occurs in the presence of hydrogen, a sulfided hydrogenation catalyst from Group VIII or VIB metals, at 25-70 bar and 240-450C.

  • ISO occurs at 250-450C, 25-70bar and a Metal (Pt, Pd, Ni) Acid catalyst on an alumino-silica zeolite framework.

  • Upstream modifications. Pre-treatment processes, surge drums and heat-exchangers are installed upstream of each reactor.

  • Downstream modifications. The output products from the reactors will contain 1-5% H2S, which is removed in an acid gas treatment unit, and then a Claus unit for sulphur recovery; both reached via new connection lines.

Refineries become bio-refineries

The main advantage of this process is cost, which is said to be 80% lower than constructing a new facility. For example, the Porto Marghera project was budgeted at €200M. In its patents, Eni states: “This method is of particular interest within the current economic context which envisages a reduction in the demand for oil products and refinery margins”.

Further advantages are that the produced diesel has excellent properties, including a high octane index, optimum cold properties, high calorific value and a further by-product stream of commercial LPGs. Moreover, the efficiency of the converted facility is seen to be similar to one constructed anew.

The disadvantage is that blending of free fatty acids is limited to c20%. This is why the bio-refineries so far intake 80% palm oil (which contain <0.1% free fatty acids). Eni states: “The reactor used for effecting the HDO step, deriving, through the method of the present invention, from a pre-existing hydrodesulfurization unit, may not have a metallurgy suitable for guaranteeing its use in the presence of high concentrations of free fatty acids in the feedstock consisting of a mixture of vegetable oils. The reactors of the HDO/ISO units specifically constructed for this purpose, are in fact made of stainless steel (316 SS, 317 SS), to allow them to treat contents of free fatty acids of up to 20% by weight of the feedstock”. Processing a broader range of vegetable oils and other waste oils would require a more costly refinery re-vamp.

Further challenges are that the production of hydrogen and other industrial above will be energy intensive. Moreover, Eni’s 1MTpa of green diesel production capacity is only equivalent to c20kbpd of fuel. It will be challenging to source sufficient feedstocks to scale bio-refineries up to meet larger portions of the world’s overall fuel needs.

Our conclusion is therefore that bio-refineries have potential when re-purposing existing downstream facilities, preserving value in the very long-term future of the industry. However, further technological improvements are required before these facilities can scale up or deliver material, and truly decarbonised hydrocarbons. Out of Eni’s other refining patents, we are most positive on Eni Slurry Technology, which is a leading technology for IMO2020 (chart below). For details of other technology leaders in energy, please see our note, Patent Leaders.

Refineries become bio-refineries

Source: Rispoli, G., F. & Prati, C. (2018). Method for Re-Vamping a Conventional Mineral Oils Refinery to a Bio-Refinery. US Patent US2018079967.

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The Ascent of LNG?

LNG demand the bull case

Gas demand could treble by 2050, gaining traction not just as the world’s cleanest fossil fuel, but also the most economical. The ascent would be driven by technology. Hence this note outlines 200MTpa of potential upside to consensus LNG demand, via de-carbonised power and shipping fuels. LNG demand could thus compound at 8% pa to 800MTpa by 2030, justifying greater investment in unsanctioned LNG projects.

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Consensus LNG demand?

A simple model of global LNG demand is shown below (and downloadable here). It is created by extrapolating recent trends in key LNG-consuming regions. The total market grew at 5.7% pa in 2013-18. At a 5.4% forward CAGR, it would reach c570MTpa by 2030. These numbers are not far from other LNG forecasters’, and thus serve as a reasonable consensus.

What excites us is the potential for technology to accelerate LNG demand. Markets are slow to reflect technological breakthroughs. Hence these new demand sources likely do not feature in consensus forecasts yet. In our view, this makes them worthy of attention.

Upside from De-Carbonised Power Generation?

The first opportunity is in de-carbonised power generation, as we have discussed in our deep-dive report, ‘de-carbonising carbon‘. We think novel technologies are reaching maturity, which can generate cost-competitive electricity (chart below) alongside an exhaust stream of pure CO2, for use in industry or for immediate sequestration. The full details are in our report.

Let us now make some approximate calculations: The world consumes 7.7bn tons of coal per annum. In energy terms, this is equivalent to c165TCF of gas, or 3,300MTpa of LNG. We believe it would be economic, and achievable, to convert c5% of this coal power to gas by 2030. Converting it to decarbonised gas could save c1bn tons of CO2 emissions per annum. In turn, this could be achieved by 200GW of de-carbonised gas-power, in 500 x 400MW power plants, each burning c50mmcfd of input gas, fed by 165MTpa of LNG. This is the first area where technology can greatly accelerate LNG demand.

Upside in Shipping?

The second opportunity is in LNG as a shipping fuel, which will become increasingly economical after IMO 2020 sulphur regulations re-shape the marine sector. The economics are shown below and modelled here.

New technologies in small-scale LNG will accelerate adoption in smaller ports, moving beyond the large port-sizes required for bunkering. The technologies and economics are explored in detail, in our deep-dive note, LNG in Transport. The economics are modeled here. To assist, Shell is also pioneering new solutions for LNG in transport.

The upshot could be 40MTpa of incremental LNG demand in the maritime industry by 2030. This is the second area where technology can greatly accelerate LNG demand.

Less positive on trucking

Is there further upside? One might expect, in an overview of LNG technologies, to find incremental upside in road vehicles: either directly in LNG-fired trucks, in gas-fired vehicles, or to produce hydrogen for fuel-cells. None of these opportunities are yet captured in our models.

The reason is economics. Compared to diesel-powered trucks, we find compressed natural gas to be c10% more expensive, LNG to be 30% more expensive and hydrogen to be around 4x more expensive (model here, chart below). We also find hydrogen to be 85% costlier than gasoline, to powers cars in Europe (model here). In most cases, electrification is the better option, as superior vehicle concepts emerge.

Our numbers do not include any incremental LNG demand in the road-transportation sector. However, it is noteworthy that replacing 1Mbpd, or c2% of the world’s road fuels with LNG would consume an incremental 50MTpa of LNG. This could cushion delays or shortfalls in decarbonised gas-power.

Potential supplies can meet the challenge.

It is only possible for the world to consume 800MT of LNG in 2030 if it is also possible to supply 800MT. While our risked forecasts are for c600MT of LNG supply in 2030 (chart below), our numbers are including just c60% of the 230MTpa of LNG capacity that is currently in the design phase, and just 15% of the 180MTpa that is currently in the discussion phase. In a generous scenario, our forecasts rise close to the 800MTpa level that is required. Please download our risked, LNG supply model to see our scenarios, and the LNG projects included.

LNG technology could thus unlock incremental LNG facilities. We are most positive on low-cost, low-CO2 sources of gas, particularly in stable and low-tax countries. To help assess the potential, we have therefore compiled a data-file of the world’s great gas resources and their CO2 content, downloadable here. Our positive outlook on US LNG is further underpinned by our positive outlook on US shale.

Conclusions: path dependency?

The numbers above are not hard forecasts. We do not believe hard forecasts are possible in a market that is shaped by unpredictable geopolitics, technologies, weather and its own price-reflexivity. However, we have argued that new technologies may unlock materially more LNG demand than is currently embedded in consensus expectations. Leading companies with leading LNG projects may benefit.

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CO2-EOR in shale: the holy grail?

CO2-EOR in shale

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.

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Does Technology Drive Returns?

Technology return on capital

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.

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New Risers for pre-salt Brazil?

next-generation riser designs for pre-salt Brazil

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.

Pre-salt riser failures from CO2-corrosion

In 2017, Upstream Newspaper reported that Petrobras had suffered two riser failures, injecting high-CO2 gas back into the Lula and Sapinhoa reservoirs. The failures occurred after just 3-years, at risers designed to last for 25.

These failures were induced by stress-corrosion, which in turn derives from the high CO2 content in the pre-salt. For example, CO2 is reported at 8-12% at Lula.

As Petrobras moves to develop even higher-CO2 fields, such as Mero (Libra), where the gas is up to 30% CO2, it has also sought to minimise the use of flexible risers, to protect against corrosion.

New solutions… new challenges?

Improved riser solutions feature prominently in Petrobras’s 2018 patent filings, which we have reviewed. One patent localises the problem of stress-corrosion to the risers’ steel cladding, which is situated in the annulus between the riser’s barrier layer and outer sheath. The barrier layer can sometimes be breached by fluids moving through the riser.

Petrobras states:“Stress corrosion is caused by CO2 and not well-covered by international standards for flexible pipes...there is normally no way to displace gases from the annulus or minimise their corrosive effects”.

It is noted that Chevron, Schlumberger and GE have all patent solutions to detect the presence of corrosive fluids reaching the steel cladding of a riser. However, to mitigate this problem, comprehensively, in a flexible, deep-water riser with many segments, Petrobras has filed its own solution (chart below).

Inert fluids are envisaged to be swept through the annulus of the riser, removing any corrosive fluids that have accumulated. The fluid is forced through each independent segment of pipe. Leak tests can be performed to detect damaged sections.

Another argument for composites?

What strikes us about Petrobras’s solution is the added complexity. As pictured above, it will be necessary to maintain a flow of anti-corrosive fluids through each riser segment, via an additional series of injection pipes and return pipes. All of these must be fabricated, installed and maintained.

After weighing up the additional complexity of circulating anti-corrosive fluids through the cladding of flexible pipelines, we grow more positive on the relative simplicity of an alternative: themo-plastic composite risers (TCP).

These next-generation materials are corrosion-resistant, withstanding CO2 concentrations up to 50% and H2S up to 200ppm. They also deliver comparable strength to steel, at 10% of the weight, which simplifies their installation and lowers overall costs for a riser system by 45% (chart below).

For our data-file quantifying the progress-to-date and the costs of TCP, please see here.

Source: Carpigiani de Almeida, M., Cameiro Campello, G., Ribeiro, J., Mello Sobreira, R. G., Loureiro Junior, W. C. & Piza Paes, M. T. (2018). System and Method for Forced Circulation of Fluids Through the Annulus of a Flexible Pipe. Petrobras Patent 2018220361.

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De-Carbonising Cars. Can Oxy-Combustion Save Gasoline?

De-Carbonising Cars with oxy-combustion

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.

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Oxy-Combustion aims to obviate the challenging step of separating CO2 from exhaust gas by burning fuels in an atmosphere that has been purged of Nitrogen (e.g., pure oxygen and CO2). This means that the exhaust gas will comprise CO2 and H20 (i.e., no nitrogen). It can readily be de-hydrated and the CO2 can be sequestered.

(In thermodynamic terms, this requires using a mechanical cycle such as the Allam Cycle in lieu or the traditional Otto Cycle or Diesel Cycle).

This technology works. It is being trialled at three power facilities globally, to decarbonise heat and power. One very promising industry-leader is backed by Occidental. The opportunity of economically de-carbonising gas is extremely positive for global gas demand, as reflected in our own models (chart below, download here).

But could oxy-combustion be used to de-carbonise oil-fired transportation?

In our review of 3,000 patents around the industry, Saudi Aramco stands out as the company working hardest to reduce the emissions of oil-fired transportation. It published over a dozen novel vehicle designs last year (details available to ThunderSaid clients).

Almost all of its efforts aim to reduce the CO2 intensity of burning liquid fuels in auto-engines. Those using oxy-combustion go back to 2013. They have been filed in multiple geographies and updated repeatedly in 2019.

The rationale is to reduce emissions from mobile sources, which comprise 25% of global CO2 and to prevent the formation of NOXs by restricting Nitrogen from the engine. One patent states: “Since pure or nearly pure 02 is combusted with the fuel, the resulting combustion product will constitute principally C02 and H20. The water can readily be condensed and separated to provide a pure, or nearly pure CO2 stream for densification and storage.”

The challenge with oxy-combustion is to purify the oxygen prior to combustion. Aramco’s approach is to achieve this task using electro-ceramic membranes, as commercialised by Ceramatech of Salt Lake City, Utah and Air Products. Aramco has also patented its own membrane cell designs (image below).

The drawback is that these membranes require high temperatures (700-800F). But Aramco’s patent notes this need not be problematic in an internal combustion engine, where c60% of the energy in fuels is converted into heat in to the engine, at 600-650C.

Thus a schematic of the proposed oxy-combustion engine is shown below, including a specially-enlarged air intake, and a membrane to separate N2 from O2.

Can Oxy-Combustion Vehicles be Commercialised?

Challenges of deploying oxy-combustion in a mobile vehicle are not overlooked by the patents.

(1) Space and weight limitations are more acute in a small, mobile vehicle than they are in a fixed power facility. Hence “a major problem … is how to minimize the additional weight and space required by air separation components” in, say, a car.

(2) Storing CO2 on board the mobile vehicle will be necessary, until it can be discharged at a disposal facility. This requires compression energy, to pressure the CO2 to 5-1,600kg/m3. There may be limited storage space. A network of CO2 disposal sites would also need to be developed alongside fuel retail stations.

(3) System stability. The electro-ceramic cells used to separate N2 and O2 have “capacity to produce high-purity O2 over thousands of hours”. But it is not clear whether they will work under extreme temperature variations. The cells may also degrade over time, given the complex chemistry of the electro-ceramic cells: e.g., doped cerium oxide electrolyte, sintered lanthanum strontium cobalite electrodes covered with silver.

(4) System sufficiency. In some high-intensity conditions — hills, motorways — Aramco’s patents acknowledge it will still be necessary to introduce N2 to the engine, emitting NOXs and CO2.

(5) Competition with electric vehicles. Finally, the fundamental energy efficiency of combustion remains c20-30%, compared with 60-80% for electric vehicles (chart below, data here). Electric vehicles have an order-of-magnitude fewer parts, whereas oxy-combustion vehicles appear to have many more.

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We conclude there is strong potential to de-carbonise gas-fired power generation with next-generation combustion technologies. But de-carbonising oil-fired automobiles may be most readily accomplished by electrification, i.e., substituting in smaller, more-specialised electric alternatives.

Source: Hamad, E. Z. & Al-Sadat, W. I. (2013). Apparatus and Method for Oxy-Combustion of Fuels in Internal Combustion Engines. Saudi Aramco Patent WO2013142469A1.

Source 2: Ben-Mansour, H., Habib, M., Jamal, A. (2017). Gas-Assisted Liquid Fuel Oxygen Reactor. Saudi Aramco Patent US2017284661 

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Permian CO2-EOR: pushing the boundary?

Permian CO2-EOR

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 oil by 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.

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Robot delivery: Unbelievable fuel economy…

fuel economy of Robot delivery

Stand on a street corner in Tallinn, in the summer of 2019, and you might encounter the scene below: not one, but two autonomous delivery robots, comfortably passing one-another.

The fuel economy of these small electric machines is truly transformational, around 100x better than a typical motorcycle (the trusty workhorse of take-aways past), around 200x better than a typical car and around 400x better than a typical pick-up.

Large implications follow for energy supply and demand, if such delivery-robots take off…

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Starship is the company commercialising the robots above, backed by the co-founders of Skype, lightly aiming to “revolutionise food and package deliveries, offering people convenient new services that improve everyday life… instant delivery works around your schedule at much lower costs”.

Over 50,000 deliveries have been completed by April-2019, including trials in California, Tallinn, George Mason University, and Milton Keynes. Based on the chart below, we estimate the fleet is traversing c400km/day. In some locations, the costs are as low as c$2/delivery, with an ambition of reaching $1/delivery as the technology scales.

What does it mean for energy demand? Take a Ford F-150 which achieves 17mpg. You can achieve a 4x fuel-economy uplift by electrifying it. Another 2.5x uplift comes from lowering the mass to 30kg. Another c40x net uplift comes from decreasing the average speed of travel to 3-5kmph. These numbers can be calculated, approximately, from the physics, in our data-file of fuel economies by vehicle type.

Direct energy economics are calculated below, based on the battery disclosures for one of Starship’s robots. A single delivery robot is implied to achieve an unheard-of c200miles/kWh. Matching the maths above, this is indeed 100-400x better than alternative transportation technologies which we have profiled.

Creation or destruction? The numbers above augur poorly for long-run demand of liquid transportation fuels. In cost terms, it is very difficult to compete with these vehicles’ incredible efficiency. What is unclear is whether such delivery vehicles destroy old demand, or create new demand, per “Jevons Paradox” that more efficient energy technology has historically increased energy demand.

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Our conclusion is to have found further evidence that transportation technology is evolving. Forward thinking energy companies will be preparing for the change, as evidenced by their patents, their projects and their venturing.

Copyright: Thunder Said Energy, 2019-2024.