For large-scale capital projects in a commodity industry, harnessing better technologies tends to unlock better returns. Hence in this 7-page note we evaluate ExxonMobil greenfield LNG plant construction technology, particularly in remote geographies.
Its technical leadership is clear in our analysis of 3,000 patents across the industry. This matters as Exxon progresses new LNG investments in Mozambique, PNG and the US.
Opportunities should arisefor investors in Exxon’s LNG projects, and for its partners, resource-owners and other stakeholders to maximise value.
In 2019, Shell pledged $300M of new investment into forestry. TOTAL, BP and Eni are also pursuing similar schemes. But can they move the needle for CO2? In order to answer this question, we have tabulated our ‘top five’ facts about forestry. We think Oil Majors may drive the energy transition most effectively via developing better energy technologies in their portfolios.
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(1). Forests should sequester 5T of CO2 per acre per annum, which is the average figure in half-a-dozen technical papers that we reviewed. However, the rates in these studies vary from 1-25 Tons per acre per annum, depending upon the species, the latitude and the rate of harvesting. Forests grow fastest in their early stages, and so paradoxically, to maximise CO2 sequestration, it may be necessary to cut them down periodically (and then re-plant).
(2). The world emits 1T of CO2 per acre per annum, which means that for forestry to absorb all of the world’s CO2 emissions, an incremental 20% of the world’s land mass must be given over to planting new forests. An extremely high number. Global carbon emissions run at 34bn tons per annum, while the world’s total land area is 37bn acres (c150M sq km).
(3). It matters where you plant. The chart above also shows a problematic skew in the world’s carbon emissions. If developed Asian countries (Japan, Korea, Singapore) wanted to offset all of their emissions by planing forests, they would need to access land areas that are c3.5x larger than their entire territories. Likewise, India and China would need to access areas equivalent to 60-80% of their own borders. To move the needle, large new forests would need to be planted in the countries on the right hand side of the chart. For the full data series, please download our data-file.
There are select opportunities in the mix, which Oil Majors can pursue. Perhaps the largest come from irrigating and afforesting desert areas. Not only are these areas large, but forests in hot areas have a tendency to grow more quickly and release more moisture, which in turn seeds clouds, which in turn reflects more sunlight and cools the planet.
(4). Environmental question marks? Forests clearly sequester CO2, but the precise climate science is surprisingly complex. Leaves absorb more sunlight than other types of land cover, increasing albedo, and warming the planet mildly. Trees can also release compounds called isoprenes, which reacts with nitrogen oxides in the air to form ozone (a greenhouse gas), while lengthening the lifespan of atmospheric methane (another greenhouse gas). Similarly, trees in tropical forests can seem to act as a conduit for soil to convey methane into the atmosphere. This deepens the need for “the right kind” of forestry investment, based on science.
(5). Capital may be better spent elsewhere? Most of the estimates we have encountered point to $20-100/ton of costs for sequestering CO2 using forests. This is competitive with other current forms of CCS (chart below, data here). However, we are also researching next-generation carbon capture technologies, which are much more competitive, below $20/ton.
To illustrate the same point another way, photosynthesis’s energy efficiency is around 0.5-1%, compared to today’s solar cells at c17% and next-generation perovskites reaching c35% (chart below). So ramping up next-genration solar could yield greater decarbonisation per unit of land area.
While we think Majors have a deep role to play in driving the energy transition, it will most likely be though game-changing technologies, which also unlock multi-billion dollar economic opportunities, per our recent note here.
References
Caldecott, B., Lomax, B. & Workman, M., (2015). Stranded Carbon Assets and Negative Emissions Technologies Working Paper. Stranded Assets Programme.
Gorte, R. (2009). U.S. Tree Planting for Carbon Sequestration. Congressional Research Service
Lenton, T.M., 2010. The potential for land-based biological CO2 removal to lower future atmospheric CO2 concentration. Carbon Management 1(1), 145–160.
Lewandrowski, J., Peters, M. & Jones, C. (2004). Economics of Sequestering Carbon in the U.S. Agricultural Sector, USDA Economic Research Service, Technical Bulletin TB-1909
Popkin, G., (2019). How much can forests fight climate change? Nature 565, 280-282
U.S. Environmental Protection Agency (2005). Greenhouse Gas Mitigation Potential in U.S. forestry and Agriculture, EPA 430-R-05-006, Washington, DC.
We define a “good battery” as one that enhances the efficiency of the total energy system. Conversely, a “bad battery” diminishes it. This distinction matters and must not be overlooked in the world’s quest for cleaner energy. Electric Vehicles are most favoured, while grid-scale hydrogen is questioned.
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As renewable energy ramps up into the global energy mix (chart below, model here), the energy system will grow increasingly intermittent. This is unavoidable, because sunshine and wind speeds vary, and these variations are correlated over wide geographic areas.
Hence, batteries will be needed, to store up excess renewable generation for when the sun is not shining and the wind is not blowing. Most commentary on batteries focuses on their costs. But there is also an enormous opportunity in their efficiency…
Designed correctly, batteries can improve the efficiency of the global energy system, and accelerate the energy transition by lowering the total amount of energy that needs to be generated. Designed incorrectly, however, these variables are all worsened. The distinction is the topic of today’s note.
To make our distinction clearer, we have created a new data-file estimating the “net round trip efficiency” of different battery types. The calculation has two steps:
First, we measure the energy efficiency of an energy storage system (kWh given out divided by kWh put in).
Second, the storage system’s energy efficiency is compared with the most likely energy source that storage system will displace.
Interpretation. A score over 100% indicates a “good battery”. It is more efficient than the energy source displaced. A score below 100% indicates a “bad battery”. It is less efficient than the energy source displaced.
Examples to illustrate good vs bad batteries
Electric cars are our top example of a “good battery”, with potential to uplift energy efficiency by 3.5x. This is because electric vehicles achieve c60-80% energy efficiencies. An electric vehicle, in turn, is most likely to displace an internal combustion engine, which typically achieves 15-20% energy efficiency (chart below, model here). Mop up c100 units of excess renewable energy with an electric vehicle battery, and it therefore displaces the equivalent of 350 units of oil-energy.
The same 3.5x uplift applies to the battery in an ‘aerial vehicle‘, as we recently reviewed in depth, with flying cars set to achieve the equivalent of 140mpg (chart below).
Grid-scale batteries can also achieve impressive uplifts in efficiency, when inefficient fuel use is displaced. As a general rule of thumb, a power plant might be c50% efficient, hence replacing the power plant with renewables plus batteries can achieve a c2x efficiency uplift.
Additional opportunities are emerging to uplift system efficiency using batteries. One recent example was described by ConocoPhillips, at the Darwin LNG plant, where the gas turbines have a “sweet spot” of maximum efficiency. Battery storage allows Conoco to avoid low-efficiency turbine usage, which will will cut emissions by 20%.
Demand shifting, in the middle of our chart, deserves special mention because it is practically free and can also arguably uplift efficiency by 1-2x. It constitutes moving demand to the times when electricity is flowing abundantly into the grid. Examples range from backups at data-centers to washer-driers in homes. The practice can be encouraged by variable electricity prices, incentivising consumption when electricity supply is abundant and disincentivising consumption at times when it is scarce.
Now we arrive at the right-hand-side of our graph, where we are more cautious. Many commentators have proposed using hydrogen, molten salt or photo-electro-chemical cells as storage mechanisms, to absorb excess renewable power, for later usage…
We calculate that these “batteries” have c35-40% round-trip efficiencies: i.e., one third of the energy is lost to “charge” the battery (e.g., hydrolysing water) and another third is lost discharging it (e.g., burning hydrogen). Mop up 100 units of of renewable energy with one of these “bad batteries” and only c35-40 units can be recovered later. This means the world’s installed renewable capacity achieves less decarbonisation.
Decision-makers may wish to consider system efficiency in these terms, to maximise the impacts of both their renewable and battery investments. Efficiency and economics tend to overlap in all the models we have built.
Multiple records have just been broken for an LNG-powered ship, as construction completed at Heerema’s “Sleipnir” heavy-lift vessel (charted above). It substantiates our recent deep-dive note, which sees 40-60MTpa upside to LT LNG demand, from large, fuel-intensive ships, after IMO 2020.
Sleipnir is a record-setting crane-lift vessel, with capacity to pick up 20,000T. This eclipses the prior records in offshore oil and gas, which were around 12,000T, set by the Heerema Thialf and the Saipem 7000. Hence Sleipnir has already lined up 18 contracts, starting with the 15,800T topsides for Israel’s Leviathan gas field, and progressing on to Johan Sverdrup Phase II.
Sleipnir is a record-setting LNG vessel, burning gas as its primary fuel (although it can also burn diesel). With a displacement of 273,700T, we estimate it is the heaviest LNG-powered vessel ever built (eclipsing the largest such container ships, at 220,000T). With a cost of $1.5bn, we estimate it is also the most expensive LNG-powered ship ever built (eclipsing Carnival’s $1.1bn AidaNova cruise ship). It has the world’s first Type-C LNG tank in an enclosed column. Numbers are updated in our data-file here.
There is upside to LNG demandin large, fuel-intensive ships, especially cruise- and container ships, after IMO 2020. Small-scale LNG may offer an economic “bridge”, while bunkering becomes increasingly attractive as volumes per port scale past c80kTpa. Forward-thinking Majors are already investing to capture the future market.
Finally, for a video of the construction vessel being constructed…
A typical offshore operator can very readily save $1/boe via continued, digital deflation; which is tantamount to $1bn per annum at a c3Mboed Oil Major.
Our numbers are derived from a case study by Cognite, which is among the leaders in oilfield digitization, collaborating with cutting-edge E&Ps, as described below.
Digitization remains the most promising opportunity to improve offshore economics. But the gains are granular and can only be seen by delving into the detail…
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This short note will focus further upon three particular avenues for digital deflation, which collectively account for $0.6/boe of cost savings at a typical offshore operator.
All are achieved using greater data instrumentation, as highlighted in Cognite’s recent case study, based on working alongside Aker-BP, which we calculate can save $1/boe across the operator’s portfolio (chart below).
(1). Production Optimisation can be attained by increasing the throughputs in processing units, such as separators. In Cognite’s example, this is safely achieved by using better data from multi-phase flow-meters upstream of the processing units. Better data enables better performance. Deferrals associated with the flow-meter calibration are also reduced by 30-50%.
(2). Smart maintenance of equipment can be achieved by greater monitoring. For instance, the Ivar Aasen sends data back to shore, in real time, on 90,000 information packages, including 18,000 valves, all the wells, compressors, pumps and generators. Cognite’s example is at these shut-down valves and fire dampers, which now require 80% fewer maintenance hours to check. In addition, the number of hours per miantenance check is reduced by 90%.
(3). Improved information flow to “digital workers” improves productivity. As context, maintenance of a large process unit (e.g., a 1st stage separator) may require 1,300 planning hours per year, but this can be improved using data (video below). In turn, this superior planning reduced the time spent on routine inspections by c50%, increasing the number of monthly maintenance jobs by 10% and with better HSE performance.
A virtual visit to an offshore oil platform, instrumented by Cognite. Live data are displayed and can be further interrogated for planning purposes …
Digital improvements offer great potential to improve offshore economics. However, as we have highlighted, no individual improvement is a magic bullet. Uplifting IRRs, particularly on new greenfield projects by say, 5pp, requires progress on as many as twenty different dimensions (chart below).
This is where Thunder Said Energy can help, screening the economic opportunities and best-practices across different companies, using our databases of patents and technical papers.
Perovskites are the fastest-improving solar innovation. The best test-cells hit a new record of 28% efficiency last year, with line-of-sight to the mid-30s, i.e., 2x more efficient than today’s silicon photovoltaics. A Major is at the cutting edge.
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Today’s renewable technologies are not sufficient to deliver a rapid energy transition. On our numbers, the world will still need 120Mbpd of oil by 2050, while the need for gas will treble, even with $300bn pa invested in wind and solar (chart below, model here) .
What can accelerate the transition is next-generation technology, delivering more energy at a lower cost.
In the solar space, the most exciting opportunity we have reviewed so far is Perovskites. Their efficiency has improved faster than any other solar cells, since the first examples were tested in 2009. There is now line-of-sight to reach 2x higher efficiency than today’s solar cells (c17%), for lower costs.
Five Facts about Perovskites
(1) Perovskites are a mineral class (named after a 19th Century Russian Count). They exhibit exceptional optoelectronic properties: A low band gap means it is easy for incoming photons to dislodge electricity (electrons). Low thermalization losses mean that these liberated electrons are effectively conducted to electrodes, without their energy being dissipated.
(2) The most common cell designs sandwich a layer of MethylAmmonium Lead Iodide (band gap of 1.55 eV) in between an ‘electron carrier’ and a ‘hole carrier’, which are in turn sandwiched between a gold cathode and a fluorided tin oxide anode. A 400nm film of this material can absorb almost all photons in visible light.
(3) Costs should in principle be lower than today’s photovoltaics, due to eliminating the intricate and energy-intensive processing of silicon. Instead, Perovskites crystallise out of a solution onto a substrate. c35% of the cost is the “hole transport layer” and c20% is the gold cathode, both of which are being improved.
(4) Constant innovation is taking place in the technical literature. Mixing perovskites with different cations or silicon can improve the stability of the cells, and liberate more electrons. Efficiency is hindered when liberated electrons recombine at the boundaries of Perovskite “grains”, hence these grain boundaries can be “passivated”. Finally, efficiency can also be improved with better transport materials, electrodes and at the interfaces between materials.
(5) Not there yet. We have classified Perovskites at TRL5. So far, most Perovskites degrade within 500-1,000 hours, due to moisture, oxygen and ultra-violet light, while achieving c200-days’ lifespan is documented as remarkable. Outdoor applications have not been proven. The test cells developed in the lab typically cover 1cm x 1cm. And most use lead, which is toxic.
In conclusion, the technology is exciting, and improving rapidly, but it is also long-dated. It requires committed investors who understand the long-term potential…
Driving the Transition
Reviewing patents and technical papers around the energy industry, what has surprised us most is the Oil Majors’ involvement at the cutting edge of next-generation renewables technology. Leading Majors want to drive the transition: strengthening their societal license to operate and capitalising on vast new opportunities in the future energy system.
It is no different in solar. In 2017, Equinor participated in the £31M Series D funding of Oxford PV, the company at the forefront of Perovskite research, and holding the most recent records for Perovskite cell efficiency. Equinor’s involvement will support Oxford PV gear up to a more commercial phase.
This adds to the other Majors’ efforts at the forefront of solar. We have reviewed 37 patents across the group, and have characterised the leading companies’ efforts here (chart below).
The downstream industry is currently debating whether IMO 2020 sulphur regulations will be resolved quickly or slowly. We think the market-distortions may be prolonged by under-appreciated technology challenges.
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As context, from 2020, it will no longer be permitted to burn fuels with 3.5% sulphur in the marine segment. Their maximum permitted sulphur content will fall to 0.5%. In principle, refining cracks will move, advantageously for low-sulphur diesel and disadvantageously for high-sulphur fuel oil.
Over time, this should provide an economic incentive to construct incremental hydro-processing and hydro-conversion technologies. However, it still may not be so simple as to construct a few extra hydro-processing units. Not all sulphur is equal.
Hard Sulphur and Easy Sulphur
On the one hand, aliphatic sulphur compounds are easily treated. The process uses a hydrogen partial pressure of 10-30kg/cm2, 180-370C temperatures, and liquid:catalyst ratio up to 4:1. The catalyst contains Cobalt, Nickel and/or Molybdenum on an aluminium oxide framework. This is industry-standard technology, available to all.
However, highly branched molecules are harder. One class, dibenzothiophenes, is pictured below. Their structure impedes the sulphur “heteroatom” from reaching the active site on the catalyst. Run it through a low-spec hydrotreater, and it comes out the other side… unchanged.
Another challenge with aromatic sulphur-containing compounds is their under-saturation. Traditional hydroprocessing techniques, aimed primarily at reducing sulphur, also tend to saturate these aromatic rings which “can increase the amount of hydrogen consumed during hydroprocessing by as much as an order of magnitude”. This is problematic at refineries with limited hydrogen. It adds cost.
It may be under-appreciated how much of the sulphur in the world’s fuel market is “difficult sulphur”, rather than “easy sulphur”. For example, if we take Saudi Arabia’s production, comprising the most abundant crude oil streams on the planet, the more challenging sulphurs comprise 0.5% of Arab Light, and 1.3% of Arab Heavy.
As Aramco’s patents note “it is very difficult to upgrade existing hydrotreating reactors” and “the economical removal of refractory sulfur-containing compounds is exceedingly difficult to achieve”. Especially if the end target is to reach higher European and US standards of 0.1% sulphur caps.
Resolving the Impasse: Large Investments?
There are solutions to this challenge. Indeed, Aramco has filed patents for methods of removing these more challenging sulphurs. One is to build a new separation unit, distill the crude into two separate streams, isomerise the ‘hard sulphur’ stream, re-combine it with the ‘easy sulphur’ stream, then hydro-treat the mixture. Hydrocracking these compounds is another option, breaking them down into lighter, smaller, “easier sulphur” molecules.
Both of these options require large investment, with multiple processing units and ancillary units. It follows that the ultimate refinery projects used to re-balance the market post-IMO 2020 are not simple hydoprocessing projects.
Against this backdrop, fears over the energy transition make it increasingly difficult to justify large, long-term investments. Particularly in Europe.
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Opportunities amidst the Challenge?
So if the market-distortions of IMO 2020 have longevity, who will stand to benefit? We are maintaining a data-file of the ‘Top Technologies for IMO 2020’ around the industry, which give specific companies an edge. The data file now contains over 25 technologies across 7 Majors.
References
Al-Shahrani, F., Koseoglu, O. R. & Bourane, A. (2018). Integrated System and Process for In-Situ Organic Peroxide Production and Oxidative HeteroAtom Conversion. Saudi Aramco Patent.
Koseoglu, O. R., (2018). Integrated Isomerisation and Hydrotreating Process. Saudi Aramco Patent CN107529542
Hanks, P. (2018). Trim Alkali Metal Desulfurisation of Refinery Fractiions. ExxonMobil Patent US2018171238
This note contains our ‘Top Five’ conclusions about the Oil Majors’ research partnerships, drawing off our database of 3,000 oil company patents. Different companies have importantly different approaches. We can quantify this, by looking at the number of patents co-filed with partners (chart above).
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(1) Working with Academia. TOTAL stands out as collaborating most closely with academic institutions, by a wide margin. In 2018, it filed 75 such patents, of which two-thirds were with French institutions. Aramco was next with c40 patents co-filed with Academia. Eni and Repsol filed c4-5 each.
(2) Working with Services. Chevron stands out as working most closely with the Services industry, as it is co-developing two particular technologies: “electro-crushing drilling” with Halliburton, and distributed acoustic sensing with Silixa. We expect Chevron to have a lead in both technologies, before they are licensed out to the broader industry.
(3) Working with Customers. Exxon has co-filed most patents with its customers: advanced lubricants with Toyota and advanced plastics with packaging companies. The moat around Exxon’s IP in both areas is extremely impressive.
(4) Working Internationally. Aramco runs the most global research collaborations, with 5-10 patents filed in each of 5 international countries. This is unusual, as most other companies confine their research partnerships to their home countries (below).
(5) Working Independently. Shell and Equinor run the most independent research processes, filing 96% and 98% of their patents solo. We have been impressed with the technical specialisations both organizations have built up in-house.
Our full database of 3,000 patents is exclusively available to TSE’s subscribers, including short summaries of each patent. For further information, please email us, contact@thundersaidenergy.com
Global energy investment will need to rise by c$220-270bn per annum by 2025-30, according to the latest data from the IEA, which issued its ‘World Energy Investment’ report this week. We think the way to achieve this is via better energy technologies.
Specifically, the world invested $1.6bn in new energy supplies in 2018, which must be closer to $1.8-1.9bn, to meet future demand in 2025-30– whether emissions are tackled or not. The need for oil investment is most uncertain. More gas investment is needed in any scenario. And renewables investment must rise by 15-100%.
Note: data above includes $1.6trn investment in energy supplies and c$250bn in energy efficiency measures
Hence the report strikes a cautious tone:“Current market and policy signals are not incentivising the major reallocation of capital to low-carbon power and efficiency that would align with a sustainable energy future. In the absence of such a shift, there is a growing possibility that investment in fuel supply will also fall short of what is needed to satisfy growing demand”.
We do not think the conclusions are surprising. Our work surveying 50 investors last year found that fears over the energy transition are elevating capital costs for conventional energy investments (below).
Meanwhile, low returns make it challenging to invest at scale in renewables.
We argue better energy technologies are the antidote to attracting capital back into the industry. That is why Thunder Said Energy focuses on the opportunities arising from energy technologies. Please see further details in our recent note, ‘What the Thunder Said’. For all our ‘Top Technologies’ in energy, please see here.
References
IEA (2019). World Energy Investment. International Energy Agency.
We categorised 300 of the Oil Majors’ technologies according to their technical maturity. We find the most exciting examples are not the most technically mature, but those on the cusp of commercialisation. Majors that work on earlier-stage technologies also have better overall technologies (c50% correlation coefficient). Hence, to create value, it is important to maintain a constant funnel of technology opportunities.
When we assess an energy technology, we score it on four dimensions: how far does it advance the industry-standard? How large is the potential economic impact? How proprietary is it? And finally, is it “ready”?
To quantify the final category, we use the industry-standard conceptual framework of ‘Technology Readiness Levels’ (TRLs), which are summarised below. It is worth being familiar with this categorization, as it recurs throughout our work.
But when do technologies get exciting?
To some extent, “excitement” depends upon your perspective. Venture funds may find most value on the earlier rungs of the ladder. But most companies and investors get excited in the later stages. We can measure this. The results are surprising.
Below, we have summarised our “TSE Technology Scores” for 300 technologies, used by the 25 oil and gas companies that we follow. The highest scores appear to be for technologies at Readiness Level Seven (chart below).
Even though these technologies are less mature than TRLs 8-9, we think they are more exciting. This is unexpected. As discussed above, our “Technology Scores” specifically award higher marks to more mature technologies, and penalise those that are less mature.
On the other hand, maybe it is not so surprising. Opportunities at TRL7 are, by definition, new and cutting-edge. Conversely, the shine tends to wear off for more mature technologies, that have already spread around the industry.
What does it means for companies?
If the most exciting technologies are the ones on the cusp of commercialisation, it is important that leading companies can embrace them. We think the answer is to maintain a rich funnel of opportunities, including those at earlier stages. Our data suggest that the technology-leaders around the industry are doing exactly this…
Below, we rank the 25 oil and gas companies that we follow. We find a 50% correlation between the companies that are working on ‘earlier stage’ technologies and those that have better overall technologies.
“Technology Scores” across 25 Oil and Gas companies, which are tracked by TSE
Investable insights. To develop a lead in technology, you have to be involved in developing technology. If your sole approach is to buy mature technologies off the shelf, you will only access them later, and with less theoretical context than the leaders. We think this explains the correlation above. We also think it matters for investing in the best energy companies, where technical capabilities are starkly different (below).
“Technology Scores” across 20 Oil and Gas Companies, which are tracked by TSE
How can we help? For our full database of 300 technologies, scores by company, or by industry sub-segment, please contact us. We can also provide consultancy services on your company, highlighting areas where there is most scope for improvement, by reference to peers’ best-practices.
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