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.
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.
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).
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%.
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.
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.
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).
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.
An exciting aspiration in wind technology is to obviate large, expensive “towers”, and unleash tethered kites into the skies. They can access 2-4x more wind-power at greater altitudes, and at 50-90% lower costs. Intriguingly, we have discovered Exxon and Shell are at the forefront of pursuing this new wind opportunity offshore, based on their patents and filings.
It would be unwise to under-estimate the complexity of creating a new LNG province, with a 50MTpa prize on the table in Mozambique. After the first two trains are in motion, the longer-term opportunity is potentially “another Qatar”. But only if Mozambique can compete for capital with US greenfields and brownfield expansions.
Hence we have reviewed 200 of Chevron’s patents from 2018. The company’s ability to develop a new, deep-water LNG province is notable. Ten examples are tabulated below.
It was interesting how many of the patents were filed in Australia and may have derived from learnings at Gorgon and Wheatstone.
For a primer on different LNG process technologies, please see our data-file (here).
We have assessed whether gas is a competitive trucking fuel, comparing LNG and CNG head-to-head against diesel, across 35 different metrics (from the environmental to the economic). Total costs per km are still 10-30% higher for natural gas, even based on $3/mcf Henry Hub, which is 5x cheaper than US diesel. The data-file can be downloaded here.
The challenges are logistical. Based on real-world data, we think maintenance costs will be 20-100% higher for gas trucks (below). Gas-fired spark plugs need replacing every 60,000 miles. Re-fuelling LNG trucks requires extra safety equipment.
Specially designed service stations also elevate fuel-retail costs by $6-10/mcf. Particularly for LNG, a service station effectively ends up being a €1M regasification plant (or around $250/tpa, costs below).
We remain constructive on the ascent of gas (below), but road vehicles may not be the best option.
To flex our input assumptions, please download our data-model, comparing LNG, CNG and other trucking fuels across 35 different metrics .