Digitization after the crisis: who benefits and how much?

Digitization offers superior economics and CO2 credentials. But now it will structurally accelerate due to higher resiliency: Just 8% of digitized industrial processes will be materially disrupted due to COVID-19, compared to 80% of non-digitized processes. In this 22-page research report, we have constructed a database of digitization case studies around the energy industry: to quantify the benefits, screen the most digital operators and identify longer-term winners from the supply chain.

Pages 2 outlines our database of case studies into digitization around the energy industry.

Page 3 quantifies the percentage of the case studies that reduce costs, increase production, improve safety and lower CO2.

Pages 4-6 show how digitization will improve resiliency by 10x during the COVID-crisis, stoking further ascent of energy industry digitization.

Page 7 generalizes to other industries, arguing digitization will accelerate the theme of remote working, esepcially in physical manufacturing sectors.

Pages 8-9 screen for digital leaders among the 25 largest energy companies in the world, based on our assessment of their patents, technical papers and public disclosures.

Pages 10-11 identify leading companies from the supply chain, which may benefit from the acceleration of industrial digitization; again based on patents and technical papers.

Pages 12-22 present the full details of the digitization case studies that featured in our database, highlighting the best examples, key numbers and leading companies; plus links to delve deeper, via our other research, data and models.

Remote possibilities: working from home?

The COVID-19 crisis will structurally accelerate remote working. The opportunity is explored in our 21-page report. It can save 30% of commuter journeys by 2030, avoiding 1bn tons of CO2 per year, for a net economic benefit of $5-16k per employee. This makes remote work a materially more impactful opportunity than electric vehicles in the energy transition.

Remote work currently saves c3% of all US commuter miles, which comprise 33% of developed world gasoline demand (pages 2-4).

Remote work could save 30% of all commuter miles by 2030, structurally accelerating as the COVID-19 crisis changes habits (page 5).

Remote work, thus screens as more impactful than electric vehicles, as an economic opportunity in the energy transition (page 6).

Ecconomic benefits are $5-16k pp pa. Our numbers are conservative. They under-reflect productivity and wellbeing improvements in the technical literature (pages 7-8).

We stress test our numbers, looking profession-by-profession across the entire US labor force, and considering new technologies (pages 9-13).

Direct energy impacts save 1bn tons of annual CO2. Impacts on oil, gas and electricity demand are quantified, including evidence from the COVID crisis (pages 14-17).

Hidden consequences are more nuanced: reshaping mobility, urbanization and online retail habits (pages 18-21).

COVID-19: what have the oil markets missed?

This 15-page note outlines our top three conclusions about COVID-19, which the oil markets may have missed. First, global oil demand likely declines by -11.5Mbpd YoY in 2Q20 due to COVID-19. This is over 15x worse than the global financial crisis of 2008-9, and too large for any coordinated production cuts to offset. Second, once the worst of the crisis is over, new driving behaviours could actually increase gasoline demand, causing a very sharp oil recovery. Finally, over the longer-term, structural changes will take hold, transforming the way consumers commute, shop and travel, but overall, these net impacts balance each other out and may not alter long-run oil demand.

Pages 2-7 outline our new models of global oil demand and US gasoline demand, underpinning a scenario where oil demand likely falls -11.5Mbpd in 2Q20, and -6.5Mbpd YoY in 2020. In a more extreme downside case, declines of -20Mbpd in 2Q20 and 10Mbpd in FY20 are possible.

Pages 8-10 illustrate how gasoline demand could actually increase in the aftermath of the COVID crisis, once businesses re-open and travel resumes. The largest cause is a c25% potential degradation in developed world fuel economy per passenger, as lingering fears over COVID lower the use of mass transit and vehicle load factors.

Pages 11-15 outline our top three structural trends post-COVID, which will persist for years, transforming retail, commuting, leisure travel and the airline/auto industries.

Please don’t hesitate to contact us, if you have any questions or comments…

How to decarbonize gas value chains?

Gas value chains present the largest and lowest cost decarbonization opportunity on the planet, commercialising zero carbon energy for an incremental cost below $1/mcfe ($17/ton of CO2). This compares with end gas prices of $4-14/mcf and other CO2 mitigation options up to $800/ton. This 15-page report outlines how to optimize a decarbonized gas value chain, securitizing forestry-based carbon commitments in an actively managed carbon fund.

Pages 2-4 outline why natural gas is the optimal fossil fuel for a decarbonized value chain, requiring the reforestation of 15-60% less land than other fossil fuels.

Pages 5-8 present the economics for forestry projects, with a breakeven cost of $50/ton, of which $15/ton is cash cost and $35/ton is capital cost.

Pages 9-11 explain how to securitize forestry carbon credits into gas sales agreements, obviating the $35/ton capital costs and creating a dedicated CO2 fund.

Pages 12-13 compare the costs of our decarbonized gas value chains against other decarbonization options, at $15/ton versus $300-800/ton for alternatives.

Pages 14-15 suggest opportunities for active managers to optimize carbon funds, sequestering more CO2 and disbursing “profits” to the funds’ limited partners.

The future of offshore: fully subsea?

Offshore developments will change dramatically in the 2020s, eliminating new production platforms in favour of fully subsea solutions. The opportunity can increase a typical project’s NPV by 50%, reduce its breakeven by one-third and effectively eliminate upstream CO2 emissions. We have reviewed 1,850 patents to find the best-placed operators and service providers, versus others that will be disrupted. Overall, the theme supports the ascent of low-carbon natural gas, which should treble in the energy mix by 2050. This 22-page note presents the opportunity.

The offshore oil and gas industry’s progress towards ‘fully subsea’ developments, without any platforms or surface infrastructure being necessary, is reviewed in detail in pages 2-5, covering key projects and milestones from 1985-2000.

30% economic savings in both capex and opex are quantified line-by-line, across c50 cost lines, in pages 6-9.

1.5x NPV uplifts and 4pp IRR uplifts are quantified by modelling a representative fully greenfield gas-condensate project on pages 11-12.

CO2 emissions can be virtually eliminated by a fully subsea development solution. Pages 12-13 add up the impacts of higher efficiency, power from shore, fewer materials and the elimination of PSV/helicopter trips.

The key engineering challenges for fully subsea systems, which remain to be resolved, are summarized on page 14.

Who benefits from the trend toward fully subsea systems, is described from page 15 onwards after reviewing 1,850 patents around the industry. This includes both the leading service companies and operators (primarily Equinor, but also TOTAL, Shell).

The leaders in subsea compression technology are assessed on pages 16-17.

The leaders in subsea power systems are described on pages 18-19.

The leaders in next-generation subsea robotics are assessed on pages 20-21.

Others are disrupted, as is described in detail in page 22.

Covered service companies in the report include ABB, Aker, Eelume, GE, Kraken, Oceaneering, OneSubsea, Saipem, Siemens, Technip-FMC, Wood Group, the PSV and helicopter sector, and c20 early stage companies in next-generating subsea robotics.

Decarbonized power: how much wind and solar fit the optimal grid?

What should future power grids look like? Our 24-page note optimizes cost, resiliency and CO2, using a Monte Carlo model. Renewables should not surpass 45-50%. By this point, over 70% of new wind and solar will fail to dispatch, while incentive prices will have trebled. Batteries help little. They raise power prices by a further 2-5x to accommodate just 3-15% more renewables. The lowest-cost, zero-carbon power grid, we find, comprises c25% renewables, c25% nuclear and c50% decarbonized gas, with an incentive price of 9c/kWh.

Pages 2-4 illustrate the volatility of wind and solar generation at today’s grid penetration, providing rules of thumb around intermittency.

Pages 5-6 illustrate the strange consequences once renewables surpass 25% of the grid, including curtailment, negative power pricing and financing difficulties.

Pages 7-9 quantify and explain how much curtailment will take place in a typical grid as renewables scale from 25% to 40%, 50% and 60% of gross generation, using a Monte Carlo approach. The model shows when and why curtailment is occurring.

Pages 10-20 quantify and explain the costs of batteries, to backstop renewables as they scale from 25%, to 40%, 50% and 60% of the grid, while avoiding curtailment. Real world conditions are not conducive to competitive battery economics.

Pages 21-23 quantify the residual reliance on natural gas. Amazingly, even our most aggressive battery scenarios only permit 10% of gas-power capacity to be shuttered. Low-utilization gas is costly. High-utilization gas is less costly. And the economics of decarbonized gas are superior to any renewables plus batteries combination.

Page 24 concludes that natural gas will emerge as the ‘best battery’ to backstop renewables, estimating the most likely shares in an optimal power mix.

Electric Vehicles Increase Fossil Fuel Demand?

It is widely believed that electric vehicles will destroy fossil fuel demand. We find they will increase it by 0.7Mboed from 2020-35. EVs only start lowering net fossil fuel demand from 2037 onwards. The reason is that 3.7x more energy is consumed to manufacture each EV than the net road fuel it displaces each year; while the manufacturing of EVs is seen growing exponentially. The finding is a strong positive for natural gas, as outline in our new 13-page note.

Pages 2-3 outline our oil demand forecasts out to 2050, reflecting the rise of electric vehicles and six other game-changing technologies.

Pages 4-5 lay out the energy economics of producing electric vehicle batteries, based new, granular details from the recent technical literature.

Pages 6-9 model the exponential rise of electric vehicles, and how rapidly increasing manufacturing energy could outweight slowly increasing fuel savings.

Pages 10-13 consider pushbacks to our thesis, including the use of renewable technology, battery innovations or vehicle autonomy.

The new forest: can carbon-neutral fuels re-shape the oil industry?

Integrated oils have a game-changing opportunity in seeding new forests. They could potentially offset c15bn tons of CO2 per annum, enough to permit the continuation of 85Mbpd of oil and 400TCF annual gas consumption within a fully decarbonized energy system. The cost is competitive, at c$50/ton. It is natural to sell carbon credits alongside retailing fossil fuels. We calculate 15-25% uplifts in the value of a typical fuel retail business, while allaying fears over the energy transition. Our 21-page note outlines the opportunity.

The advatages of forestry projects are articulated on pages 2-5, explaining why fuel-retailers may be best placed to commercialise genuine carbon credits.

Current costs of carbon credits are assessed on pages 6-8, adjusting for the drawback that some of these carbon credits are not “real” CO2-offsets.

The economics of future forest projects to capture CO2 are laid out on 9-10. We find c10% unlevered IRRs at $50/ton CO2 costs.

What model should fuel-retailers use, to collect CO2 credits at the point of fuel-sale? We lay out three options on pages 11-14. Two uplift NPVs 15-25%. One could double or treble valuations, but requires more risk, and trust.

The ultimate scalability of forest projects is assessed on pages 15-19, calculating the total acreage, total CO2 absorption and total fossil fuels that can thus be preserved in the mix. Next-generation bioscience technologies provide upside.

A summary of different companies forest/retail initiatives so far is outlined on page 21.

MCFCs: what if carbon capture generated electricity?

Molten carbonate fuel cells (MCFCs) could be a game-changer for CCS and fossil fuels. They are electrochemical reactors with the unique capability to capture CO2 from the exhaust pipes of combustion facilities; while at the same time, efficiently generating electricity from natural gas. The first pilot plant is being tested in 1Q20, by ExxonMobil and FuelCell Energy. Economics range from passable to phenomenal. The opportunity is outlined in our 27-page report.

Pages 2-4 outline the market opportunity for more efficient carbon separation technologies, which can be retrofitted to 4TW of pre-existing power plants, without adding $50/T of cost and 15-30% of energy penalties per traditional CCS.

Pages 5-13 outline how MCFCs work, including their operation, development history, how recent patents promise to overcome reliability problems, and their emergent adaptation to carbon capture.

Pages 14-18 assess the economics, both in absolute terms, and by comparison to new gas plants and hydrogen fuel cells. CCS-MCFC economics range from passable to phenomenal, at recent power prices.

Pages 19-23 suggest who might benefit. FuelCell Energy has received $60M investment from ExxonMobil, hence both companies’ prospects are explored.

Appendix I is an overview of incumbent CCS technologies, and their limitations.

Appendix II is an overview of six different fuel cell types, comparing and contrasting MCFCs.

Shell: the future of LNG plants?

Shell is revolutionizing LNG project design, based on reviewing 40 of the company’s gas-focused patents from 2019. The innovations can lower LNG facilities’ capex by 70% and opex by 50%; conferring a $4bn NPV and 4% IRR advantage over industry standard greenfields. Smaller-scale LNG, modular LNG and highly digitized facilities are particularly abetted. This 16-page note reviews Shell’s operational improvements, revolutionary greenfield concepts, and their economic consequences.

Pages 2-3 outline Shell’s rationale for radically re-thinking LNG project designs, and how we have assessed its progress, across c300 patents from 2019.

Pages 4-6 outline operational improvements, described in Shell’s patents, which can reduce opex by up to 50% and uplift IRRs by c3%.

Pages 7-13 outline novel LNG plant designs, based on Shell’s patents: including advanced materials, alternatives to cryogenics (which can abet small-scale LNG) and next-generation modularization. Thether these can cut capex by c70%.

Pages 14-16 outline the economic opportunities, describing how Shell’s patented innovations affect our project NAVs at LNG Canada and the US’s Lake Charles.