Category: Report

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Can carbon-neutral fuels re-shape the oil industry?

CO2 neutral fuels with carbon offsets

Fuel retailers have a game-changing opportunity seeding new forests, outlined in our 26-page note, then commercializing CO2 neutral fuels with carbon offsets.

Nature based solutions could offset c15bn tons of CO2 per annum, enough to accommodate 85Mbpd of oil and 400TCF of annual gas use in a fully decarbonized energy system. The cost is competitive, well below c$50/ton. It is natural to sell carbon credits alongside fuels and earn a margin on both. Hence, we calculate 15-25% uplifts in the value of fuel retail stations, allaying fears over CO2.

The advantages of forestry projects are articulated on pages 2-7, explaining why fuel-retailers may be best placed to commercialize genuine carbon credits.

Current costs of carbon credits are assessed on pages 8-10, 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 11-14, including opportunities to deflate costs using new business models and digital technologies. We find c10% unlevered IRRs well below $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 15-18. 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 19-25, 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.

What is crucial is to do this right. Cutting corners and flogging low-quality offsets will be a trust-destroying disaster. Hence it is important to screen for high-quality nature-based CO2 removals.

A summary of different companies forest/retail initiatives so far is outlined on page 26.

Our 3 key points on how CO2 neutral fuels with carbon offsets could reshape the oil industry are also highlighted in the short article sent out to our distribution list.

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On the road: long-run oil demand after COVID-19?

Long-run oil demand after COVID-19

Another devastating impact of COVID-19 may still lie ahead: a 1-2Mbpd upwards jolt in global oil demand. This could trigger disastrous under-supply in the oil markets, stifle the economic recovery and distract from energy transition. This 17-page note upgrades our 2022-30 oil demand forecasts by 1-2Mbpd above our pre-COVID forecasts. The increase is from road fuels, reflecting lower mass transit, lower load factors and resultant traffic congestion.

Upgrades to our granular 2020-2050 oil demand models, including headline numbers, are outlined on pages 2-3.

Travel demand that will never come back is described on pages 4-5, including remote work, a shift to online retail and lower business travel. Our forecasts for higher oil demand are not based on a Panglossian recovery of travel habits to pre-COVID levels.

The shift from mass transit to passenger cars is detailed on pages 6-9, covering ground-transportation (buses and train), mid-range air travel, and reverse urbanization enabled by remote working.

Load factors are lightly reduced, requiring more cars to service each passenger-mile of travel, as outlined on page 10.

Higher road traffic dents fuel economy, which we have quantified using real-world data from the City of New York, also drawing on data from prior oil downturns, on pages 11-14.

Implications for oil markets, companies and the energy transition are discussed on pages 15-17.

Key points on long-run oil demand after COVID-19 are spelled out in the article sent out to our distribution list.

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Decarbonize Heat?

decarbonize heat

Natural gas currently fuels two-thirds of residential and commercial heating, which in turn comprises c10% of global CO2. In this 20-page report, we have assessed ten technologies to decarbonize heat, including heat pumps, renewables, biogas and hydrogen. The lowest cost and most practical solution is to double down on natural gas, alongside nature-based carbon offsets. Global gas demand for heating should continue rising by 3bcfd per year.

Heating’s contribution to global energy demand, gas demand and global emissions is broken out on page 2.

Natural gas currently supplies two-thirds of heating. Different boiler types, their costs and their efficiencies are reviewed on page 3.

Natural gas can be decarbonized with nature-based solutions. The mechanisms and the costs are explained on page 4.

Other incumbents are contrasted on page 5, including oil furnaces and electric heaters, showing how their costs vary with oil, gas and power prices.

Heat pumps can be cost-competitive, if powered from the grid, and our screen of leading heat pump companies is presented on page 6.

Running heat pumps purely off of renewables is not economical. The numbers and the challenges are outlined on pages 7-9.

Solar rooftop heaters can also be cost-competitive in certain contexts, but not in our base case and not at scale (page 10).

Biogas costs are very high, but landfill taxes can act as a kingmaker for these projects, ramping them to c10-20% of developed world gas grids (page 12).

Hydrogen is least economic of the options we considered. Costs and challenges for blue, semi-green and fully green hydrogen are outlined on pages 13-14.

Capturing more waste heat from industrial processes, finally, holds some potential, and we screen numbers on pages 15-16.

Conclusions and impacts for the global gas market are articulated on pages 17-19.

Which gas resources are best-placed to decarbonize heat are summarized on page-20.

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Biofuels: better to bury than burn?

Burying biomass

Burying biomass to sequester CO2 could be more economical than biofuel production with a $15-50/ton carbon price. Thus the global bioethanol industry could be disrupted. Burying biomass would also remove 8x more CO2 per acre, at a lower total cost. More conventional oil could be decarbonized with offsets. Ethanol mills and blenders would be displaced. The numbers and implications are outlined in this 12-page report.

Nature-based solutions to climate change need to double annual CO2 uptake from plants in our models of decarbonization, using forests and fast-growing grasses (pages 2-3).

We profile the bioethanol industry, which is already using fast-growing grasses to offset 2Mbpd of liquid fuels. But our models suggest the economics, efficiency and CO2 intensities are weak (pages 4-6).

A first alternative is to reforest the land used to grow biofuels, which would carbon-offset 1.5x more oil-equivalents than producing biofuels (pages 7-8).

A more novel alternative is to bury the biomass, such as sugarcane or other fast-growing grasses, which could sequester 8x more CO2, with superior economics at $15-50/ton CO2 prices (pages 9-11). Another concept is to bury wood for carbon sequestration.

Company implications are summarized, suggesting how the ethanol industry might be displaced, and quantifying the CO2 intensity of incumbents (page 12).

This report was originally published in 2020. We have also deepened our analysis of the corn ethanol industry, CO2 of corn production, alternative uses for bio-ethanol and an outlook for biofuels in the 2020s. We have not seen much progress or momentum behind the idea of burying biomass crops for carbon storage.

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Conservation agriculture: farming carbon into soils

Conservation agriculture

One-third of the atmosphere’s post-industrial CO2 does not derive from fossil fuel combustion but from the degradation of soils, where organic carbon has fallen from 4% to 1-2% due to mechanized agriculture. Conservation agriculture rebuilds soil carbon. It can sequester 3-15 bn tons of CO2 per year, generating carbon credits, while restoring loss-making farmlands to exceptional profitability. Fertilizer demand would be decimated. This 17-page report outlines the opportunity, costs, CO2-removal, winners and losers.

Soils contain 3x more carbon than the atmosphere. But soils have shed 120bn tons of carbon since the dawn of mechanized farming. This is darkly etched into world history, with events such as the US dust bowl. Stemming the net loss of soil carbon is crucial to our energy transition models (pages 2-5).

Conservation agriculture is an emerging practice to restore soil carbon. Its tenets and achievements are described on page 6.

How much CO2 can be removed by conservation agriculture? We have surveyed the academic literature and modelled the potential impact (pages 7-8).

The economics are exceptional, evidenced by a detailed case study, with loss-making croplands transformed to profitability (pages 9-10).

Adoption is in an early innings. Policies are summarized in key geographies such as Alberta, Australia, France and the US. Private companies are now appearing to accelerate the theme. Some have ties to Shell (pages 11-12).

Technology leaders for measuring soil carbon are summarized on page 13-14.

The global fertilizer industry is disrupted by the theme, as fertilizer application can be cut 50-90% using conservation agricultures’ practices. Fertilizer production comprises 1% of global CO2. We profile the largest public companies and their CO2 intensity (pages 15-16).

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What oil price is best for energy transition?

best oil price for energy transition

It is possible to decarbonize all of global energy by 2050. But $30/bbl oil prices would stall this energy transition, killing the relative economics of electric vehicles, renewables, industrial efficiency, flaring reductions, CO2 sequestration and new energy R&D. This 15-page note looks line by line through our models of oil industry decarbonization. We find stable, $60/bbl oil is the best oil price for energy transition.

Our roadmap for the energy transition is outlined on pages 2-4, obviating 45Mbpd of long-term oil demand by 2050, looking across each component of the oil market.

Vehicle fuel economy stalls when oil prices are below $30/bbl, amplifying purchases of inefficient trucks and making EV purchases deeply uneconomical (pages 5-6).

Industrial efficiency stalls when oil prices are below $30/bbl, as oil outcompetes renewables and more efficient heating technologies (page 7).

Cleaning up oil and gas is harder at low oil prices, cutting funding for flaring reduction, methane mitigation, digitization initiatives and power from shore (pages 8-9).

New energy technologies are developed more slowly when fossil fuel prices are depressed, based on R&D budgets, patent filings and venturing data (pages 10-11).

CO2 sequestration is one of the largest challenges in our energy transition models. CO2-EOR is promising, but the economics do not work below $40/bbl oil prices (pages 12-14).

Our conclusion is that policymakers should exclude high-carbon barrels from the oil market to avoid persistent, depressed oil prices, and stabilize oil at the ‘best oil price for energy transition’ (as outlined on page 15).

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Upstream technology leaders: weathering the downturn?

Upstream oil and gas technology leaders

Leading technologies correlate 50-80% with ROACEs and -88% with costs in the energy industry. Hence, we assessed 6,000 patents from 2018-19, to determine which Energy Majors are best-placed to weather the downturn, benefit from dislocation and thrive in the recovery. This 14-page research note finds clear leaders in onshore, offshore, shale, LNG and digital, while others in the industry may be pulling back from upstream oil and gas.

Pages 2-4 quantify the importance of leading technologies in uplifting energy industry returns and deflating costs, including worked examples.

Pages 4-5 outline the added importance of technologies amidst the current downturn, its evolution and the industry’s potentially rapid recovery.

Page 6 explains how we use patents to identify technology leaders in energy.

Pages 7-13 explain who are the upstream technology leaders: onshore, offshore, in deep-water, unconventionals (shale), LNG and digital technologies. This informs which companies will emerge strongest from the current downturn, and how they may react amidst the dislocation.

Page 14 quantifies how upstream patent filings have changed YoY. Some Majors appear to be backing away from upstream technologies, possibly due to fears over the energy transitions, while others have stepped up their focus.

The work follows on from last year’s deep-dive report, identifying patent leaders in energy.

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Digitization after the crisis: who benefits and how much?

Digitization after COVID-19 crisis who benefits 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.

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Remote possibilities: working from home?

working from home for energy transition

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).

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COVID-19: what have the oil markets missed?

Impacts of COVID-19 coronavirus on global oil demand

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. (Please note, our oil supply-demand numbers have subsequently been updated here).

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…

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