Technology leadership is crucial in energy. It drives costs, returns and future resiliency. Hence, we have reviewed 3,000 recent patent filings, across the 25 largest energy companies, in order to quantify our “Top Ten” patent leaders in energy.
This 34-page note ranks the industry’s “Top 10 technology-leaders”: in upstream, offshore, deep-water, shale, LNG, gas-marketing, downstream, chemicals, digital and renewables.
For each topic, we profile the leading company, its edge and the proximity of the competition.
Companies covered by the analysis include Aramco, BP, Chevron, Conoco, Devon, Eni, EOG, Equinor, ExxonMobil, Occidental, Petrobras, Repsol, Shell, Suncor and TOTAL.
Upstream technology leaders have been discussed in greater depth in our April-2020 update, linked here.
More information? Please do not hesitate to contact us, if you would like more information about accessing this document, or taking out a TSE subscription.
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.
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.
Decarbonisation is often taken to mean the end of fossil fuels. But it is more feasible simply to de-carbonise them, with next-generation combustion technologies.
This 19-page note presents our top two opportunities: ‘Oxy-Combustion’ using the Allam Cycle and Chemical Looping Combustion. Both can provided competitive energy with zero carbon coal & gas.
Leading Oil Majors are supporting these solutions, to create value while advancing the energy transition.
Carbon capture remains an “orphan technology”, absorbing just c0.1% of global CO2. The costs and challenges of current technologies are profiled on pp2-4.
Energy penalties are particularly problematic. Paradoxically, the more CCS in our models, the longer it takes to de-carbonise the energy system (see pp5-6).
Next generation combustion-technologies are therefore necessary…
Allam Cycle Oxy-Combustion burns CO2 in an inert atmosphere of CO2 and oxygen. We evaluate a demonstration plant and model strong economics (see pp12-15).
Chemical Looping Combustion burns fossil fuels in a fluidized bed of metal oxide. We profile the technology’s development to-date, net efficiency and levellised costs, which are passable (pp8-11).
Oil Majors are driving the energy transition. We count ninety patents from leading companies to process CO2, including 30 to de-carbonise power. The best advances are profiled from TOTAL, Occidental, Aramco and ExxonMobil. (See pp16-19).
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).
So far we have reviewed 400 patents in the downstream oil and gas industry (ex-chemicals). A rare few prompted an excited thought — “that could be really useful when IMO 2020 comes around”.
Specifically, from January 2020, marine fuel standards will tighten, cutting the maximum sulphur content from 3.5% to 0.5%. It will reduce the value of high-sulphur fuel oil, and increase the value of low-sulphur diesel.
This note summarises the top dozen proprietary technologies we have seen to capitalise on the shift, summarised by company (chart below).