Ramp Renewables? Portfolio Perspectives.

It is often said that Oil Majors should become Energy Majors by transitioning to renewables. But what is the best balance based on portfolio theory? Our 7-page note answers this question, by constructing a mean-variance optimisation model. We find a c0-20% weighting to renewables maximises risk-adjusted returns. The best balance is 5-13%. But beyond a c35% allocation, both returns and risk-adjusted returns decline rapidly.


Pages 2-3 outline our methodology for assessing the optimal risk-adjusted returns of a Major energy company’s portfolio, including the risk, return and correlations of traditional investment options: upstream, downstream and chemicals.

Page 4 quantifies the lower returns that are likely to be achieved on renewable investment options, such as wind, solar and CCS, based on our recent modeling.

Pages 5-6 present an “efficient frontier” of portfolio allocations, balanced between traditional investment options and renewables, with different risk and return profiles.

Pages 6-7 draw conclusions about the optimal portfolios, showing how to maximise returns, minimise risk and maximise risk-adjusted returns (Sharpe ratio).

The work suggests oil companies should primarily remain oil companies, working hard to improve the efficiency and lower the CO2-intensities of their base businesses.

CO2-EOR in shale: the holy grail?

What if there were a technology to sequester CO2, double shale productivity, earn 15-30% IRRs and it was on the cusp of commercialization? Promising momentum is building, at the nexus of decarbonised gas-power and Permian CO2-EOR…

First, this week, we finished reviewing 350 technical papers from the shale industry’s 2019 URTEC conference. The biggest YoY delta is that publications into EOR rose 2.3x. CO2-EOR is favored (chart below). Further insights from the technical literature will follow in a detailed publication, but importantly we do not see underlying productivity growth in shale to be slowing.

Second, we re-read Occidental Petroleum’s 2Q19 conference call. More vocally than ever before, Oxy hinted it could take the pure CO2 from decarbonised power plants and use it for Permian-EOR; with its equity interest in NetPower, 1.6M net Permian acres, and leading CO2-EOR technology. Quotes from the call are below:

  • On CO2-EOR: “We are investing in technologies that will not only lower our cost of CO2 for enhanced oil recovery in our Permian conventional reservoirs, but will also bring forward the application of CO2 enhanced oil recovery to shales across the Permian, D.J. and Powder River basins”
  • On decarbonised gas power: “What it does is, it takes natural gas combines that with oxygen and burns it together, and that’s what creates electricity and it creates that electricity at lower costs… one of our solutions is to put that in the Permian… for use in our enhanced oil recovery… It will utilize our gas that that if we sold it would make nearly as much”.
  • On the opportunity: “We are getting calls from all over the world, with people wanting our help to — figure out how to capture CO2 from industrial sources, and then what to do with it and oil reservoirs”.

Our extensive work on these themes includes two deep-dive reports linked above. Our underlying models can connect c10% IRRs on oxy-combustion gas plants (first chart below) with 15-30% IRRs at Permian CO2-EOR (second chart below). On these numbers, the overall NPV10 of an integrated system could surpass $10bn.

EOR remains one of the most exciting avenues to boost Permian production potential. So far, our shale forecasts assume little direct benefit (chart below). But an indirect benefit is implicit, as we assume 10% annualized productivity growth to 2025, which would underpin a very strong ramp-up (chart below). 2023-25 currently look well-supplied in our oil market model, due to falling decline rates, but this could be compounded by CO2-EOR.

We are more positive on the ascent of gas, stoked by increasing usage in decarbonised power. We see potential for gas demand to treble by 2050.

De-Carbonising Cars. Can Oxy-Combustion Save Gasoline?

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.

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We conclude there is strong potential to de-carbonise gas-fired power generation with next-generation combustion technologies. But de-carbonising oil-fired automobiles may be most readily accomplished by electrification, i.e., substituting in smaller, more-specialised electric alternatives.

Source: Hamad, E. Z. & Al-Sadat, W. I. (2013). Apparatus and Method for Oxy-Combustion of Fuels in Internal Combustion Engines. Saudi Aramco Patent WO2013142469A1.

Source 2: Ben-Mansour, H., Habib, M., Jamal, A. (2017). Gas-Assisted Liquid Fuel Oxygen Reactor. Saudi Aramco Patent US2017284661 

Permian CO2-EOR: pushing the boundary?

We see enormous opportunity from CO2-EOR in the Permian. It can double well productivity, generate 15-20% IRRs (at $50 oil) and uplift production potential from the basin by 2.5Mbpd. The mechanism and economics are covered in detail in our deep-dive note, Shale-EOR, Container Class.

But what is happening at the leading edge, as companies try to seize the opportunity?

To deploy CO2-EOR, operators must be confident in the technology. It must be predictable, with well-calibrated models informed by field-tests and laboratory studies.

Excitingly, Occidental Petroleum is developing such models. Its laboratory analysis into CO2-EOR has been published in a new SPE paper, in partnership with CoreLabs.

Oxy is at the forefront of CO2-EOR, according to our screening of patents and technical papers. It has conducted 4 x field trials, with further ambitions to lower decline rates from 2020 and drive value through its Anadarko acquisition.

This note profiles our top five findings from Oxy’s recent technical paper. CO2-EOR’s deployment is supported.

(1) CO2 was found to be “the best solvent” for huff’n’puff in the Permian, after laboratory-testing Wolfcamp cores, with CO2, methane and field gas. Under simulated reservoir conditions, around 3,600psi, bubbles of CO2 immediately began dissolving into the oil, helping to mobilise it.

(2) CO2 swelled the oil by 15-76% under the reservoir conditions tested in the study (below, right). Swollen oil is more likely to dissociate from the reservoir rock and flow into the well.

(3) Accurate ‘Equation of State’ models have been developed, matching the pressure, viscosity and well data from the laboratory study.

(4) Multiple Cycles. Huff’n’puff works by sequentially ‘huffing’ gas into a depleted shale well to entrain residual oil, then ‘puffing’ back the mixture of gas and oil. Ideally, this cycle can be repeated multiple times, recovering more oil each time (illustration below). Oxy’s laboratory study continued recovering material volumes of oil over six cycles. Lighter fractions were recovered in earlier cycles, followed by heavier fractions in later cycles. The authors concluded: “The multi-cycle incremental recovery – even at the small core plug scale – suggests the significant potential for multiple HnP EOR cycles for a future unconventional EOR project design”.

(5) Huge Recovery Factors. What slowed the eventual recovery of oil in the study was the high volume of oil already recovered. Initially, these shale samples contained 10.3% oil (as a percentage of the initial pore volume). By the end of the huff’n’puff trial, they contained just 2.4%, implying c77% of the oil had been drained: an incredibly high number, when compared with c 8-10% recovery factors in most analyst models. The result matches other lab tests we have seen in the technical literature (chart below). The field-scale implications of these studies are discussed in our deep-dive research.

Source: Liu, S., Sahni, V., Tan, J., Beckett, D. & Vo, T. (2019). Laboratory Investigation of EOR Techniques for Organic Rich Shales in the Permian Basin. SPE.

De-Carbonising Carbon?

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).

Lost in the Forest?

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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