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.
Prioritising low carbon barrels will matter increasingly to investors, as they can reduce total oil industry CO2 by 25%. Hence, these barrels should attract lower WACCs, whereas fears over the energy transition are elevating hurdle rates elsewhere and denting valuations. In Guyana’s case, the upshot could add $8-15bn of NAV, with a total CO2 intensity that could be c50% below the industry average.
Pages 2-3 introduce our framework for decarbonisation of the global energy system. Within oil, this requires prioritising lower carbon over higher carbon oil barrels.
Pages 3-6 outline the economic value in Guyana, which is now at the point where it is hard to move the needle with further resource discoveries.
Pages 7-8 show how lower WACCs can be trasnformative to resource value, even more material than increasing oil prices to $100/bbl.
Pages 9-17 outline the top technologies that should minimise Guyana’s CO2 emissions per barrel, including flaring policies, refining quality, midstream proximity, proprietary gas turbine technologies from ExxonMobil’s patents and leading digital technologies around the industry.
Our conclusion is that leading companies must deepen their efforts to minimise CO2 intensities and articulate these initiatives to the market.
Precision-engineered proteins are on the cusp of disrupting the meat industry, according to an exceptional, 75-page report, published recently by RethinkX. The science is rapidly improving, to create foods with vastly superior nutrition, superior taste and superior costs, by the early-2020s.
The energy opportunities are most exciting to us, after reading the report. If RethinkX’s scenarios play out, we estimate: direct CO2 savings of 400MTpa, enough to offset 10% of US oil demand; 2bcfd of upside to US gas demand; and enough land would be freed up to decarbonise all of US oil demand, or increase US biofuels production by 6x to c6Mbpd.
We would be delighted to introduce clients of Thunder Said Energy to the reports’ authors, Catherine Tubb and Tony Seba. Please contact us if this is useful.
Many commentators fear long-run oil demand is on the cusp of a steep contraction, leaving oil and gas assets stranded. We are more concerned about the opposite problem. Projecting out the current trends, global oil demand is on course to keep rising to over 130Mbpd by 2050, undermining attempts to decarbonise the world’s energy system.
Our new, 20-page note reviews seven technology themes that can save 45Mbpd of long-term oil demand. We therefore find oil demand would plateau at 103Mbpd in the 2020s, before declining gradually to 87Mbpd in 2050. This is still an enormous market, equivalent to 1,000 bbls of oil being consumed every second.
Opportunities abound in the transition, in order to deliver our seven themes, improve mobility, substitute oil for gas, reconfigure refineries for changing product mixes, and to ensure that the world’s remaining oil needs are supplied as cleanly and efficiently as possible. Leading companies will seize these opportunities, driving the transition and earning strong returns in the process.
Equinor is deploying three world-class technologies to mitigate Johan Sverdrup’s decline rates, based on reviewing c115 of the company’s patents and dozens of technical papers. Our new 15-page note outlines how its efforts may unlock an incremental $3-5bn of value from the field, as production surprises to the upside.
Pages 2-3 provide the context of the Johan Sverdrup field, its implied decline rates and how their variability will determine the field’s ultimate value.
Page 4 re-caps the concept of decline rates and how they should be measured.
Pages 5-7 recount the history of Digital Twin technologies, the cutting edge of their application offshore Norway and evidence for Equinor’s edge, as it deploys the technology at Sverdrup.
Pages 8-11 illustrate the upside in Permanent Reservoir Monitoring, comparing Equinor’s plans versus prior achievements deploying the technology off Norway.
Page 12-14 show the cutting-edge technology that excites us most: combining two areas where Equinor has established a leading edge. This opportunity can improve well-level production rates by c1.5x.
Page 15 ends by touching upon other technologies that will be applied at Sverdrup, quantifying Equinor’s offshore patent filings versus other listed Majors’.
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.
Energy transition is underway. Or more specifically, five energy transitions are underway at the same time. They include the rise of renewables, shale oil, digital technologies, environmental improvements and new forms of energy demand. This is our rationale for establishing a new research consultancy, Thunder Said Energy, at the nexus of energy-technology and energy-economics.
This 8-page report outlines the ‘four goals’ of Thunder Said Energy; and how we hope we can help your process…
Pages 2-5 show how disruptive energy technologies are re-shaping the world: We see potential for >20Mbpd of Permian production, for natural gas to treble, for ‘digital’ to double Oil Major FCF, and for the emergence of new, multi-billion dollar companies and sub-industries amidst the energy transition.
Page 6 shows how we are ‘scoring’ companies: to see who is embracing new technology most effectively, by analysing >1,000 patents and >400 technical papers so far.
Page 7 compiles quotes from around the industry, calling for a greater focus on technology.
Page 8 explains our research process, and upcoming publication plans.
In 2018, we reviewed 250-years of energy transitions, arguing that another great energy transition is now on hand.
It will occur over the next century. Thus for another hundred years, today’s energy industry will remain vitally important. In addition, new sources of supply will create unimaginable new sources of energy demand.