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.
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.
The super-giant Mero field in pre-salt Brazil is not like its predecessors. While prolific, it has a 2x higher gas cut, of which c45% is corrosive and environmentally unpalatable CO2. Hence, Petrobras, Shell, TOTAL and two Chinese Majors are pushing the boundaries of deepwater technology. Our new, 16-page note assess four innovation areas, which could unlock $2bn of NPV upside. But the distribution of outcomes remains broad. $4bn is at risk if the CO2-challenges are not overcome.
Page 2 provides background on pre-salt Brazil, especially the flagship Lula project, which a new super-giant, Mero, is trying to emulate.
Page 3-4 contrast Mero to Lula, based on data from flow-tests. Mero has a 2x higher gas-cut and c8x higher CO2.
Page 5 reviews Petrobras’s own internal concerns over CO2-handling at Mero, and how they are expected to sway the decline rates at the field.
Page 6 outlines our valuation of the Mero oilfield, testing different CO2-handling scenarios. Our full model is also available.
Pages 7-8 review Mero’s FPSO design adaptations, to handle the field’s higher gas and CO2. These will be 2-2.5x larger FPSOs than Lula, by tonnage.
Pages 8-10 illustrate pipeline bottlenecks facing pre-salt Brazil. After considering alternative options (re-injection, LNG), we argue more pipelines may be needed.
Pages 10-12 describe riser innovations, which may help handle the risks of CO2-corrosion at Mero. One option is overly complex. The other is more promising.
Pages 12-16 cover the holy grail for Mero’s CO2, which is subsea CO2 separation. This would be a major industry advance, and unlock further billion-barrel resource opportunities. Upcoming hurdles and challenges are assessed.
Pages 15-16, in particular, cover Shell’s industry-leading deepwater technology, which may be helpful in maximising value from the resource, longer-term.
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.
Shell is the leading Major in driving new LNG demand, based on patent filings (chart above). As an example, we highlight a leading new technology to promote LNG demand in transportation, by mitigating the problem of boil-off.
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.
There is only one way to decarbonise the energy system: leading companies must find economic opportunities in better technologies. No other route can source sufficient capital to re-shape such a vast industry that spends c$2trn per annum. We outline seven game-changing opportunities. Leading energy Majors are already pursuing them in their portfolios, patents and venturing. Others must follow suit.
Pages 2-3 show that today’s technologies are not sufficient to decarbonise the global energy system, which will surpass 100,000TWH pa by 2050. Better technologies are needed.
Pages 4-6 show how Oil Majors are starting to accelerate the transition, by developing these game-changing technologies. The work draws on analysis of 3,000 patents, 200 venture investments and other portfolio tilts.
Pages 7-13 profile seven game-changing themes, which can deliver both the energy transition and vast economic opportunities in the evolving energy system. These prospects cover electric mobility, gas, digital, plastics, wind, solar and CCS. In each case, we find leading Oil companies among the front-runners.
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).
An exciting aspiration in wind technology is to obviate large, expensive “towers”, and unleash tethered kites into the skies. They can access 2-4x more wind-power at greater altitudes, and at 50-90% lower costs. Intriguingly, we have discovered Exxon and Shell are at the forefront of pursuing this new wind opportunity offshore, based on their patents and filings.
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).