The Third Major Energy Transformation (w/ Rob West)

During. The month of May our Tuesday, trend, theme, has, been about oil today, we're going to continue that theme we're going to talk to Rob West Rob. West is an equity, analyst, who's moving, towards, consultancy. Because. He's really fascinated, by the changes, in technology and, the movement. To multiple, energy sources, that is having such a great impact, on the oil market so, it's gonna be interesting to talk to him about what's. Happening, in this space what. Are the changes, and what's a tiny frame, that we should expect some of these changes to take place I'm looking forward to meeting Rob and, let's hear what he have to say. Our, industry, is going through probably. Its biggest ever period, of change it's. All driven by technology technology, is coming through and changing everything. In, energy, and. Really those. Changes, are just under researched, there, isn't enough analysis. Looking at those, game-changing. Technology, isn't what they mean for the world so, an hour on my own firm called, Thunder said energy what, we do is we look, at those game-changing, technologies, and economic. Opportunities, that they're creating. Honest. Truth being transformed. We. Probably have more uncertainty. In energy today than. Ever and. It. Is killing investment. In our sector killing, it so. I put yourself in the shoes of the. Investment community last. Year the global energy industry spent, one, point eight, five trillion. Dollars, to meet the world's energy needs and, every. Day every week you're, being asked to open your wallet to this industry, when, all around you you have signs of change you, have people out in the streets protesting saying. They're sinners you shouldn't exist you. Have energy transition. That's, a catch-all, word, that people use to refer to this period of change. But. Actually. We're. Not having an energy transition, we're. Having five energy transitions, all at the same time let's, go back to those challenges of getting, capital into this industry, so. There is an obsession right now with, buybacks, the number one thing that investors, want from Big Oil is their money back there's. One way to make your stock price go up and that's to do a bigger buyback, and. Why. What. Has to happen to make investors. Actually, prefer. Reinvestment. And, we've measured that last, year I started going, around asking, investors, you know what what hurdle rate would you need what, return, would you require where, you genuinely, prefer, this. Oil major not, to do a bigger buyback, but put, more money back into their business and their results really surprised me so, when, it comes to renewables, like wind and solar investors. See ten percent, as good, enough when. It comes to gas people, say 13%. It's kind of what they need as a hurdle, rate why, well because it's the cleanest, fossil fuel, so we feel okay about that when you get to shale what people say 15% is, the right hurdle right and again you ask why and the answer is because it's. Short cycle within, 10 years you've got a 3x cash-on-cash return on, your investment, and then you get to the scary side of the chart where, you, get to offshore projects. These big mega projects, that the oil industry is famous for and the. Hurdle rate the required return is now 20%. For, investors to want to do those projects. It gets even scarier when you ask about coal they. Say no, no we, will never find more coal and. Then if you press them the answer comes out somewhere like 40% so. Think, about what that means, think, about the. Analysts. Favorite, concept. Marginal. Cost right so there's always analysts, like like, me trying to figure out what is the right oil price the way we do that is a marginal cost calculation.

You Say what, what does the oil price have to be in order for me to go out and find develop. Produce, and commercialize, the, marginal, barrel of oil in the market and because there's such a capital, intensive industry when. You take that hurdle rate from 10 percent to 20 percent you, take the marginal, cost of oil from, $40, a barrel to, $80. A barrel so, pulling. Capital, away from the, energy industry naturally. Has the risk of decreasing, supply when. You decrease supply of a commodity pretty, easy to guess, what happens to the price goes, up and, really you know there's this question mark that you, know we could be in for a period of on the supply in the 2020s. Because. Of this divestment, movement and. Actually that really worries me because. If you think we need to have an energy transition, and, it's going to take decades, you. Know what, is a big spike in the price is going to do to the political will you, know if oil went to $100. A barrel tomorrow would. People really want energy transition, or they want cheap energy again you, know we need to get that balance right and that is the hardest challenge for the market right now as to thread that needle. What. Are these energy transitions, and what do they look like well we've got historical, precedent, for this and we, can go back and look at these two big, energy transitions, that have occurred in the past to. Form a view of what the future is going to look like too so, the first big energy transition, is coal. 1750. The world's energy mix is about 90% burning. Wood and. Horses. And oxen pulling. Carts. Right, it's not a particularly, advanced. Energy system, and, then over. This period of 80 years from, 1830. Onwards, coal really. Starts building into the mix and. This is the first great energy transition, it. Takes 80 years as I said and we still burn twice as much wood as coal, in the 19th century as this is happening at. The same time coal. Creates all these new sources of demand like, steamboats. And mechanization, and railways that's, what the first one looks like the. Second one looks eerily similar, so. It's, oil oil. Starts really building into the mix for about 1910. Onwards oil. Peaks the share of the world's energy mix in 1973. Again, a 60 year transition and, just. In the same way we've burned 15%. More coal than oil in the 20th century and oil, unlocked these unimaginable. New sources of demand that nobody could have seen coming like, plastics. And planes and cars so. Here, we are in 2019, and. It. Looks like we're going to have an energy transition but, but actually we're, not we're. Gonna have five energy transitions, all at the same time these are happening right now and. I think that analogy of what the past looks like is really applicable here I think, it's also going to take, 70. Plus years to meaningfully, shift the energy system and I think it's also going to create new, sources of demand and opportunities, there's just beyond, imagination. Today and, so let's let's go into that so. What are these five great energy transitions, number. One. Renewables. The. Price of wind. And solar has come down by 90. Percent since. The 1980s. If, you, go out and fill your car up with oil today at the you, pay 100. Cents per kilowatt-hour, for, energy okay, wind and solar on average adding kilowatt, hours to the grid at, about five cents a kilowatt hour. They. Are the bottom of the cost curve and, they're. Gonna scale up and reshape. The entire energy landscape over. The next century energy. Transition, number, two, shale. So. For the first 150, years of oil we've. Been getting this, resource, from conventional. Reservoirs, these. Are sand, stones and carbonates, that are porous and permeable now. We have the last decade, we. Haven't been reliant on getting. Oil out of these reservoir, rocks we, are going straight into the source rock where the oil is generated, and visit. Transformation, was ten times more oil in, these source rocks than in the reservoirs, and the technology, just keeps getting better and better I recently, went back through 300, technical, papers in shale 100. Of them are gonna improve productivity, on. My numbers shale is going to be capable of reaching 2530. Million barrels a day and to a lot of people that's gonna sound crazy but I, can take you through some of that and these technologies coming through they're just game changers, energy. Transition, number three. Electrification. So. If you, were driving a fossil fuel car today you. Get 18, percent conversion. Efficiency, of the, gasoline, in the tank to, useful energy you can drive with make. That current electric car and you're at seventy percent so, the solution, here is you.

And Electrify, as much of this inefficient. Combustion process, as possible and, again that is going to go and apply to as. Many machines as possible, over the next few, decades this. Is why you see oil majors trying to get into electricity business, this. Is the future energy transition. Number four, digital. So, it's really easy to think of an oil platform as, an oil platform as, an oil platform but. The, ones being built today from. Our engineering perspective. Are. Light. Years ahead, of the platforms, of the past you, go out to the North Sea today to, a modern, instrumented. Form and has, 60,000. Tags on. 60,000. Pieces of equipment or. Laying data back, to shore in real time if something, is about to break you can see that it's about to break before it breaks and stop, it breaking, this. Is yielding, up, X per barrel of three to four dollars on these, next generation platforms. And it's. Sweeping, through the whole industry. Energy. Transition, number five the, Big Kahuna. Carbon. The, world is putting, thirty-five billion, tons of carbon out into the atmosphere every. Year and. Will change that and the. Oil companies know. We've got to change that in fact, you could go so far as to say nobody. Is more, interested, in driving, this energy transition, than Big Oil because, if they don't they, are not going to have a license to operate and. Really. In the last few years you've seen companies, embrace. That message, hook, line and sinker these, companies know they've got to change and they want to deliver this transition, so, let's recap here are the five themes renewals. Shale. Digital. Electrification. And, environmental, really all of these just. Are enormous. Uncertainties. For investors, and that is why without. An understanding, of these uncertainties is so hard to open your. Wallet to this industry and that. Is the, whole point of why, I want. To do what I'm doing which, is helping best to see the opportunities, in technology because you know we need to rebuild, not. The. Energy system that we have so far but, three or four more of these things I'm just aren't going to do it and as the capital can go in so the latest numbers from the IEA and I. Mentioned, the world invested, 1.8, five trillion. Dollars in energy last year we, need to increase that by two hundred three hundred billion dollars per annum by. The 2020s, in order to meet the world's energy needs there, are opportunities, there unless, investors, can see those opportunities it's, not going to happen and we've got to change that. What. Is this long mean for oil prices, it's. One of the most wonderfully. Complex questions, in the whole world I always like to think about the oil market, as a clock you, can choose to you focus on the second hand or the, minute hand or the hour hand and so maybe let's, have a little bit of time on each of those when. I ran, my oil. Supply demand model, over. The last 10 years it's. One of most humbling experiences you can have because, you, spend your whole life you. Know adding up, 100. Million barrels a day of supply, barrel, by barrel by barrel and a hundred million barrels a day of demand barrel by barrel by barrel and then, some. Rebel attack in Libya blows, up your model for reasons you could just not possibly, have perceived and that is the day, by day oil market, it's driven by, unknowable. Changes, and remains. Incredibly. Humbling to try to predict the needs, of the minutes and so. I've given an example of next year my, oil market, balance is over a million barrels a day oversupplied. Not. Scary I would suggest as, shale. Ramps up and these Permian, pipelines, become one bottle necked you, know we could see some pressure on prices, then, when you look at the our hand and go, back to that question of are we investing, enough in our industry, yeah, I see some real. Risks of price spikes. By. The mid-2020s, I can, be 2. To 3 million barrels a day on this applied on the path we're on and that that's coming from one, of the most bullish people on shale productivity, in the universe so. What. Does that mean well I'm really worried about it do. You know the the story of prohibition that, doesn't. Always, get brought up in the oil markets, but it's, a chapter of history where you, know for 60, years the u.s. talks about we need to get off alcohol alcohol, is one of the big evils, of the world in. 1920. They actually do they banned the sale of alcohol and. There are people writing, we've done it it's great the, world is now going to be wonderful, and, what happens nobody can sell alcohol so. The price goes up seven, times but. It turned out that people still want to consume alcohol and, so, even, with a 7ex, price increase, demand. Only fell by about, 2030 percent and. Then you got all these unintended, consequences. Like people. Going blind from drinking moonshine and, the mop and, then. You get to 1933, and people, think this. Experiment, wasn't such a good idea backtrack. It, past the 18th amendment and, you.

Know We, now look back at this period of history where, alcohol. Was illegal and we think what a weird, weird. Chapter, well. If. We. Get energy transition, wrong, we. Could repeat the story in fossil. Fuels if we. Pull back too hard and, under. Invest in fossil fuels and have, big price spikes we're, going to lose the political, will to drive. This, multi-decade. Change. So. Is, it really a multi-decade change, right that's that's the pushback you always get is it really gonna take 70, 80 years and this is where I just think you have to look, at the numbers around, the world today, we. Consume. 60,000. Terawatt-hours. Of. Energy. Per year around. The world today we consume, 60,000. Terrill hours of energy per year if. You look at wind and solar, we're. Investing, 400. Billion dollars per annum into, these new technologies. And each. Of them at most. Has. Added. 150. Terrible. Hours per. Year so. Growing. At 150. Per year how. Long is it going to take to. Move a, 60,000. Tarawa our market, and that that's why. You. Might come to the conclusion this is going to take decades. You. Can change this if we can get better, technologies. Into the industry and we can really do it but, again, that's, reliant, on somebody, finding opportunities, in these technologies. So. What are the opportunities, for, energy. Investors. Well. I'd, like to go back to the, analogy of the clock let's, look at the second hand first this. Is going to continue to be driven by who does the biggest buyback and I think we can all be well aware that that. That's the biggest force gripping the market today is that desire, for cash, return now, let's look at the minute, hand what. You see there is some, underperformance, in the sector, there's really been quite notable, because. People. Want to rotate out, of this. Uncertain, industry, into more, attractive spaces, like tech and industries. With a big future, but. Now let's look at the hour hand and this. Is where you can really do some analysis, that shows. You the opportunity, and this is the one that I'm most excited about I've just been through 1,800. Patents, around, the industry you know it's blowing me away how. Much technology is, coming. Through some of these big oil majors we, think about them as fossil. Fuel companies, but, really, at the leading edge of technology and, these in these these majors, Wow. The. The leaders are doing. Some incredible, things and so, let's, bring it back to those five. Big, themes that we talked about and go through them one by one let's. Start with renewables. I'll. Give you my favorite, example in this sphere if. You're the area of wind in. The wind industry this. Is well known principle, that. If you. Go. Higher, the. Winds are faster, and that's actually is exponential. So it's a cube function of height, but. You can't get at these Heights with conventional, turbines, because the. Towers become too tall you already have 40% of all the cost is in the foundations. And the pylons so. How, could you get these, wind.

Investments. To reach. Those, higher, altitude. Winds well there's, a new technology, called airborne, wind which. Actually uses kites and the, kites have this really long tether that goes back down to earth and relay, the power back down to a base station they're. Really, pioneered, by Google. At a company called Makani that google invested, in these things are pretty cool they they ride the wind, up they, get to about 300, meters earning, nosedive, and as they knows that these propellers, all along the vehicle start spinning, at breakneck speed, and this and 600 kilowatts back down the cable to earth and they get to the bottom they pull up and they make another loop so. Look. At the oil majors patterns. Exxon, mobil has patented the. Ability to do big. Wind farms, of these flying. Wind kites offshore, and the patent humbly says you, know these systems could power the entire energy, needs of the united states four times over and this, year showers gonna test one of these concepts, offshore in the North Sea it's actually going to fly one yet, lo and behold at, the forefront of renewables. Behind. The scenes you have oil majors trying. To gear, up and and find. These opportunities and, invest in them. Disruption. Number two shale. Shale. Is gonna be capable. Of generating, 2530. Million barrels a day I know that sounds ludicrously. High to some people but. Remember this is a technology industry, not, a clunky. Bricks. And mortar capital. Industry of. Those 300 technical papers in shale I've been through you know how many used data. 97%. Of them you, know how many of them used data to build really advanced, models or optimized that their processes, 60. Percent of them this is a data industry, and, as the digital. Technologies, get better and better so as a shale production we, have doubled, productivity, in shale since 2015, and, I'll. Give you three examples of, things that can improve it coming. Up enhanced. Oil recovery we. Can get 50%. Recovery that is in the lab, distributed. Acoustic, sensing, you can now hear, every. Single meter by meter by, meter along, these Shale wells and how to do them better and, algorithms. Machine. Learning to figure out exactly what, is the best way to frack, that bit of rock who's, at the forefront of this there, are well-known EMPs like EOG and Occidental, in the, patents and the technical literature you, just think wow and on, the major side Exxon. Mobil and Chevron, just reconfigured. That businesses towards shale those, numbers keep getting upgraded and they're gonna keep getting upgraded and, that. That's where, they've placed their chips in this transition. Disruption. Number three, digital. And. We've been through eighteen hundred patents and four hundred technical, papers I started. Trying to score the. Digital, capabilities. Of, every.

Oil Major in the market you. Go through digital, drilling, technologies, digital production, technologies, digital. Optimization. Technologies, and, you. Know the company, that really, has impressed me in that sphere is BP this. Is driven by the, upstream CEO, Bernhard Looney who, has already been the visionary, behind this, and I. Could. Bore you with so many examples but, my, favorite one is called apex imagine. A complex oilfield where, you have over, a hundred wells and. Every single day you face the challenge of well how hard do you pull on every. Single one of those wells. And. In the past that was just unknowable, well. In combination with, a tech company in. California. Called Palantir, BP. Is now monitoring, every single one of those wells in real-time it. All feeds into an algorithm the. Algorithm does a linear optimization and, says turn, that one down turn that one up turn, that one up turn that one off and, you. Can get 10. Plus percent increase. In the production of an asset from, doing these optimizations. So, these are algorithms coming, through and transforming, our industry and this, is gonna happen more, and more and more and the, companies at the forefront of this are, going to really, reap the benefits, and the companies that aren't doing it again in trouble, disruption. Number four you. Gas an electrification. So. On, my numbers by, 2050, if, we're going to meet the world's energy needs gas. Demands going to travel that. Is the only, way I can see to do this without, big. Increase in the carbon emissions, and, as I mentioned earlier electrification. Just. It, is a game-changer. Efficiency. In the energy sector so. A couple of majors have realized this and. That's why they're, reconfiguring. Their business, towards, gas, LNG, and, electricity, networks I put. Shell total BP. But, but really most of these companies are. Doing this as well and, they are they're. Doing more and more of these projects, again. You can look at the technologies, they've been developing, and there, are some really interesting advances. Coming through a company by company when. You go to the company investor presentations. They. All have. Speeches. They all have logos, they will have presentations. They will have cash flow targets, and on, the surface they can look quite similar, when. You start going through their patterns, and that. Proprietary, technologies. The. Spread, is enormous, I would, just put it this way if you invest in oil with, the same technologies, as everybody else you. Will get the same returns as everybody else if you. Invest in oil with twice. As good technologies, you'll. Get twice as good returns and so, if I was going to place my chips. On a oil company, I'd, be looking at who has that lead and it. Is stark when, you start to contrasting, the different firms within, some of the more niche opportunities um. This. Is where, it. Gets really exciting, particularly. If you're more. Of a private. Equity or venture capital, investor, so, I'll give you a couple of ideas in that space that have really excited, me one, of them is a area, called plastic, pyrolysis, so. Around. The world today we can, only recycle 15%. Of the plastic, very. Very pure PE tea your high density polyethylene and, the, other 85% of, the plastics, either. Go into landfill, or they get incinerated, or worst of all 9, million tons a year of them end up in the oceans there. Are companies now that have. Cracked how, you can take those mix plastics, and turn. Them back into oil so. Instead of being a waste product product, this, is now a way.

To Create. Economic value and, you. Model the economics, of these things I could, go to a, waste, management facility, you. Know in anywhere. And you get there's 500, these sites in Europe. You, could put in a small, pyrolysis plant, and, you. Can make a 30%. Return turning. Plastic back into oil and in, the process, you. Could take out 15, million, barrels a day of oil demand by the, 2040s. And you. Can help solve this enormous. Challenge at the world faces and so, I've, been through 20, companies, all the patents all, of their different technologies, and you. Know Wow there are opportunities, there so. That's the sort of area where I like, doing the work is to try and find. Opportunities. From energy disruption, and help. Decision-makers. Get, behind them. I'm. Going to do something now that is can get me into trouble and. Just. To try and be helpful I'm. Gonna say who I think the leaders are around. Some, of these big themes and this. Isn't discredit. The people that I don't say, everybody. Has some technology, somewhere where you think wow but. But who are the leaders in shale. Technology. I've. Really been impressed by EO. G, Occidental. And. Increasingly. Exxon, and Chevron, in. Digital, technologies, I've, really been impressed by BP, in. Energy. Transition, technologies, I've, really, been impressed by Shell. Total, ne and. In. Offshore technologies. Really, been impressed by, total. Ecuador. And and. Chevron, there's. One that I haven't mentioned it. Was just impressed, me across the board and it's. Topical because I believe they have some. Kind of world's largest IPO, coming up but, when, you go through the technical, literature Wow, Aramco. Stands out as a. Amazing. Company, just, from a technical perspective that's. The one where you read through all their patents, and you think ah I. Had. No idea somebody, was doing that so. That's, just a handful, and there's a lot more that a, lot, more that we could run through but those are the ones that resonate. With me so. How would you invest in the sector on a day to day basis, I think, you've got a couple of options the first one if you're going to have this volatility, in the price is. You. Got to be prepared to ride out volatility, and, I think the biggest opportunities, of taking. A long-term view, and, being willing to ride out that volatility, when other people are in investing. You. Get paid to be courageous and. You. Do the numbers the, world is going to need energy. The. World is particularly going to need the, best energy it can get and if, you invest in the companies that give. You the best energy you can get then. When push comes to shove and the volatility plays out thinking. To come out on top, when. It comes to the more. Trading. Oriented strategies, there. Are some pair, opportunities. That you know you can use, the D risk the volatility. In the oil price so. Find. A technology, leader and parrot, with less, of a technology leader on the short side and so, those are the things that I'd be looking at if I was investing. In the equities in this sector on a day to day basis. So. Let's bring it all together, there's. Six, trillion dollars of capital that is. Disinvested. From. Fossil. Fuels right now and I think that's the wrong answer I think, that's going to leave a lot of value on the table, and I, think there's a way we can do so much better which. Is identifying. The. Best energy technologies. Identifying. The opportunities, that they create and getting, behind them because. If you can drive capital. Where, it's needed in this industry, we. Can finance better, energy for the whole world I would like to give you an example that that had some personal resonance. With me growing, up in southwest London in. The early 1990s. My. First ever word was. Tonto, what. Is Tonto, it was a two-year-old, trying to say the word Concorde, and why do I think that matters well let's yeah, we started in the 18th century let's go back to the 18th century. Captain. Cook sails, to Australia. It. Takes two years by. The, turn, of the 20th century, on, a steamship. That journey is down to a couple of months then. In 1933. This. New company comes along called, Queensland. And Northern Territory's aerial, services. Today. We know them as Qantas, and they, launched this service called the flying boat and the flying boat goes, from Sydney, to London and, it makes about 30 stops, along the way and it, takes that journey down to about 10 days so. Two. Years a couple. Of months ten. Days and. Another forty years later you. Get the Boeing 747. That journey now takes one day then, you fast forward to. The. The time I talked about you and I was a kid and we.

Had Supersonic, travel, we. Had the. Ability to go. Four. Or five times, faster. Again. And. And. We've lost that and, that's a really strange, thing when you think about this arc of human, progress and human ability but, you know after centuries, of improving, we, start naming backwards, there's. Other great data you can get from the UK Department of Transportation where. They quantify, the speed. At which people travel, around, the UK going back to 1970s. Between 1970. And 2000. It basically doubles and since, 2000, it's, got seven percent slower, to. Get anywhere so as we're talking about this. Big, theme of energy transition, I think. It's really sad if we. Deliver. An energy transition, at. The cost of all, losing, our mobility. And losing, the just, life-changing. Prosperity. And hansung effects of the energy system and. What. I think would, be a wonderful, thing for the world as. If we, can do both can. We shift the energy system become cleaner and more efficient, and also unlock better. Energy technologies, for people because. That's. The opportunity, our sector has to make, its mark on the world and I think for an investor being part of that journey can, be incredibly. Exciting and I think, can also pay rewards, rob, is the second, person that we've had who's talked about oil in the, context, of this much wider space, and the importance, of these, technical, logical changes, that, are taking place he. Was talking about the capital needs, of the, energy, sector to prevent some dramatic oil, price spikes in the, future, and the, importance, of the large cap, companies many. Of these are the ones that people often think of dullards, but, he thinks that these are very much at, the epicenter. Of what, is going on and the changes, that are taking place across the whole energy, spectrum, itself we've, got one more day still to go next Tuesday, where we'll hear another perspective, within. The oil and the energy space and I hope you'll tune in for that one as well thank, you. You. You.

2019-05-23 14:24

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