4IR Implications Part 3: Energy Transition

This is the third post in the series considering the left-field consequences of the 4th Industrial revolution (4IR). Not only are there several technology trends leading to breakthroughs in productivity but also there are drivers pushing changes in approaches to energy. This is a long post, so apologies in advance, but there’s quite a lot to say on the topic.

If you were in Surrey and was asked “does the world need any more cars or need a better standard of living”, you might be tempted to answer no. If, however, you were in the poor parts of south east Asia or Africa you might instead agree that raising living standards is good idea. To do that output per person must go up and that will require technology, know-how, organisation, and energy. As living standards rise demand for domestic energy rises too.

Development has implications for energy demand, supply, and emissions. For capitalism to continue to provide improvements to people’s lives different economic drivers will be required if we are to address environmental constraints. Some will come from technological advances, some by regulation and some by changing desires of consumers. In short, we need a transition in our approach to energy.

I’m going to address energy transition in four ways: energy substitution, energy efficiency, decarbonisation, and decommissioning.

Many members of the Bestem Network are involved in the oil and gas industry. Please don’t read this post as a prediction for oil prices, it’s not. It’s also not about the short-term outlook for the oil industry. It doesn’t deal with the decades of piped gas and LNG and the abundant shale gas available. Instead it explores inescapable (if inconvenient) long-term trends. Guided by the insights from members of the Bestem Network, I am concerned to know if I am investigating along the right track more than demonstrating “being right”.

For oil veterans “Energy Transition” is firmly on the agenda in 2021. Many people I talk to are experiencing declines in their current business. Some are starting to believe the value of resources and capabilities that drove business success in the past should now be reconsidered. For them, it’s tempting to term any new line of business as energy transition – because it is a transition away from the energy business they knew. This phrasing doesn’t aid analysis. That’s why I decided to consider this topic in four dimensions.

There’s a lot of resistance and denial about change in the Oil and Gas industry. People can’t comprehend that skills, resources and assets that seemed so valuable three years ago, may no longer be so. Oil companies are writing off reserves, there is talk of stranded assets. Of course, there are people whose interests are served by changing the public discourse and some of the “illogical” conclusions of proponents of the new order may be “wrong”. Perhaps all parties have the same priorities, but in a different order? If enough people subscribe to a new paradigm, they can sway the outcome. Watch out, history only calls this way once.

What’s the data say?

If you haven’t read the BP statistical report on energy and oil – you’ve missed out. LINK

For my oil and gas colleagues, please note the graph above is for energy usage and therefore does not include consumption of oil and gas for other purposes such as chemical feedstock. These other uses account for about 15-20% of consumption. LINK

Perhaps petrochemicals will become a relatively more important use for oil. There are important developments including the configuration of the new Yanbu refinery that hint at this. Perhaps this market will be dominated by the middle east. LINK.

By far the most important sources of energy are Oil, Gas and Coal. Our modern world is built on their consumption which has increased 10x since 1900. In many ways the history of the 20th century is the history of oil. I am currently reading Daniel Yergin’s book the New Map, it’s a great reminder of how mega-politics is tied up with energy. LINK

Figures from the USA indicate that approx. 40% of energy is consumed in the home (heating, lighting, powering equipment, etc.), 30% is used for transport (private cars, lorries, boats, planes etc.), and 30% is used in industrial settings (steel, cement, manufacturing, mining, oil production, etc.). LINK

As other parts of the world catch up with the lifestyles of the Europeans and North Americans sheer weight of numbers could mean another 100x increase in energy consumption is on the horizon unless something changes.

Unfortunately, this poses two problems: Firstly, consumable resources are finite causing scarcity and price rises which slow global development, and secondly it appears that the emitted gasses are inconveniently killing us all (albeit quite slowly). LINK

Apparently we must emit no more than 100GigaTonnes of CO2 before the end of the century. LINK. In 2018 we emitted 40MegaTonnes. LINK. Carbon concentration in the atmosphere stands at 400 parts per million (up 50% from where we stood in 1850). At the current rate, excluding growth, we hit our upper limit in about 25 years, leaving us 55 Years where we must emit nothing at all. So, we must grow and use more energy but emit less carbon.

On top of this, advances in power semi-conductors, computerisation and battery technologies are making electricity more interesting. The use of oil, coal, and gas to create electrical energy that will then be transformed into stored potential and then to kinetic energy is less efficient than directly generating electricity in the first place. This is especially true when the price of new generating equipment is benefitting from economies of learning and scale. Since 2010, utility-scale solar PV power cost has declined 82% LINK and LINK

The upshot of all of this is that:

  • The human population of the world cannot safely advance until its growing energy requirements are met by means other than oil, gas and coal
  • Not only must we not increase the rate of CO2 production, we must reduce it

Combine this with some trends:

  • There is a growing desire to use electrical power
  • Measurement, algorithms, and power-switching leads to reduces losses in electrical power systems
  • Cost of generating electricity from the sun and wind is reducing
  • It’s possible to capture CO2 as it is produced so it is not released
  • It’s possible to remove CO2 already present in our atmosphere
  • There are other fuels that don’t produce CO2 when they burn

All this points to: growth in renewable generation; a stop in demand for oil, gas, and coal for electricity generation; reduction in the tasks that need doing; ways to use less energy to perform tasks; moves to reduce the production and release of carbon dioxide; and ways to remove the darned stuff from the air if at all possible. This is neatly summed up in categories Energy Substitution, Energy Efficiency and Decarbonisation. And will inevitably lead to Decommissioning.

Energy Substitution

Perhaps this is the first true energy substitution? We’ve had fuel augmentation before – adding coal on top of wood, and oil on top of coal. Sure, there was a little displacement, but mainly it was new growth that accounted for the new fuel and we continued to consume the old stuff pretty much at the same rate as before. The method for conversion from chemical to mechanical-power did, however, change – steam, internal combustion, turbine. This time is different as we’re transitioning on three fronts simultaneously: the primary method of capturing energy; displacement of established uses; and finding new (more efficient) ways to consume.

The benefit of electro-mechanical conversion

Direct use of electric drives to replace fuel combustion is occurring in both transport and in industrial settings. There are some areas that prove harder to electrify – especially when heat is the desired end-product. These include steel making, cement manufacture, distilling, cooking, and domestic heating.

There are positive drivers pushing the direct use of electricity in mechanical drives. This method provides excellent controllability using complex sensors, computer control and high-power semiconductors. It also provides excellent scalability – very small motors up to massive monsters. Electricity is also relatively easy to distribute.

The downside to electricity has always been difficulties related to is use in temporary, new, or moving applications. This relates to portability, transport, and storage. Battery technology is an issue as is gaining a connection and maintaining grid reliability. Users tend to fall back on diesel-based generation for both portability and reliability.

In transportation (especially aviation) weight is an important factor because, unlike fuel tanks, batteries do not get lighter when they are empty.

The business drivers of electric energy adoption:

  • Falling cost of direct electricity generation from wind and solar
  • Increasing battery performance
  • Requirements for fine-control and monitoring driven by computer control enable new solutions
  • Opportunities for efficiency from system level monitoring and prediction coupled with intelligent distributed control

Obstacles are:

  • Cost of infrastructure for grid establishment
  • Time to establish connection
  • Difficulty in transporting stored energy
  • Difficulty of use in mobile applications (battery storage and weight)

The societal drivers are:

  • De-carbonisation
  • Energy security

Under the current business rules, when positive drivers are strong enough and the obstacles small, users will naturally substitute. To maximise the societal drivers (or public good) regulation changes may be required to tip business decisions. These can come in the form of subsidies, penalties or license-to-operate. The decision is dynamic – what doesn’t make sense today, may do tomorrow (note the 82% fall in the price of solar over the last decade). The more that electrification occurs: the more technology is developed and the more the price falls; the more experience we gain and the less risky the outcome becomes. As demand and volumes fall for older technologies, they become more expensive and less convenient. Over time tipping points are reached and business decisions become easier to make. I explained this dynamic in relation to electric cars here LINK

There is a great piece by Tim Harford examining the shift from steam to electrical drives at the turn of the 20th Century. It provides a framework for understanding the drivers of the elongated time lines required for a transition. LINK

Scale Matters

Renewable generation used to be a cottage industry, but scale matters and it’s starting to swing the economics decidedly in favour of renewables.

Solar power is a factory manufacturing and construction problem. Site operation is pretty much zero intervention. Factors that have driven down cost will continue to do so with manufacturing costs decreasing and per-cell-output rising. While it’s unlikely to rival Moore’s law, research into cooling, focussing and reflected energy is promising a 10x improvement in output, which will compound the learning economies we’ve already seen. Solar is already the cheapest way to make power, and result of development may mean that we see a further 10x fall in price per MW generated.

Scale in wind power matters. GE are trialling a 12MW turbine in Rotterdam LINK It won’t be the last.

Standardised production

Unlike oil and gas platforms each turbine is essentially the same as the last one. There is no top-side processing to be designed and no process modification during its life. Wind has already achieved the standard, reusable, modular offshore design that Oil and Gas have been talking about for so long and never managed. This will lead to reduced requirement for engineering design and economies of scale and learning for installation and operation.

Oil and gas have been very wasteful for decades by creating bespoke engineering solutions on a field-by-field basis. There are many apocryphal stories of cost escalation in oil and gas facility engineering. Including one operator specifying 20 shades of yellow for sub-sea valves, which may or may not be true. But here’s a link that makes me think maybe it is LINK

Large generation assets promise cheap, reliable power distributed by a common connection. That’s a welcome development because small-scale generation posed unexpected public-good problems. In several underdeveloped countries central generation is unreliable, and users are tempted to go off-grid. Unfortunately, this has a detrimental effect on the public grid subsidy and leads to a death spiral for national utilities resulting in even worse service for citizens.

Energy Efficiency

There’s not a huge amount to say about energy efficiency other than its about stopping waste which means: for heating more insulation; for energy conversion making less heat and noise; and for moving parts less friction and less weight. Overall, it means stopping doing what’s not really needed – such as unnecessary journeys by better planning and routing, and not heating or lighting spaces no one is occupying.

This leads to energy reduction technology using predictive algorithms, sensing and fine control of systems.

Examples include google reducing energy consumption of its data centres by 30% by predicting the weather. LINK

High-power semiconductors enabling DC power transmission and reduced line-losses.

And there is tons of work going on using big data and AI to reduce logistics costs. LINK

There are activities that can not only be made more efficient but also completely replaced by new technologies. For instance, additive manufacture and additive construction may displace some of the need for energy used making materials such as cement and steel, thereby increasing construction efficiency and reducing energy requirements and carbon emissions.

Decarbonisation

I’m not a climate scientist but if enough smart people tell me there is a problem, I tend to believe them. Though, in my view, this is not about saving the planet – the Earth will be fine – it is about preserving an environment within the tight tolerances required for the human life we’ve come to expect.

For climate change, my reading of the situation is that we have a problem related to imbalances of gasses and particles in the atmosphere. Energy substitution and energy efficiency will naturally reduce carbon emissions in some areas. It may help continued growth of middle classes across Asia and Africa without a proportionate increase in carbon emission. However, this won’t be enough as there are still areas where electrification is not yet practical, and efficiency gains not enough.

This leads to two approaches to decarbonisation: chemical fuels which are not carbon based; and methods to rid the atmosphere of un-eliminated carbon emissions.

Alternative fuels maintain the thermal cycle but don’t produce CO2. The two most often noted are Hydrogen and Nuclear. I would not want either if it were not for the carbon argument (in almost every application it’s a compromise) but they may be necessary as sub-optimal answers until better ones can be found. Hydrogen wins on portability and Nuclear on reliability and capacity (and portability in applications like marine warfare and space exploration).

Its unfortunate reactions with steel aside, hydrogen is interesting as replacement fuel in domestic settings where pipes, compression and metering etc are available. Like copper phone lines, it is unlikely that any country that does not already have the legacy infrastructure would invest in it now.

Capture and storage

Talking of legacy, the oil and gas folks are pretty good at drilling holes, moving fluids, and running large pipelines. They also have some bits of kit in the North Sea (and pipes running to and from them) that it would be great to find a use for these when the oil stops. There is a lot of interest in finding ways to pump CO2 through the system and store it in underground spaces vacated by the oil that was pumped out.

I can see why you’d want to do that if you owned the infrastructure, and it’s an interesting short-term measure but it doesn’t seem like this would be a scalable solution to on-going growth and just like oil wells run dry, storage facilities will eventually get full. The idea that we have to add a complete industry with scale and complexity of oil and gas solely to deal with the emissions of other industries adds a layer of inefficiency and cost that, if allocated correctly, would make them even more open to replacement by alternatives.

Fuel Cells

The use of hydrogen in fuel cells makes little sense in the long run if battery and super-capacitor storage improves. Generating electricity, to convert to hydrogen, to transport under high pressure, to convert back to electricity seems absurd to me.

In my view, hydrogen is not part of the endgame of energy transition. It may be an interim step where direct electrification and transport/time-shift of stored electrical-energy is not yet practical. It does make sense to accelerate decarbonisation when an alternative has not been established, but it is inferior to many other forms of chemical energy except for its emission properties.

Hydrogen is more viable while legacy resources and assets exist in abundance such as low-cost infrastructure, fabrication facilities, mechanical engineering, and process engineering. It would require a lot of careful handling under pressure, temperature and, combustion. Luckily it can be consumed (less well and with modification) by legacy assets such as internal combustion, jet engines and domestic boilers.

Nuclear

The same arguments apply for Nuclear energy, but not so strongly and even less for fusion. Nuclear fuel is abundant and (with care) easy to transport and energy conversion is centralised. Energy is, however, still derived from the release and recapture of heat and the physical movement and containment of molecules and (and particles) under extreme conditions.

Decommissioning

When thinking about decommissioning my mind normally turns to removing infrastructure from the North Sea at the cessation of oil and gas operations. To be fair with an almost £80Bln prize at stake in the UK alone it’s not surprising that there is interest. LINK

But there is much more. If we are going to move to a low carbon world based on electrification, then there are many more assets that need to be decommissioned or refreshed. Ranging from filling stations, pipelines, car plants, car scrappage, domestic boilers, lorries etc.

If we combine this with the other changes in technology coming from the fourth industrial revolution, we are also going to find new uses for car parks, high streets, out of town retail centres and the list goes on.

It goes without saying though, that we will have to make sure we can decommission without emitting carbon dioxide in the process.

Implications

Implications: Energy Substitution

Even now, without any change in the incentives there are many areas where renewable generation is the best commercial choice. It is only going to get more so as more breakthroughs occur in generation and grid-level and portable energy storage.

The demise of internal combustion engines will have knock-on effects for manufacturers of components including radiators, hoses, vibration dampers, seals, drive belts, spark plugs, lead-acid batteries, gearboxes, and pumps.  Innovators may want to consider how to reskill and serve power engineering, distribution systems and electric control. Additionally, they may want to consider which ancillary manufacturing assets will be affected (either interrupting supplies or creating opportunities for low-cost acquisitions). Innovation is also likely to be available in any area which relies on diesel or other fuel oil to create electricity or provide non-transport related rotary motion.

Will cars and solar panels be manufactured and sold as consumer white-goods and semi-conductors? In which case they are going to come from Taiwan, Korea, and China.

As turbines become common place and large ones most economical, they will become like the Airbus A-380. There will only be a few manufacturers. They may not be operators. Unlike an oil-field that starts as a risky proposition but then provides a natural monopoly, offshore wind generation will become routine and be open to competition. Capital may be cheaper, but the returns will be lower. The bloat of the oil and gas industry cannot continue to be supported.

Implications: Energy Efficiency

Anything that can be done to increase the amount of useful energy output from the energy we consume will help. This comes in two forms – reducing the things that need to be done and improving the way they are done if they are unavoidable.

Innovation will come from increasing the utilisation of energy through sharing, careful planning, insulation, and conversion efficiency. Search out unoccupied space in containers, trucks, and aircraft. Plan who goes where when and in what sequence. Predict when power will really be needed and when it’s not. Any process that gets hot when heat is not its primary objective should be examined.

Transmission of energy is inefficient, as is standby generation. Expect to see DC supply, smart grids, community generation and local storage/recharge solutions emerge. Expect the need for AC power to diminish – semiconductors and high-frequency switching is much more efficient, light weight and controllable.

Look for opportunities to displace concrete and steel in manufacturing processes, perhaps finding a new use for solid-state carbon fibre or graphene and for additive manufacture.

Implications: Decarbonisation

In the absence of market distortions there is no business case for decarbonisation. But the world needs it to happen. This will require a combination of intervention policies (subsidies, penalties, regulation) and a willingness for consumers to pay extra for low-carbon products.

Programs to capture carbon at source and sequester it in some form add to the costs of production and only make sense if the alternative (in the form of penalties or sale of credits) tip the balance. The cost of carbon-inclusive production will provide opportunities to innovate in no-carbon alternatives at price points not currently viable, once these products start being adopted, learning and scale economies will kick in to speed adoption.

As carbon pricing becomes widely adopted across industries, innovation is likely. From understanding sources of carbon in supply chains (and engineering it out), planning for low carbon production and finding alternative ways to operate that do not produce carbon.

Fundamental research opportunities are still available for atmospheric scrubbing and short-term opportunities may be available around capture and storage of carbon from industry.

Implications: Decommissioning

Unfortunately, no-one wants to pay for decommissioning. The activity does not create productive assets so there is no return on investment and traditional business cases don’t work. It’s only done because it’s mandated and because there is a sense of responsibility for the environment (which may have brand and license implications).

Contracts will be let to the lowest price operators; innovation will therefore be required to reduce the cost to enable profit while bidding at the lowest price. All Seas managed to do this with their vessels – low cost but, by moving first with large capital assets and capacity to dominate demand thereby deterring competition. They can charge a low price but well above their cost resulting in healthy profits. LINK

When it comes to decommissioning infrastructure such as high voltage AC power transmission lines, domestic boilers and old cars, efficiency in the operation will be important, but so will re-use of the materials. Removing old infrastructure and scrapping cars may not sound like a gold mine, but perhaps it is. Literally.

Decommissioning old power stations, nuclear or conventional, is risky business where quality will count. There are stringent standards for Nuclear and projects that will last for decades. Conventional can be a little more “cowboy”. With wide scale decommissioning perhaps new rules and regulations will be needed to avoid this sort of tragedy? LINK

Points to Ponder

As of January 2021 ExxonMobil was valued at about $175 per barrel of oil equivalent from upstream production over the past nine months. French nuclear generator EDF is valued at $280 per barrel of oil equivalent produced over the same period. Spain’s Iberdrola, with its high renewables output, trades at $1,200 per barrel of oil equivalent produced. LINK

There is some evidence that there may be a squeeze on oil supply in the short term, and there may be a last hurrah of the oil and gas industry, but the writing seems to be on the wall.

We are likely to see more policy interventions around CO2. Business cases need to be dynamic and make space for emerging scenarios. The direction of pricing is clear but magnitude and timing are yet to resolve.

I fear for my friends in Aberdeen and Stavanger who expect to be involved in renewable generation. Despite these places being repositories of skills and expertise, I doubt there will be labour shortages significant enough to drive a search for talent – and the inflated labour prices and high-cost working practices are unlikely to be appealing.

Areas such as decarbonisation are likely to be subsidised. Engineering skills bases exist in the North West ship building areas, in Teesside, the Welsh Valleys as well as the South East coast of Norway, southern Sweden, Northern Germany, industrial Belgium and Denmark. There is no obvious reason that governments will bestow subsidies on the oil-rich provincial towns, and there is no unusual depth in high-power electrical engineering skills or modular manufacture that creates a pulling force. Look to Airbus and RollsRoyce for a hint on which locations may be subsidised.

Energy production is turning into a 4th industrial age process now. Over time energy will become essentially free to western consumers (in the absence of new taxes) and will become affordable for developing countries providing the elements required to swell the educated middle classes

Tax and Trade

In the UK fuel is taxed at the point of consumption, domestic electricity is taxed at a lower rate than petrol. North Sea oil has its own tax and royalty regime (on a field-by-field basis). When electricity moves cars and oil stops pumping, these tax revenues will need to be replaced. Expect changes to the tax system.

Globally this tax issue is one of national wealth, balance of trade and currency. Many economies are supported by petro-dollars. That may cease. Even if impoverished populations can benefit from cheaper energy, it is still likely that there will be political tensions within and between many countries.

As we continue to electrify there will be increased demand for copper, nickel and rare earth metals. These extractive industries are out of keeping with 4th industrial age processes. Perhaps we will see a boom in resource rich areas such as Africa and south America until such time as we can harness graphene and ceramic based super conductors.

Business models that are based on bespoke designs, complex operations, resource scarcity and speculative exploration are likely to be replaced by ones supported by more standardisation, predictable un-manned operation, with steady, predictable returns. This will lead to reduction in man-power requirements, creativity, and variability. Cost structures and operating characteristics (and associated returns) across the energy industry are likely to evolve to resemble those of other utilities such as water.

Large oil and gas companies are currently moving to re-invent themselves as renewable energy companies. They have spotted the trend, but there is no guarantee that they will bring the right behaviours to the table to be able to operate in the way that will be required. Their strong balance sheets, engineering skills and ability to operate in harsh environments internationally may provide them with a well-financed head start.

During the 1980s RACAL was a military radio, radar and missile guidance provider. They were highly experienced in complex frequency hopping radio systems. This gave them a well-financed head start into a new industry, just like oil companies have today. Racal were well placed to develop mobile phone technology.  

However, Racal was the wrong place create a consumer marketing and general-public-facing service. By 1991, as the technology became mainstream, the Racal board took the wise decision to float the division and spin it out as a standalone company that could develop its own culture. RACAL ceased to be independent when it was acquired by Thales in 2000. Vodafone, the division it spun out has done rather well. LINK

Perhaps we will see the renewables divisions of Shell, BP and Statoil spin out and compete with Iberdrola if they want to be utilities or Siemens, GE and RollsRoyce if they want to make turbines. Unlike Vodafone, their spin outs will be competing with established successful companies with long track records. It may not work out as well as it did for Racal shareholders.

Innovation is Key

In whatever way this pans out there is one thing clear – there are lots of unknowns and lots of variables. The only way to survive will be to be vigilant of the macro forces and constantly innovate to evolve offerings as events reveal themselves.  

6 Months into a 3 week crisis

I have lots of new ideas to share, but not the time to commit them to words.

I’ve not found time to update this blog for a while. To be honest I don’t think the uncertainty that comes with this crisis makes it wise to take too rigid a point of view. And, like many others I speak to, my days seem to be slipping past. I seem to be doing a lot of work, but I am finding less time to invest in new areas for the future and many discretionary tasks I no longer have the concentration to focus on.

Some of my friends and colleagues have noticed similar fatigue levels affecting performance in their businesses too. As one put it, we are now six months into a three week crisis.

All the emergency measures we put in place are all still there, the system is starting to creak and it no longer seems temporary. And it doesn’t really work for the long-run. We have learned new ways to use technology and have become expert in the tools for remote working. What we must now do is rethink our processes and routines to take advantage of these while making space to grow and learn.

Ken & Mark from AGM transitions, and I have been working on turning our small guides into a book. It’s now available from Amazon here: [LINK] – I hope that the practical advice and structure are something that will help you through this stage of lock down.

Here is the link to the original post: [LINK]

Watch out, they are comming for you

The cost of innovation is going down, barriers to entry are falling

Keeping it special

If you work in heavy industry and are near technology, you will know that there are some very robust pieces of kit out there. What I’ve always been surprised at is:

1. how simple many of the devices are in terms of functionality; and

2. how “special” they are in terms of obfuscating the obvious.

The effects of these two factors has been, for years, to reduce competition. By making it difficult to get hold of units (via price) and creating a jargon around the obvious configuration/deployment it has promoted a closed shop approach.

Keeping up standards

In some ways keeping out the riff-raff can be promoted as a good thing – it provides assurances around quality and safety. But it slows down innovation. You might say that perhaps this is good. Maybe you don’t want to be too innovative around safety and compliance systems. Afterall making mistakes is expensive and dangerous.

Keep up!

One of the aspects of the 4th industrial revolution that will challenge that thinking is simulation. I used to think that digital twins, virtual worlds and simulation would help reduce the cost of maintenance, let the experts create new ways to work and basically bring down the operating costs for the incumbents.

What if it leads to a whole new raft of competitors? What if anyone can have low-cost access to a virtual oil rig, or virtual power station, or virtual chemical plant? Not only will they learn how it’s supposed to work, they can try things and see what happens – learn by doing, learn by breaking, but do it virtually. Perhaps this will lead to:  

  1. they might come up with much better ways to operate it that you do; and
  2. train themselves to operate it before you hired them

Result: Better ways of working, access to more talent, incumbents get beaten.

If you have ever witnessed teenagers playing fortnite, you will know how fast their thinking can become and how fast their brain-hand connetion is. Imagine how quickly they will be able to react to real-world situations and think through the information being thrown at them.

Examples

I’ll provide two examples of where “public access” and “new ways of working” are already influencing established hierarchies. It won’t be long before these mechanisms appear in heavy industry.

Don’t expect today’s engineers to enter the workforce unprepared nor unwilling to take on the establishment. Watch out for competition from smart people who are not part of the established hierarchy. Don’t think the way you work today, will be the way you work tomorrow.

Example 1: Team Huub-Watt bike

I was lucky enough to see this cycle team win gold at the Track Cycling World Cup in December 2019. The team is comprised soley of amateur racers and they ran a completely novel strategy calculated using simulations and software. Their budget is £15,000 per year. They beat Team GB who have the best coaches, facilities and trainers available – and a budget this year of £26m. That’s over 1,000 fold decrease in cost and substatially BETTER performance.

Response from the establishment was to change the rules, enforce the status quo. This may not work forever. It probably won’t work for you.

https://www.tri247.com/triathlon-features/interviews/huub-wattbike-uci-interview

They were not, however, afraid to make use of the technology for their own ends. Zwift is a cycle simulator that people can use at home and join in real-time cycle events and ride-outs while collecting performance statistics. It is now being used by pro-teams to identify and recruit talent.

https://www.cyclingweekly.com/news/latest-news/i-want-to-ride-in-the-worldtour-how-british-cycling-are-using-zwift-to-help-identify-young-talent-454806

Example 2: British Touring Car Championship

In the gentleman’s toilet at the Royal Automobile Club in Pall Mall – in the heart of establilshment London – there are a series of framed caricatures of some of motor racing’s greats from the last 100 years. These include W.O. Bentley and Mike Hawthorn. Motor racing is glamourous. And costly. The money needed to race in formula 1 are legendary, but even the karting in a 125cc class will likely cost you the best part of £50K a season. Developing cars, tracks and drivers costs money.

So what do you think will be the outcome of last weekends win for James Baldwin in the first of the British GT Touring Car championship races? It’s a pretty big series, and winning a race is not easy.

Especially if it’s your first race you’ve ever competed in.

James honed his skill as a driver in a simulator he set up at home for under £1,000. And his talent was found when he entered a competition in an “E-Sports” event.

Turns out that the simulation prepared him surprisingly well.

https://www.goodwood.com/grr/race/modern/2020/8/worlds-fastest-gamer-wins-on-british-gt-debut/

https://www.bbc.co.uk/news/newsbeat-53554245

In transition! what’s your strategy?

COVID 19 and all that

I don’t want to be the Cassandra who brings bad news, but this is not over. In fact, it will never be over. I think we are transitioning.

Through this blog I’ve shared some of my exploration of the fourth industrial revolution, what we will experience and what technologies will drive it. When we look back at this time, we will see this as the moment the old world ended, and the new world began. Of course, there were hints of what was to come that happened before now, and there will be vestiges of the old world carried forward – but this is the moment we will talk about. It will be like we mark the start of the  jet age by referring to the end of the second world war.

It’s in the news

The headlines in the papers have been about: job losses; social distancing; and remote working. We are seeing a drop in demand, an increase in cost to serve and reduction in capacity and competition. This must lead to increased prices and suppressed demand. The consequence of this is inflation of real-prices that will drive out the old ways  and encourage emergence of new ways of doing business with lower structural costs that will create new ways to consume.

Innovation will be required

Every sector will be affected and the only way to respond is through systematic commercialisation of innovation. The future may be unpredictable, but the direction is clear. What will your strategy be?

FT stories today

Today’s FT had two stories that I think are indicators of the future:

The future of manufacturing

This one: https://www.ft.com/content/5610b913-d763-4d5f-a7cd-c51ff7adde21 tells of BAE communicating with it’s supply base that it intends that the Tempest fighter will be 50% assembled by robots and 30% of the components will be 3D printed.

How long will it be until we can have a general factory which can assemble anything using software and downloaded designs? In 50 years will we have one in every town? Every home? What will that mean to distribution, logistics and manufacture? How can you have international trade? How can you secure intellectual property? How will you distribute wealth?

The future of information and society

Then there is another story today: https://www.ft.com/content/b13ff98d-ffcb-4cfc-a853-3ba2cb75e717 Where Wolfgang Munchau argues that COVID-19 has marked the end of the analogue age.

He makes a clear case for the use of direct real-time monitoring of digital data and how we can compile and use this information to guide our actions. He talks about central government’s role in disseminating information (like inflation), and the use of drones to reshape our military.

Previous writings

If you’ve not read them already – here are a couple of blog posts that explored my thinking around this topic.

October 2018 – Self driving cars and tech-tipping points: https://bestemnetwork.com/2018/10/10/self-driving-and-the-digital-avalanche/

June 2018 – Elon Must and the reinvention of manufacturing: https://bestemnetwork.com/2018/06/11/the-fourth-musketeer/

May 2018 – Ocado and the reinvention of logistics:  https://bestemnetwork.com/2018/05/09/ocado-wheres-my-avocado/

May 2018 – Four Grand Challenges – the (re) emergence of british industrial strategy:  https://bestemnetwork.com/2018/05/22/four-grand-challenges/

July 2017 – Automation Risks. Automation itself poses a new risk to operations that needs to be managed seperately:  https://bestemnetwork.com/2017/07/07/automation-risk/

May 2017 – Technologies driving change in upstream oil and gas, their implications and impact https://bestemnetwork.com/2017/05/31/4th-wave-value-upstream-oil-and-gas/

March 2016 – Primer for the 4th industrial revolution, what technologies are driving it and it’s wider implications for industrial society.  https://bestemnetwork.com/2016/03/29/innovation-and-productivity-with-4th-industrial-revolution/

Responding to the Crisis: Leader’s Handbooks

What should we be doing right now?

It’s an economic emergency. Every company is having to rethink what they do and how they operate. Together with AGM Transitions we’ve asked our networks to share their recent experiences. We’ve written three guides:

COVID – Responding to the crisis – Leaders Handbook

COVID – The Transformation Handbook

COVID – Remote Working Handbook

What happened?

Since I published my post on March 9th the world turned upside down. Covid-19 is a “big one”, certainly when considering the economic impact of the measures taken to stop its spread.

Couple that with the shocks to both supply and demand in the oil world and members of the Bestem Network have been left slightly shell shocked.

What will happen next?

We are starting to understand where we are – but we’re battling to understand where we will need to go.

As Gordon Ballard said in the FT on Saturday: “In the past, activity decreased then picked up again — each time, we saw it come back,” he said. “Now it’s not entirely clear if things just come back as normal. Everything has changed.” [Link]

For some context however I should point out that even with 30% drop in oil demand we are now only at the level that was normal in 1996 [Link]

What have I been up to?

Alongside my hour’s cycling, home cooking, housework and playing with electronics:

  • Looking after my clients
  • Contributing my skills to my community to innovate systems to support neighbours in need; and
  • Working out what we have to do to come out of this ready for the next phase.

Stay Safe, together we will get through this.

 

Sell now while stocks last

Who’d have thought it?

In December and January, I was writing about what we might face this year. The world looked very different than it does this morning.

As I write the London market is off 8%, the Oil Price has dived to $35/BBl and Energy stocks are off 20-30%.

Continued shocks

The world seemed a rosy place in 2013. Since 2014 we’ve experienced a series of shocks – 2014 Oil Price crash, Brexit, Trump, refugee crisis, Syrian wars, trade wars, climate strikes, energy transition, Covid-19 and now Saudi & Russia are playing poker. None of this was predicted widely.

As we head deeper into the 4th Industrial revolution we will see more “externalities” that will further disrupt our best laid plans.

What about Covid-19?

Maybe Covid-19 isn’t “THE ONE” maybe it is. But it has certainly exposed how susceptible our current end-of-3rd Industrial Age, free-trade, globalised and business-case-obsessed economy is.

We have not priced risk correctly and we have not built in contingency. Workers on zero hours contracts can’t self-isolate, just-in-time imports from China are not working. To address this will require changes in policy and macro-rules to make a response possible in the face of short-run economic competitive pressure.

For more information on Covid-19 McKinsey has an excellent primer here [link]

Will business need to change

It seems clear that changed business practices will be needed if we are to become more resilient in an era where travel can be minimised, whole communities quarantined and trade in physical products localised.

Perhaps we will quickly switch to business that makes more use of information-rich scenarios (video conferencing, designs for 3D printers, remote controlled operations)?

We also now have another example of what can happen when information travels wider and quicker than knowledge. In this case panic buying of toilet roll. As we become more information-reactive in our business processes we need to bear this in mind.

Innovation is the answer, now what’s the question?

The only strategy I can see that will help is to learn to innovate quickly and be ready to react with purpose and knowledge as the future reveals itself to us.

It will never be this slow again!

Mood music changes

So BP have gone back to the future. Beyond Petroleum all over again.

When I started the Bestem Network 7 years ago I focussed it on issues surrounding the Oil and Gas industry – specifically how to use technology and reconfigure operations to develop and produce projects at lower cost and risk.

Last drop or leave it in the ground?

The Wood report was flavour of the month and much of my work centred around MER-UK (Maximum Economic Recovery). One of the categories of posts on this site was (and still is) labelled “Last Drop”; it focussed around the changes that would be required to make it possible to cooperate economically to achieve the maximum aggregate profit for the industry. It tackled things like tying together infrastructure, developing small pools and draining the basin over the long-haul and not to optimise short-term or locally.

While I never expected that the industry would return to 2012 levels, I did expect that it would come back and stabilise at a more “normal level”. I was concerned that the “big-crew-change” would mean that young people would not have the knowledge to operate our much-needed oil and gas infrastructure. I had no idea that they would reject oil and gas completely. That thought occurred to me in 2019 when I visited London Tech Week.

In 2017 I wrote that exploration was really of waning interest [Link] but I didn’t expect one of the primary reasons was that we didn’t want any more hydrocarbons.

Contrast this recommendation from Wood in 2014: “Government and Industry to commit to a new strategy for maximising the recovery [of oil reserves] in UK Continental Shelf] with the growing idea that we might leave reserves in the ground.

I wonder what the report on maximising the economic recovery from the whaling industry said.

Could the oil industry just disappear?

Despite sounding the drum for the 4th Industrial Revolution and arguing (nicely) with Patrick Von Pattay ( I was the more conservative because I thought that oil and gas really wouldn’t change fundamentally). It appears I may have underestimated things.

A very successful (and foresighted) businessman recently told me that the plastic-straw industry had simply ceased to exist within six months of the revelations of the damage it did to the oceans in the TV programme the Blue Planet. This chap now takes into account environmental position before bidding for work from a company – not for ecological reasons. He wants to direct effort to customers that will remain in business!

Surely we can’t do without oil?

Of course, there are oilmen who will tell you that the world economy cannot work without hydrocarbons – their case has always been that growth will come from renewables, and that demand would be flat. I tend to agree. But what if we’re wrong?

Here are a couple of thoughts for this (exceptionally) rainy Feb morning.

  • Solar is the cheapest form of energy production already. It’s getting cheaper and more efficient at a blistering rate.
  • Petroleum products might become classified as a dangerous substance – think asbestos or CFCs, what would that do to demand and price when supply, licensing, permitted uses and public perception of the product changes.
  • Microeconomics – which is what many businessmen optimise for – operates within Macro economic boundaries. Macro economics are formed by policy, are political and by nature are ideological. Think about: Soviet Russia, China, Thomas Pickety, Trade Wars, Sanctions. Things you think are “real” business decisions can be usurped by political will in an instant.
  • The IPCC report on climate change was issued in 2007, the Paris agreement was 2015 we seem likely to go beyond this and as a world embrace Net Zero sooner rather than later. For insight listen to Myles Allen on the life scientific (BBC https://www.bbc.co.uk/programmes/m000fgcn )

Engineering will still be important

With all this doom and gloom around it’s easy to get despondent. But, here’s the good news: if the world decides it wants to change then this will call for difficult and complex engineering, delivered in remote locations across political divides on an unprecedented scale over a mulit-decade period.

Not only will we need to invent all sorts of new technology for carbon reduction, energy efficiency, generation, storage etc. etc. We will need to deploy them all and decommission all the legacy assets.

There are not many companies that can muster the amount of engineering talent, capital control processes, large scale international project management, logistics construction that will be required. In fact, I can think of two that could – Energy and Shipping. And of course, if the world doesn’t change, oil and gas will have a renaissance.

Under all circumstances the people inside the oil industry will have skills that are needed and which are hard to replicated at scale. The only loss of value will come from those who can no longer exploit their control of underground deposits of oil in the future, and those that must pay for legacy assets and impact from the past.

Fundamental engineering practice still matters

With all the digital wizz (which I fully support) it is important not to lose sight of the practical situational requirements, human organisation and civil society that we need to enable the “platform” in which the innovative start-ups, electric cars and energy transition can happen.

Basic engineering discipline still matters, and is sometimes overlooked by hand-waving innovators and wet-behind-the ears management consultants.

You probably know about the 737-Max flight-stability software and instrumentation scandal. Recently, I read an article on Boeing where it says they are now re-inspecting new plane fuel tanks because they have found rags and tools left in them by construction workers: https://www.flightglobal.com/air-transport/boeing-orders-737-max-inspections-after-fuel-tank-fod/136819.article

It’s a sobering thought when flying :- if the wrong culture takes hold and introspective and solid processes are overtaken by gregarious and extroverted leadership.

The world still needs good engineering.

Ubique & Quo Fas Et Gloria Ducunt

2020 Vision

Sorry for the title. It’s not very original. Everyone’s been using that for the last decade, but still it seems appropriate. Every January I’ve made a post predicting the year ahead. I normally write this in December and publish it at the beginning of the year. It normally makes a few tongue in cheek exaggerations to in order to raise a smile. I stole this idea from Old Knights Almanac that used to appear each year in the RETRA magazine [Link ]

Today is the day we leave the European Union. My advice is to ignore this and go and buy today’s FT. It has many stories that summarise the transition we’ve witnessed and sets out the stall for next year. Below I’ve taken extracts and headlines and they tell the story. The one thing not mentioned is the UK Government’s industrial strategy, more on that in another post. Oh, and my watch phrase for this decade is “Society 5.0” – I think we’ll be hearing more about this in the comming while.

First here is an extract from this story (https://www.ft.com/content/b64b692e-4387-11ea-abea-0c7a29cd66fe).

This caught my eye because it illustrates the emerging tech leadership that is flowing from a very entrepreneurial and exceedingly smart China, the comming tech trade-wars and how there is a shift in earnings among tech players reflective of the shift in tech approaches – showing even when you are the innovator you have to keep innovating!

BT has said the cost of implementing the UK government’s cap on the use of Huawei equipment will cost it £500m over the next five years as it reported its third quarter figures.

[…]

There’s a bumper crop of earnings to report: Microsoft reported a 14 per cent advance in revenues, to $36.9bn, helped by cloud revenues which grew 39 per cent to $12.5bn, Tesla has notched up its first-ever back-to-back quarterly net profits. The electric car pioneer called 2019 “a turning point”. AT&T’s entertainment business WarnerMedia revealed a $1.2bn hit due to costly investments in its upcoming streaming service to rival Netflix. Nintendo’s quarterly operating profit rose 6 per cent to $1.5bn, missing expectations. Samsung Electronics confirmed its fifth straight quarterly decline in profits but said it expected memory market conditions to improve in 2020.

To avoid the risk of plagiarism I am going to direct you to today’s FT (go buy a copy or have Amazon deliver you one). The headlines from these stories paint the picture and tell the story all by themselves.

Why Microsoft and Tesla are the decade’s big disrupters

https://www.ft.com/content/b3e659fc-4380-11ea-a43a-c4b328d9061c

Ginni Rometty steps down as IBM tackles cloud era

https://www.ft.com/content/aabee59a-43aa-11ea-abea-0c7a29cd66fe

Rich and famous turn to ‘personal cyber security’ to protect phones

https://www.ft.com/content/96c79040-40ea-11ea-bdb5-169ba7be433d 

The Apple effect: Germany fears being left behind by Big Tech

https://www.ft.com/content/6f69433a-40f0-11ea-a047-eae9bd51ceba

Elon Musk jolted by German protests over Tesla factory plan

https://www.ft.com/content/8b10555e-4345-11ea-abea-0c7a29cd66fe 

The UK’s employment and productivity puzzle

https://www.ft.com/content/a470b09a-4276-11ea-a43a-c4b328d9061c 

For today’s oil market the real threat is to demand, not supply

https://www.ft.com/content/5bf49cb0-41cb-11ea-bdb5-169ba7be433d 

Shell to slow investor payouts after earnings fall 50%

https://www.ft.com/content/4e1fa700-4334-11ea-a43a-c4b328d9061

Orsted/offshore wind: Go-Greta:

(Henrik Poulsen has turned a national oil company into the world’s largest offshore wind builder and green energy champion)

https://www.ft.com/content/719dd81d-2527-4b83-8aed-e6624476c191

Competition rules stymie co-operation on climate goals

https://www.ft.com/content/b3e0da9c-3eba-11ea-b84f-a62c46f39bc2 

I wish you a healthy, hearty,happy and prosperous 2020.

No point being right at the wrong time

Experts, at least the ones I have talked to, cannot see how renewables and electric cars will make a meaningful impact on hydrocarbon demand in the medium term. Factors such as intermittency of supply and storage, coupled with economic growth in India, China and Africa and the requirements for chemical inputs are some of the factors that drive their opinion.  Add to this the energy required to produce cement and the methane contribution from red meat farming and it covers many of the themes suggesting the modern economy would fail quickly without oil and that this is not changing anytime soon.

When I talk to the investors, however, they tell me that it is now much easier to finance renewables than oil. The returns required are often 5-10x higher for fossils than for wind or solar. Though some are fearful of the potential knock-on effects of the “CRD-IV” Basel regulations.

When I hear Rob West speak, he tells us about the is the possibility that the current low investment in oil and gas may meet the natural decline curves on the way-down and growth demands on the way-up to form a spike in the Oil price. Such increases have previously been the portent for economic slow-down, the rise in violent protest and countries going to war with their neighbours.

There are countless articles that repeat the claims about the fall in Solar prices being dramatic enough to threaten conventional and nuclear generation. Here’s just one sample on “oilprice.com”:

“The Next Stage Of The Solar Boom Is Already Underway”

https://oilprice.com/Energy/Energy-General/The-Next-Stage-Of-The-Solar-Boom-Is-Already-Underway.html

However there was a rather underreported article recently in the FT which migh suggest something different:

https://www.ft.com/content/be1250c6-0c4d-11ea-b2d6-9bf4d1957a67

[…] Yingli was the world’s largest solar-panel maker in 2012 and 2013, exporting all over the globe and celebrated in China as a national champion…..Today Yingli is insolvent. It has been defaulting on debt payments since 2016, and in 2018 it was kicked off the New York Stock Exchange because its market capitalisation had sunk below the minimum $50m threshold. Although Yingli still makes solar panels, its factories operate at a loss and the most valuable asset it has left is the land underneath them….The company is the highest profile casualty of a change in policy that is being felt across the renewable energy sector in a country once celebrated as the world’s clean energy champion. Chinese investment in clean energy is plummeting — down from $76bn during the first half of 2017, to $29bn during the first half of this year.

Maybe the fall in the price of solar may not be all to do with manufacturing efficiency and fall in production cost, perhaps it’s also to do with the marginal cost of production, large fixed asset factories, sunk costs and supply-and-demand.

Whatever opinion you may rationally deduce is of no relevance. We’re going down a renewables route on a green agenda that no longer needs to stand the test of traditional economics and logic but will become a defining shared belief. Something that can’t be questioned. Something that is above rational thought. As one of the UK Ministers said a few years ago “We no longer need experts”.

If members of our network are to proposer in the short-run they must understand the impact these forces will have on their business and take action. In the long-run economics and logic will re-assert, but by then the world will have changed and who knows what we might discover we can do by making seemingly irrational choices? Perhaps there will be game-changing, unpredictable inventions found. You cannot prosper in the long-run if you don’t survive the short-run.

As John Maynard Keynes said in 1925, “The market can remain irrational longer than you can remain solvent”.

Petropolitics – 2019 style

As I write this in Late November 2019, we are in the middle of the oddest British general election campaign I can recall. It is by no means clear what the outcome is going to be, and the choice seems to be choosing an irrelevant option or picking a party that might be the least damaging.

We are in an era defined by what (or who) people are against, not what they are for. Debate is framed by blaming the “others” for what they have done/will do and simply stating that you are for the opposite of that. None of the political parties offer policies that stack up using the accepted logic or economics of the late 20’th century. Nor are they willing to justify them in those terms. This is a dangerous time where sub-groups (old, young, migrants, followers of religions, business owners, workers, environmentalists, the fossil fuel industry, etc.) are at risk of being pitted against one another – each blaming the other for causing the situation they believe is comming. Fearful that one group has stolen the others’ hope.

We are in globally unstable times. Perhaps energy supply is a contributory factor.

The UK became a net exporter of Oil in 1979 and our economy boomed. In 2005 we became an importer again. Things became bleaker. Shale Oil has recently led to the USA becoming self-sufficient for the first time since the second world-war. China is an importer of energy.

The USA have no energy-related interest to protect by managing global tensions but perhaps China now does. Could this be part of the reason that the world feels less stable?  Look across Europe, North and South America, Hong-Kong Australia and the Arab World and see how divisive and “entitled” the politics and associated direct-action has become.

One area where there is broad agreement, however, is on climate change. We are in a net carbon zero goal-setting race. And we’re in good company – other countries are falling over themselves to do likewise (with notable exceptions of course).

This is a topic that the world has rallied around to fight a common “enemy”. Big themes (such as the previous “war on terror”) can be used to justify the case for actions that are irrational if viewed using other frameworks – such as logic, or economics.

Is it right that we permit large nations to pollute our planet and if not, how can we stop it? As an example, today’s FT reports that the Permian basin is set to flare 7BCM of associated gas this year – for comparison, the whole UK gas sector produces 45BCM per year.

Weighing up the pro’s and con’s of reduced carbon emissions, understanding the winners and losers and the national self-interests is not easy, and the result will not be determined only by logic and economics. Politics and the opinions of the uninformed could be decisive. And disastrous.

Currently, anyone expressing a view other than that we should halt emissions and reverse climate change is lambasted. The Oil and Gas industry needs to be careful to understand and react to the political climate (i.e. the opinions of others) and not rely on the logic of days-past and the economic models from the 70’s. Lip service, ignorance or faux-concern is the wrong approach.

We risk losing the license to operate in the UK and this will damage us all.