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.

While we were sleeping – Oil 1.4 and Solar

It’s been very busy since the Network Dinner in September. I will post an update on the discussion later this month.

In the mean time I’ve been busy working on innovation – more of that later – but I recently came across two interesting items that I think might be worth sharing.

Firstly the FT ran a special issue talking about Oil and Gas 4.0 [Link]. It’s good to see that this term is being widely applied – and a big change from when I started to talk about it a few years ago.

I wrote an article in March 2016 when I claimed that Oil and Gas were really at 2.5 while industry was going 4.0 [Link] I was concerned about the lack of urgency and technology progress. I also called out the contribution of Collette Cohen as being one of the few that seemed to get technology. She is now director of the Oil and Gas Technology Centre.

The OGTC were referred to in this article [Link]

In October, the non-profit Oil & Gas Technology Centre (OGTC) in Aberdeen in Scotland, announced the next phase in its autonomous robots project with Total of France, which is developing what it calls the world’s first offshore work-class robot. The first phase of the work saw Austrian firm Taurob create a robot to conduct visual inspections at Total’s Shetland gas plant and the Alwyn gas platform in the North Sea. A second-generation version will have a stronger chassis and a heavy-duty arm that will lift objects and turn valves. It will be tested by Total and Equinor of Norway, the research initiative’s new partner.

“A lot of our work on hazardous environments focuses on whether we can avoid sending people into those areas in the first place,” says Stephen Ashley, head of OGTC’s digital transformation solution centre.

Another article coined the phrase Oil and Gas 1.4 which is a clever take on the combination of an old-age industrial organisation embracing new digital technologies within its core business. I think I like this term better than my 2.5 one.

This article [link] makes the point that the new technology is prevalent in some areas of the business, but that the new frontier for production might be the application of technology to find economic ways of enabling enhanced oil recovery. 

Unmanned rigs are now commonplace, complex operations are monitored from a single control room, leaks and emissions of greenhouse gases can be identified by drones and satellites, removing much of the need for direct human inspection. Numerous technologies are being applied in ways that can reduce cost and improve productivity.

The key question, however, is whether the digital revolution can answer the sector’s biggest challenge: how to secure future production. Oil demand is not falling. There may be 7m electric vehicles on the world’s roads but there are also 1.2bn vehicles with internal combustion engines.

[…]

One answer must be for companies to make the most of assets they already hold. Across the world the typical recovery rate from a conventional oil or gasfield is only 35 per cent.Even after decades of production giant fields such as Prudhoe Bay in Alaska or Ghawar in Saudi Arabia still contain billions of barrels of oil. Recovery rates have slowly risen and provinces such as the North Sea, originally expected to close at the end of the last century, continue to produce oil and gas. In Norway recovery rates are typically 50 per cent — well above the world average but still leaving half the resource base undeveloped.

The point at which recovery becomes uneconomic, ie when the cost of enhanced recovery is greater than the value of the oil, is a serious constraint.

What I’ve found really interesting this year is how irrelevant the oil and gas industry seems to have become down here in London. What I mean by that is that Oil and Gas seemed to be at the crux of things in a way that, say, copper mining and concrete production wasn’t. It used to be a cool place to play with technology, travel the world and to make a bunch of money. I think those days may be over (though some predict a spike in prices around 2025). Now no-one here cares about Oil and Gas at all.

Where I am seeing a lot of action and excitement is around Solar and Wind. I thought for a while it was just me becoming aware, but now I’m onvinced that it was a sea change and it really is picking up. And the cost-curve of Solar is particularly striking.

I urge you to have a look at Tim Harford’s article on Solar [link]. As always he has an ability to grasp the implications of what he sees in ways that other’s don’t. He looks a PV cells – how in 1980 Solar was about $100 per watt ($10.000 to light a light bulb). It is now already below $0.25 / watt and falling. Utility scale production is now looking to provide generation at below $0.015 per KW/h. [link]

The thing about Solar Panels is that they are a pure manufacturing play. Once created they just sit there and make energy. No moving parts, no plat to really operated as such. We have been, and continue to be, very good at manufacturing standard products in standard factories.

Sometimes the learning curve is shallow and sometimes it is steep, but it always seems to be there.

In the case of PV cells, it’s quite steep: for every doubling of output, cost falls by over 20%.

And this matters because output is increasing so fast: between 2010 and 2016 the world produced 100 times more solar cells than it had before 2010.

Batteries – an important parallel technology for solar PV – are also marching along a steep learning curve.

The learning curve creates a feedback loop that makes it harder to predict technological change. Popular products become cheap and cheaper products become popular.

And any new product needs somehow to get through the expensive early stages. Solar PV cells needed to be heavily subsidised at first – as they were in Germany for environmental reasons.

More recently China seems to have been willing to manufacture large quantities in order to master the technology.

Watch this space, it’s just getting cheaper, better and faster. This is where the action is – I just don’t know how to play the opportunity yet.

 

London Tech Week

Last week was London tech-week. I guess a bit like London fashion week, only much larger.

There were events all over London – this has grown from a week of borrowed conference rooms and underground gatherings into a large series of happenings. Monday-Wednesday saw the COG-X show near the google campus north of Kings Cross. At this event there were 10 stages giving parallel presentation sessions over the full three days, an Expo, start-up section and various corporate networking events.

Wednesday and Thursday (yes overlapping) saw the TechXLR8 exhibition at the Excel Centre, this was a large expo event with presentation 6 stages running all day.

Alongside these two there was also 5G Europe and Identity Management conferences both of substantial size.

Have a look at the website here https://londontechweek.com/events – there are 18 pages of events with 7 events per page. Tech-XLR8 above is only one of these.

This blog previously covered the launch of the UK’s industrial strategy (at Jodrell Bank) and the lack of coverage of this in the main stream media [Link]. Well, despite there being still no interest from the media. The UK industrial strategy was evident everywhere – with announcements from the various bodies, challenges, and funding opportunities. Have a look at this if you haven’t already : https://www.gov.uk/government/publications/industrial-strategy-the-grand-challenges

And did you know there is an “Office for Artificial Intelligence” ? https://www.gov.uk/government/organisations/office-for-artificial-intelligence

I’ll write more about some of the events in due course but here are the highlights:

  • There were 1000’s of under 40, very intelligent, eager advocates of tech everywhere. Very diverse in terms of sex, ethnicity, country of origin you name it, very much in contrast to this [Link]
  •  AI, IoT, ML, CV, AR, VR were the flavours of the moment (and I learnt some really interesting new insights here, more later)
  •  AI Ethics is a huge deal, and lots of people are thinking about this.
  •  Energy tracks focused on decarbonisation, distributed grid and combining sensor technology with predictive algorithms to reduce consumption. Oil and Gas didn’t feature once.
  •  Interesting to see the traditional tech players (with notable exceptions) were looking dated and pushing out platitudes about the new tech and the business impact it should have (but with no concrete examples). Meanwhile there were (really) hundreds of well-funded small companies that had real-world use-cases for niche solutions that had demonstrated value (though most had not had to pass a business-case hurdle to get going).

What struck me most was the vibrancy of the arenas, the buzz of conversation and the high-energy engagement between participants – problem solving and exchanging ideas. It was very refreshing to see. There was also a willingness by all sorts of industries to try new solutions and approaches – knowing that not everything will work but understanding the need to learn and push the envelope forward. The pace of change is amazing.

I was lucky enough to have the chance to try a VR simulation made by Linconshire Fire Brigade to train their officers in fire investigation. On with a VR head-set and into a virtual world. It was very, very realistic.

Oh and everyone was talking about “Digital Disruption”

Next year London Tech-Week should be one for your diary.