Framing Energy Transition

I’m dissatisfied with the term Energy Transition. Everyone’s doing it, but they’re all doing something different. So, I’ve been working on a framework for describing what’s going on.

Much of my network is concerned with Oil and Gas and there is this term “Energy Transition” banded about. Which it seems they define as –

“What we are doing now won’t work in the future. Let’s find ways to apply our skills to ANYTHING new and hey-presto, that must be energy transition”

As a definition it is not helpful. So I am looking for a different way of classifying things. This is what I have so far.

Meta Industries

Firstly, I took the word Energy and examined it. That led me to realise that it is really one of a few “meta-industries” that provide the fundamental requirements for our world. Energy being one. Others include things such as Shelter, Food and, Transport. Each of these meta-industries have alternative outputs which can be used to provide their utility. For instance, Energy, output can be fulfilled by Oil, Gas, Coal, Electricity, etc. You get the picture. It’s the same for the others meta-industries.

Meta Industries in transition

Each Meta industry has alternative outputs which are, somewhat, interchangeable and can achieve the primary goal of supply.

Each of these alternatives outputs have a supply chain of interconnected industries that will be impacted by a switch between alternatives. Such a switch will also require modification of consumption activities. i.e. switching more of the Meta Industry “Energy” output from Oil to Electricity requires electric vehicles, which require batteries etc.

I think talking about working in “Energy Transition” is almost meaningless. Energy Transition is an outcome created by other activities. These activities are things you can work on. Energy Transition is not a thing in itself but a description of what happened. It would be the equivalent of saying you work in “Energy Profitability”.

Working Up, Working Down

This thinking has led me to a framework around each alternative supply chain (working down) and from each “traditional” industry (working up).

To explain, the Oil Industry is a component of the “Energy” supply chain, but is also a component of the “Fertiliser” supply chain which is part a “Food” Meta Industry output alternative.

It is difficult to analyse the “oil industry” in isolation as it gets caught up in all it’s supply chains from energy to chemicals to road construction to transportation. I propose that we can simplify the analysis by looking down from a fundamental Energy Meta Industry.

There are 4 Industry groups impacted in a transition between alternative outputs of a Meta Industry. E.g. the switch from Oil to Electricity.

  • A: Industries that will cease to be needed
  • B: Industries that mitigate the impact of (A) industries until they do
  • C: Industries that will replace them
  • D: Industries that do not need to change at all

Industries that die and ones that help them pass peacfully

The (A) industries are unwelcome but necessary for a while. The goal should be to make them obsolete as soon as possible.

This removal creates economic opportunity:

  • To reduce the environmental impact until they do (for instance by reducing unnecessary emissions)
  • As facilities are removed from service, activities for dismantling the infrastructure will flourish
  • Professional services for financing, operating, and advising in this space.

The reducing capacity of (A) industries will lead to reduced scale economies and higher cost of capital.

Temporary mitigating industries emerge

The (B) industries are temporary, they will somehow clean up the unavoidable impact that (A) industries have until they are closed down. Carbon scrubbers that sort of thing.

The doom-spiral for doomed industries

Even if they are doomed, (A) industry projects will still be required to be around for a time. But they will also need to execute unpopular projects with loads of political risk. They will have higher cost of capital. They will carry increased costs from compliance, regulatory charges, and penalties. They will need to pay for a new input cost – (B) industries. They will have higher operational costs. They will find it hard to recruit and retain staff so labour costs will increase. These increased costs will lead to increased output prices. This will cause further reduction in demand for their product. Scale economies will kick in for competitive substitutes. It will become a downward spiral for the old, and an upward whirlwind for the new.

New industries emerge as innovation accelerates

The (C) industries are the up and coming replacements. They will likely be easier to finance, enjoy tax breaks and subsidies. They will also benefit from scale-up, learning economies and rapid innovation. They are likely to employ modern technology such as autonomous vehicles, AI, 3D printing and big data from the start. They will be the foundation of the 4th industrial revolution.

Some things stay the same

The (D) industries are the ones with very little impact on the environment that don’t need to change in this Meta Supply chain. But may be impacted by due to interference from other Meta Industry transitions.

Meta Industries need to be analysed seperately

This lens applies to all the Meta Industries, and can help disentangle the analysis.

Of course there are interconnected implications, because if the Oil Industry is a type (A) industry for energy, it may be type (D) for, say, fertiliser manufacturing. So even if it is eliminated from the Energy Meta Industry, it may not be from the Food one. But the implications of the changing cost of production may have interesting implications for fertiliser pricing and availability.

Two brand new Meta Industries

On top of this there are two more new Meta Industries. These meta industries don’t seem to function well with our current rules, regulations, incentives and rewards. To get them to function we’ll need some changes to the economic rules of the game.

Meta Industry 1: Coping with Climate Change. As sea levels rise and storms increase there will be activities required to deal with this. From insurance, to design, to retro-fit conversions, to disaster recovery.  Meta Industry Output is “resilience”.

Meta Industry 2: Cleaning the biosphere. There are technologies being worked on that can remove harmful gasses from the air, can rehabilitate rain forests, rewild habitats etc.  Meta Industry Output is “Biosphere Maintenance”

The problem with these two Meta industries is that it’s not clear who would pay. In an individualist capitalist society it is in no one person’s interest to pay for this, but we will all benefit from it if it occurs. We have moved away from socialist policies for the common good for a long time, but maybe these industries will require us to return to them – and on a global scale.

We must act together or not at all

Climate saving behaviour is binary and it’s global. We’re either all in, or all out. You cannot get off the bus or sit this one out.

As a species we have been very good at creating multiple view points on many topics. Each side convinced that they are right. History being written by the victors and the untrodden path left shrouded in what-ifs.

With the Internet we have “culture wars” where no choice is made but factions live side by side (with various degrees of friction) and multiple opinions matter.

While there are a few points of view on climate change, the science seems to be clear. But then not everyone believes in science. Most engineers believe in science. But not all the ones I know choose to believe climate scientists. They explain to me (with no data) that forces bigger than us must be doing it (volcanoes, solar weather etc.).

Many don’t believe in religion. Whether they see the irony in being scientific, rejecting religion as hocus pocus but then assigning climate change to a “force bigger than us that we can’t understand” I’m not sure.

We cannot have co-existing points of view on climate and succeed. We, as a species are either for cleaning up our act, or we are not. There can be no compromise. To be successful with a path of modifying the atmosphere the vast majority of the world will need to act. It is not a personal choice, it is a collective one.

The world seems to be increasingly insisting that we need to clean up our act. Whether “right” or “wrong” does not matter, it looks like it is happening. There will be a battle for public opinion but will not be national. It will be global.

Will Peace Keeping Forces, may become environmental enforcers working at the behest of the UN, the World Bank, the IMF, WHO or goodness knows? Perhaps the IPCC will mobilise an army to takeover polluting plants and shut them down.

I’ve been a banging the drum for a technology led 4th industrial revolution for years, but I now feel we will have a technologically enabled, climate led one.

The implications of technologies such as AI, Autonomous Vehicles, Remote Sensing, Big Data etc. means that the outcomes will be similar to those I’ve written about before but they will be a by-product. I’ve realised the optimisation function has changed, or it was always this and I’ve just woken up to it.

Should we nationalise oil and gas?

6 Years ago, I touched on the UK boom years from 1979 and how much of that was financed by selling state industries and taxing oil and gas. It also discussed the reduction in tax revenues and the power of private money to distort local markets that has arisen lately. https://bestemnetwork.com/2016/02/02/schumpters-cayman-island-holiday/.

Today we are in a world of record gas price rises with electricity being sold at the marginal rate of production – which is determined by gas prices. This has led to massive state interventions in the energy markets of Europe. One approach is to tax the super-profits of non-gas electricity producers and use the money raised to distribute to the poor to help with their bills (French model) and another is load up on borrowed money and distribute it to power companies and the general population through bill subsidies and caps taking no regard to income or usage (British Model). The British model leads to borrowing almost 2x the money required for the furlough scheme. They are heading for borrowing levels (104% of GDP) not seen since the end of the Second World War.

I wrote about tax systems and wealth distribution in regard to the 4th Industrial Revolution here: https://bestemnetwork.com/2021/01/08/part-2-work-trade-taxes-and-government/

It is apparent to me that political tensions are mounting around the issue of private ownership of essential services. These include things such as education, health, rail, water, and power. 

The movement towards cooling the planet will require global co-operation. After the second world war trans-national institutions such as the Nato, the IMF and the World Bank were set up to ensure that we did not recreate the problems that led to the hyper-inflation in Germany of the 30’s and the Great Depression that enabled dictators to flourish – this eventually led to global conflict. Maybe access to essential services should be controlled this way in the future?

Thought Experiment

Consider this if you will. It is only a thought experiment.

Neoliberal markets seem to be failing to create public good as witnessed by the electricity suppliers’ bumper profits and freezing grannies who can’t afford to eat.

Water companies continue to pump raw sewage into the sea while taking money without any real-choice from households and distributing it to their foreign owners as dividends.

Profit seeking behaviour can lead to bad outcomes for the public if it is used to withhold goods and services essential to life and when poor behaviour towards our shared environment is rewarded.

In these situations the customer essentially has no choice but to pay. To me this sounds a lot like a tax, but where the benefit does not go to the citizens, and the “tax payer” has no control over operations whose side-effect is unwelcome.

If we are to reduce emissions, perhaps we might need to treat Oil and Gas as a controlled substance like say plutonium, or asbestos. I have been disappointed that some of the oil executives I speak to don’t really want to reduce unnecessary emissions – even when doing so would generate positive cash flow from saved fuel gas. They just don’t see it as a priority when their time can be spent elsewhere for more profits.

Perhaps the profit motive should be removed?

We also have a transition problem to deal with. We will need to develop new oil and gas fields, but we also want to shut them down as quickly as they can be replaced. That’s going to lead to some expensive risk capital and an inevitable rise in prices if the “free” market is put in charge.

One solution to capital availability and the required policy volte-face (to switch from building to shutting down capacity) might be re-nationalisation of assets. Operators can be paid a service fee to produce them.

Perhaps it won’t be a nationalisation but a super nationalisation (internationlisation? globalisation?). Setting up an institute like the IMF to control all global oil and gas operations, control the product prices and set consumption quotas to ration usage. Perhaps that might be a new role for OPEC to regulate and license consumption rather than regulating production quotas to maintain the price.

Let’s see how the political winds blow, but I feel the limits of free markets are likely to be tested when it comes to Oil and Gas.

If you have time, check out this post on energy security – it’s good to remember where we came from. https://bestemnetwork.com/2016/02/09/energy-security-and-geopolitics/

Are we there yet? (or road-bock ahead – let’s take another route)

What a period of unpleasant surprises we’ve had recently. In my view they are a combination of causes and effects of the 4th Industrial Revolution. Global warming concerns are driving decarbonisation which is driving energy transition which is driving new technology adoption and resulting in the 4th Industrial Revolution by the back door. It’s not smooth and gradual – external shocks are accelerating and decelerating the process. Not everyone’s happy about it.

There have been a series of large shocks to the economic system. The system that prevailed from 1979 until 2008 no longer functions. The word crisis has been overused. It has not been a single crisis but a series of lurches during a sustained dismantling of a globalised integrated approach that was fuelled by logic and data in what will be seen as a politcally benign period.

I am not going to detail all the main drivers and the minor and major shocks but it’s quite a list. One that includes drivers like digitalisation and information transparency, speculations such as the CDO market (and probably bitcoin), and unplannable events such as Icelandic volcanoes, pandemics, Brexit and a war in Europe.

Almost 10 years ago I started the Bestem journey in pursuit of understanding and helping others cope with the 4th Industrial Age. If you had asked, I would have explained how I believed the rise in technological capability would inevitably result in its adoption. Increased efficiency and the “rise of the machines” would lead to changes to working patterns and force changes in the way wealth was distributed.

You can imagine how disappointed I am that, even with solid business cases in place, companies I talked to resolutely couldn’t have cared less. Certainly not enough to implement change. They were doing just fine thank you and there were more important things to spend their time on. Admittedly I was talking to Oil and Gas operators who exist in a quasi-monopolistic position (where they rarely feel the pressure to compete with each other) but the story was similar in many established industries. Taxi drivers and Hotels were disrupted by Uber and AirBnB – but they were victims of an information revolution rather than an industrial one. If anything, their systems became less efficient, but the profit-distribution changed.

A couple of years ago, I realised that the economic case for solar had dramatically improved. Semi-conductor technology and electrical efficiency had also experienced a step-change improvement. I was sold on the case for energy transition where electrical systems replaced chemical ones based on traditional economic drivers. Of course, I argued, in certain applications where portability of high-density energy was required (air travel etc.) there really were not many alternatives to gasoline available. So, my view was that energy growth would be taken care of through electricity but that fossil fuels would remain the baseload for a while to come.

Then I saw the data on climate change and decarbonisation. I did my research, I read Bill Gate’s book, I watched the BBC series on the obfuscation operations conducted by Big Oil and re-watched Al-Gore’s inconvenient truth from 25 years ago.

I still speak to oil companies that see compliance with environmental legislation and emissions reductions as some form of cost to be managed. It really isn’t. Protecting the atmosphere (or as Al Gore put it, the layer of varnish on top of the globe on your desk – yes it is that thin, and the only thing that makes life possible) is extremely important. It should be our number one priority, it’s a matter of morals not profits. It should be a matter of regulation.

Add to that the evident issues of energy geo-politics and how “western” civilisation and values seem increasingly at odds with the behaviour of “strong-men” leaders who control fossil deposits, and it seems clear that independent, non-centralised, distributed generation and consumption adds resilience that can withstand shocks and provide stable, reliable and fairly priced energy.

We are on the cusp of change in many industries forced by energy scarcity, emissions reduction, supply chain re-configuration, demographics, and work-force expectations. There will be no choice but to adapt to these new configurations, some of which will be underpinned by legislation and international sanctions.

Of course, if you are setting about re-configuring an industry it will inevitably use new information and digital technologies, it will use AI and it will use 3D printing. You might not choose to swap your perfectly functional old system with a slightly better new one, but if you must change anyway then of course you will replace with systems that use the new technologies. These new technologies will be more efficient and will lead to different employment mechanisms and the distribution of wealth.

It’s the same outcome I’ve been banging on about, but it will take a different route.

Change is hard, Business case for survival is hard – screw it let’s cut costs

BA still can’t get operational IT right. The 4th Industrial Revolution has been delayed due to myopic business cases. I suspect BA as a large encumbant in a stagnating industry suffers from this. Fighting climate change will change the calculus and global enforcement of new laws, and what is viewed as acceptable behaviour will require a rethink on spread-sheet optimisation.

When my focus was solely on the digitalisation aspects of the 4th industrial revolution, I wrote a story about BA in 2017 [link], and then again in 2018 [link]. On both occasions I highlighted both how fundamental “Operational Information Technology” was to the heart of the business (rather than a support function) and how “business-case” led decisions had led to bad outcomes.

My friend Krzysztof [link] talks about technical debt  and how, like fast food, it’s occasionally acceptable – but in the long-term will kill you. He speaks of this in the context of software development, but I think it could equally be applied to deferred and missed modernisation opportunities for operational systems.

I thought BA had got the message, and then this:

https://www.theguardian.com/business/nils-pratley-on-finance/2022/mar/31/ba-investors-as-much-as-customers-deserve-explanation-for-it-woes

Change is hard

BA said they would change, and I assume they tried. Just goes to show, change is harder to achieve than it looks. The first step is for leadership to acknowledge that change is required, but implementing that change can be difficult, especially if most of the reason for bad outcomes is their own inability to admit to blind spots. Add to that some bad decision making processes (and possibly some autocratic opinoins) and this is what happens.

Diversity is often talked about but not always understood. Building “Cognitive Diversity” into leadership decisions is challenging, especially when – in order to reach new decisions – the fundamental value decision frameworks need to be challenged. My friend Csaba over at ICQ Global [link] works extensively in this area. If anyone has a line into BA’s management, they might pass on his number.

This is the digitalisation problem. It comes down two factors:              

  • cost justification cases for the SURVIVAL of companies cannot be made due to an inability to demonstrate a return on investment. (daft when you think about it)
  • cases for cutting flexibility and reducing performance on the grounds of cost saving are quickly approved and implemented.

The result is, no digitalisation, no change and a crash course in crisis management. I think this all stems from most “business case” and ROI calculations assuming that the business environment will remain static and everyone will wait around until you can educate senior management and make sense of their digital investment opportunities.

Innovation will be driven by decarbonisation

With the race to decarbonise the atmosphere well and truly on – goals such as electrification and energy transition will impact whole swathes of supply chains.

Digitalisation and the wider adoption of 4th Industrial Revolution technologies will be a prerequisite for survival. The purpose will no longer be to boost short-term profit, but to achieve outcomes that enable companies to survive. It will be interesting to watch how myopic business cases will be overcome.

Perhaps there is a case for saying that financial returns are a hygiene factor and should have a target optimal. Maximisation – for this phase of the transition – should perahaps be focussed elsewhere.

How are you going to hire, train, incentivise and manage the performance of the leaders we now need in place?

It’s all about productivity

If you have followed this blog for a while you will know that, like a broken record, I have been banging on about digitalisation, the 4th Industrial Revolution and the productivity conundrum. I have often referred to Tim Harford’s article about electrification and how long it can take to make a transition.

Recently, I’ve started to add the “Energy Transition” into my thinking on the topic. The outcome remains the same but I keep finding more and more reasons why it will inevitably happen.

One of my go-to reads is Ian Stewart, Deloitte’s chief economist. If you’ve not signed up for his Monday briefing then you really should – it’s excellent. Today I have lifted most of his post (available here: https://blogs.deloitte.co.uk/mondaybriefing/2021/06/the-looming-capex-boom-.html) not only because I’m being lazy but also because it talks to many of the points I’ve been trying to communicate to my clients over the last 7 years (since I started Bestem).

Throughout history economies have been shaped by shocks, from recessions to technological shifts and energy transitions. The Great Depression helped change thinking about the role of government, paving the way for a permanent expansion in the state. The switch from steam power to electricity triggered a vast reorganisation of manufacturing.

The pandemic and the drive to net zero are similarly epoch-making events. The pandemic has driven technology adoption and changes in business practices. The energy transition involves an overall of energy production and distribution.

The structure of the economy will change. The sectoral balance of the economy, the skills needed, the uses of capital, the allocation of capital, will shift, creating winners and losers. It will also bring opportunities to rethink organisations, invest and raise productivity in ways that had not previously been considered viable or necessary.

The unlocking of the economy has unleashed a surge of pent-up demand into an economy operating with reduced capacity. That is creating inflation and bottlenecks, and incentivising investment. Meanwhile large corporates are flush with cash, capital is cheap and institutional investors want businesses to step up investment.

The global semiconductor shortage has spurred a flurry of investment announcements in new factories. Automakers are building new battery plants to meet demand for electric vehicles. Rising freight rates have prompted a surge in new orders for container vessels. And the move to ‘hybrid’ working and the growth of online shopping require a reconfiguration of office space and an ever- rising volume of warehouse capacity.

Labour costs play a role in investment decisions too. As countries emerge from lockdowns labour shortages have started to appear in sectors including manufacturing and construction. In the UK increases in the minimum wage continue to outstrip inflation, raising costs for firms and sectors reliant on lower-income work. An exodus of some 650,000 foreign-born workers from the UK last year, equivalent to 2.0% of the workforce, and a reduced flow of less skilled labour from the EU, create new pressures. More expensive and scarcer labour would sharpen incentives to invest in productivity-enhancing equipment and skills. Machines, for instance, could readily substitute for labour in washing cars and coffee preparation (I was in a motorway service station last weekend where the queue for Starbucks led me to get the same product from a self-service machine in the next-door Waitrose. I couldn’t tell the difference).

In the UK government policy has set out to boost investment with the capital-allowance ‘super-deduction’ targeted at plant and machinery. The Bank of England estimates that this will have its greatest effect in raising investment in some of the most capital-intensive sectors including manufacturing and transport.

A surge in private sector capital spending is likely to coincide with rising levels of public infrastructure investment, particularly related to ‘green’ projects. So, with private and public investment likely to grow, this recovery is looking very different from the one that followed the global financial crisis. Then UK business investment took six years to climb back to its 2008 peak. Today the Bank of England sees investment snapping back quickly, ending next year almost 10% above pre-pandemic levels. A similar story is likely to play out globally. Morgan Stanley believes that global investment will stand 20% above pre-pandemic levels at the end of 2022, a remarkable recovery from last year’s downturn.

This sort of surge in capex could help shift the dial on productivity, especially if, as seems likely, it is accompanied by organisational changes and the application of technology. (While business investment fell in the US and the UK last year, spending on IT and computers rose as firms investing in remote working and new ways of doing business.)

Much of the problem of poor productivity in the UK is concentrated in the long tail of medium- and smaller-sized businesses. The pandemic may, paradoxically, have had some positive effects here, as businesses of all sizes adapted and used new digital practices to weather the downturn.

One encouraging sign comes from the retail and administrative services sectors. Both sectors have registered strong productivity growth over the past decade, defying the characterisation of these as labour-intensive, low-productivity parts of the economy. Online shopping, self-service and use of IT in administrative tasks seem to have played a big role. It may be that other labour-intensive sectors, such as healthcare and education, might in time achieve similar gains in productivity.

It won’t be plain sailing. In some important respects the pandemic and the energy transition could act as a drag on productivity. It’s not, for instance, clear how significantly increased levels of homeworking will affect productivity. A recent study of a large Asian tech company found that increased communication and coordination costs more than offset gains from reduced commuting times and reduced overall productivity . Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee, cautions that lower use of offices and transport infrastructure imply a less productive use of the capital stock . Nor is capital spending rising everywhere. Some fossil fuel companies and airlines are cutting capex in anticipation of lasting weaker demand. Structural shifts in the economy risk creating mismatches between supply of and demand for labour. The interruption to education and rising youth unemployment could leave lasting scars.

The pandemic and the energy transition represent the greatest structural change since the shift to electrification and the Great Depression in the inter-war period. The question is how these changes can be harnessed to build a better future. The years after the financial crisis were marked by weak investment, productivity and wage growth. We should be able to do better this time

Here are a selection of earlier articles that talk to the same themes.

How’s your Covid score card?

Today the FT ran a story about food inflation. They said:

“Global food prices surged by the biggest margin in a decade in May as one closely-watched index jumped 40 per cent in the latest sign of rising food inflation.”

https://www.ft.com/content/8b5f4b4d-cbf8-4269-af2c-c94063197bbb

15 months ago we flagged that possibility. Mark, Ken and I sat down to collate the findings from our network and to analyse it through our innovation and transformation frameworks. We not only had some sound advice on what approaches could be considered, but also we threw in some “wild-cards”.

Corporate debt overhang will need to be erased before growth emerges – that may be through default, forgiveness or increased inflation. The availability, cost and impact of capital may be unlike anything experienced by today’s finance professionals. Long term mass-unemployment may result from the disruption to our daily lives and lead to political pressure to change the order of beneficiaries from the production of wealth from the application of capital.

It wasn’t universal of course – we also suggested that house prices might crash. I think the government thought that too, because they suspended property purchase tax to stimulate the market. We were wrong, we didn’t expect that thousands of people would want to leave cities and drive up the price of properties with outside space. Though it’s not over yet…..

Why not read the report again (it’s short) it would be great to hear your take on our other advice – where did we nail it, and where did we miss? Alternatively you can also read the much more extensive book “Responding to Crisis, a Leader’s handbook” available from amazon here:

Energy Transition is a horizontal technology.

Until today I thought energy transition was a consequence of the fourth industrial revolution. Now I am convinced it is fundamental driver of change.

I have been an advocate of digitalization being at the heart of the fourth industrial revolution for a few years now. One of the reasons for it is that it is a “horizontal technology”. It is called this because it affects many other industries. Farming gets better, industrial processes get better and (when they get self-driving to work) others, like taxi driving, cease to exist. While I still think digitalisation is at the core, I don’t think it stands alone.

I am a gen-Xer and, 5-10 years ago, I started to notice there was a lack of interest in careers in engineering of fossil fuels from new entrants. I blamed that on all the old folks in grey suits not listening to new hip ways to be digital. While the ignorant old men rejecting digitalisation (and pooh-poohing new ways to work) was definitely correlated I’m no longer sure it was causal.

When I went to the energy sessions at London tech week, no one was talking oil and gas. No one. Not a single fossil fuel company was present. It was all renewables, smart grids, energy efficiency. Now I know why.

Energy transition – and in a broader sense decarbonisation – affects every industry. In the same way that digitalisation is not doing business the same way and just replacing paper with computers, energy transition is not about going about life in the same way and just changing the fuel used.

Today I watched this remarkable video by my friend Rob West who has been in the Bestem Network for a few years now.

It also looks like Rob might think that video is a new skill that’s going to be required to function in the commercial world soon. I do.

Not only has he provided me with a light-bulb moment around energy transition, but also he explained the dilemma of being true to your metier while trying to get people to pay you to do more of what you think is important work. In a way he also shows how digitalisation allows businesses to be more specialised and to reward those who know what they are talking about rather than just those that can harness the power of others. That’s how I intend to run Klynetic Innovation.

Good work Rob, keep it up!

How are you going to innovate?

This year everyone appears to be talking about innovation. Many think it’s being driven in response to the pandemic. If that were so, all we would need to do is wait until the vaccine is delivered and we can forget about it and go back to the way it was. Almost no-one believes this to be true.

The commercial world is evolving, and the end state is not yet known. This means traditional budgeting, planning, efficiency drives and cost reduction will not be enough for success. Organisations must accelerate their innovation agenda – this is not about inventing something new; it’s about taking what you know, reconfiguring it to be relevant and continuing to adapt and evolve.

In the previous three posts I set out some of my thinking about the fourth industrial revolution because I think this model serves well to explain why we are experiencing change. As part of your innovation thinking you may want to consider seven fundamental factors that underpin the revolution. They may not have an immediate impact on today’s business but as Wayne Gretski almost said – it’s best to skate to where the puck is going, rather than where it is now.

It is hard to untangle these factors because they influence each other and form self-re-enforcing feedback loops (which accelerates change). I find it useful to use this when considering issues and deciding where to focus, I hope you do too.

1. information creation and connectivity

The ability to create, share and access information has implications across social, political, and industrial spheres. Whether as flash-mob revolutions, exposure of tax fraud, mob-trolling of celebrities or remote monitoring of industrial plant and machinery.

​Transparent information undermines authority by revealing the inconsistencies, lies and hypocrisy required to govern. Anonymous transmission of ideas on social media leads not only to emboldened action but also to misinformation and on-line bullying. Information is conflicting and unreliable and knowledge and certainly is displaced by opinion. The ability to sift and evaluate data and then apply rational analysis is not evenly distributed among populations.

​The cost and availability of creation, capture, and transmission equipment has reduced nearly to zero. It is ubiquitous. The creative idea, installation of capture equipment and the editing of results is rare and not free.  One cannot go back and measure the past, so value may be found in stored experience. If you can curate information and control its presentation, then there is power to influence perception.

​Commercial innovation is likely to arise from creative firsts, unique archives, collection networks, influencing curation, and low-cost data organisation, error-correction, and editing.

2. understanding and acting upon information

Advances in computing power have led to new ways to analyse information, methods to learn and infer meaning and procedures to decide how to act. This leads to automation – unattended service, purchase reccomendations, warehouse picking and self-driving vehicles.

​Too much data causes problems with human-led processing such as overload, decision biases and selective world-models. We have evolved to make binary conclusions “being decisive” and “acting with confidence” are perceived as star qualities. Leading based on flexible decisions resting on the probability afforded by analysing emerging information is uncommon. Motivating others to make swift progress in the face of uncertainty will require a new set of leadership skills.

​Commercial innovation is likely to arise from increased quality of service accurately targeted towards needs, as well as reduced cost of provision. Companies that can harness learn to direct activity and make progress under conditions of uncertainty will also benefit.

3. additive manufacture

This is not just 3D printing. Many things are traditionally created by removing material using techniques like cutting, drilling, thinning, and shaping. This wastes material, energy, and time. The materials we use – cement, steel, rubber, plastics are chosen because they lend themselves to these processes.

Additive manufacture will change the materials we pick, it will reduce waste in production and change the shapes we create and the material performance we obtain. It will not only impact factories but also it will change extraction industries and trade routes. It will be possible to email design files and create what’s needed on site without the need to ship raw materials, sub-assembled parts or finished goods.

We are seeing the rise of extrusions and laser-melted metal powders and will shortly embark on assembly at the molecular level. This will mean the same forces that change building materials will impact other wasteful processes including agriculture, slaughtering, drug formulation, paper making and paint manufacture. We can expect to also see different flow-processes with lower temperatures and pressures, lab-grown meat, structured drug design and smaller-batch runs. Additive manufacture principles will impact a diverse range of industries including specialist machine makers, house-hold construction, manufacturing, farming, and medicine.

Commercial innovation is likely to come from creative designs, disintermediating supply chains and creation of innovative not-possible-before shapes and material-performance. There will be insights for applying this technology to industries not considered before.

4. planet maintenance, collective responsibility

Some call this activism or environmentalism, but whatever you call it there are growing movements encouraging (and forcing) vested interests to consider the impact they have on the wider world. This encompasses the materials consumed, the energy used, and the waste products created.

​Fuelled by information and analysis governments have concluded that there is a climate emergency which calls for rapid decarbonisation. This is leading to energy transition, smart-grids and electric drive trains on the one hand, and examination of the energy intensity of industry and ways of living on the other. It has also given rise to the notion that resources on earth are finite which leads to the circular economy (where goods are recycled into new goods) on one hand, and the drive for mining of materials from asteroids and the seabed on the other.

​Commercial innovation is likely to occur around opportunities afforded by legislation – such as carbon pricing, outlawing of practices as well as the inclusion of sustainable methods and transparency of operation. Smart ways to redirect and reuse energy will become valuable.

5. organisation of labour

We now have remote working and video conferencing; people don’t need to go to the office. People don’t need to be in the same town or the same country.  The COVID crisis of 2020 saw mass adoption and made it normal to use.

On-line retail, automation, self-driving cars, and additive manufacturing will reduce demand for labour in many sectors and, due to our global supply chains and clustering of industries, this is likely to create geographic areas where traditional work will become scarce.

The gig economy is at one end of a spectrum of employment that runs from employee, through contractor, project team into gig work. The quantum of work purchased is becoming smaller and pay is more related to outcome rather than time spent on a task. Bonds and exclusive service to one employer is becoming less common.

​Commercial innovation is likely to encompass ways to facilitate remote interactions, telepresence, and ways to build trust (both emotional and technical). Ways in which goods and people are transported will change leading to opportunities in non-traditional geographies and innovations are possible in the way labour is accessed, motivated, managed and rewarded.

6. culture, art, craft and beauty

The 4th industrial revolution moves us more towards a world where less human labour is needed to produce and distribute the goods, services, and energy we need. Other factors will come to the fore in determining what is more “valuable”.

​Where we are used to optimise for low-cost production, we will increasingly favour products, services and experiences that appeal on an emotional level. Emotions will become more important. This is occurring already via inclusion policies, social movements, and campaigns for various forms of justice. We can see on-line culture forming value through influencers and followers whose product is purely an experience and a connection between people with similar perceived values.

​How one spends time will become more important. Dedicating large amounts of time to an employer will seem less likely to determine level of “success”. This will lead people to choose to do more things that they like – leading to more artisan production.

​Commercial innovation may occur in the labour market by enabling people to find their vocation and navigating the changed expectations required to transition career thinking to match the 4th industrial age. The types of products and services sold, and the labour conditions required for workers will increasingly require taking account of design, beauty and evoke emotions, resonate with the values of buyers and be fun.

7. politics of wealth and power

This is likely to be the slowest area of the 4th Industrial revolution to mature. But it will be the most profound and biggest determinant of outcome. While it is tempting to ignore this because it does not lend itself to traditional commercial analysis, it is likely to prove one of the biggest source of disruption and should not be left unattended.

Changes in this factor are likely to occur in (possibly hotly debated) jumps because this deals with fundamental and, for many, unimaginable changes to basic principles of societal organisation. If labour is no longer in short supply this could lead to what used to be called mass unemployment.

I believe that we are less likely to tolerate wide-spread poverty such as that experienced when people moved from the land into the cities during the first industrial revolution. Perhaps we will find a way to allocate resources to people other than by labour, while still maintaining civil and ordered society. What was once called welfare may become a universal basic income.

Accepted definitions of wealth may change to include more than money. Because time is an immutable constraint, this may become a currency. How it’s spent may differentiate between rich and poor. Manners, deportment, compassion and popularity may be qualities that people will support to determine unequal reward for others. Honour and shame may become fashionalbe once more. In some socieites this may instead become enforced compliance. Human groups naturally form hierarchies. When traditional methods of determining who has more worth changes then so will our definition of who is more worthy. Some people want to be “top-dog” and will use every method to be so (or remain so) – not only by pulling themselves up, but also by pushing others down.

As information asymetry combines with confirmation bias, we are likely to see politics become more fractional. Groupings will emerge like sides on a battlefield. They may be wealthy industrialists with their capital and bankers, career politicians with their nationalistic tendencies, intellectually enlightened middle classes, disenfranchised and once-proud working classes and individuals who want to be made to feel special and better than their peers. These interests will come with different ideas about what to optimise for success and how to go about doing it.

Different factions with competing ideas, their votes, their followers, and their financial means will be pitted against each other. They will use new technologies, historic resources, traditional oratory, and brute force. They will use the structures and institutions of society – as well as whatever form of subterfuge is available – to further their conflicting objectives. Human history suggests that without acceptable compromise frustration will lead to anger, irrationality and even violence.

Conclusion

Commercial innovation here may be hard to achieve but being alert to the political and social dimensions will provide early warnings and adaptation may keep you on the right side of history.

For more information please see:

4th Industrial Revolution Implications parts 1-3

IR4 Part 1: Information and Communications LINK

IR Part 2: Work, Trade, Taxes and Government LINK

IR4 Part 3: Energy Transition LINK

Earlier thinking around the subject

Innovation and Productivity with the 4th Industrial Revolution LINK

Digital Disrtuption Landscape for Upstream Oil and Gas LINK

Get out of the way of digital Crhis LINK

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.