Leading the Energy Transition an Introduction to Low-Carbon Energy Technologies PAGE 4

Winter 2012 Published by Schlumberger Business Consulting SBC Energy Perspectives Energy Perspectives

Leading the Energy Transition An introduction to low-carbon energy technologies PAGE 4

Winter 2012 PLUS 30 IEA’s Fatih Birol on the new energy landscape 36 Waste gas: a crucial piece of the energy poverty dilemma 12 18 24 The Challenge Energy Sustainably Managing 42 The importance of R&D and of Transition Transition a Strategic Resource what oil and gas companies need to prepare for Lord John Browne of Why oil and gas companies Water issues carry Madingley on the are in a prime position to significant business risk current energy capitalize on alternative and must be integrated transition and the sources of energy into the strategic planning challenges ahead of energy companies Energy Perspectives About Energy Perspectives Managing Editors Energy Perspectives is published by Schlumberger Business Consulting Hermes Alvarez to communicate business solutions and innovative viewpoints on today’s Opoku Danquah biggest strategic, operational, and organizational issues facing energy Board of Editors industry decision makers and thought leaders. Energy Perspectives is Muqsit Ashraf distributed by Schlumberger Business Consulting to the energy industry’s Olivier Perrin most prominent decision makers and thought leaders globally. For Antoine Rostand information on how to receive Energy Perspectives, request permission Arnold Volkenborn to republish an article, or comment on an article, please email Stephen Whittaker [email protected]. Schlumberger Director of Corporate Communications, Energy Perspectives Editor-in-Chief About Schlumberger Business Consulting

Associate Editors Schlumberger Business Consulting is all about transforming the world’s Amy Donahue energy business for the 21st century. We are a management consulting Kathryn Hite firm with the strategic and operational insight, global reach, and practical Christopher Khoo experience needed to provide a material impact on the oil and gas sector. Laurent De La Porte In 2004, Schlumberger Business Consulting was established under the Peter von Campe sponsorship of Schlumberger Chairman and former Chief Executive Officer Andrew Gould to help oil and gas companies realize dramatic performance Contributing Authors improvements and sustained growth. SBC comprises more than 200 Hermes Alvarez consultants recruited from the best consulting firms, energy companies, Antoine Aris and academic institutions globally. Operating from 13 major offices and Muqsit Ashraf various satellite offices worldwide, SBC engages clients on a wide Renaud Brimont spectrum of management issues, ranging from strategy and organization Vivek Chidambaram to operational effectiveness. Rakesh Jaggi Amy Long About Schlumberger Antoine Rostand Schlumberger Limited (NYSE:SLB) is the world’s leading oil field services Tamas Seregi company supplying technology, information solutions, and integrated Olivier Soupa project management that optimize reservoir performance for customers Peter von Campe working in the oil and gas industry. Founded in 1926, the company today design employs more than 108,000 people, comprising over 140 nationalities, in The Pohly Company approximately 80 countries.

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Energy Perspectives is managed by Schlumberger Business Consulting (SBC). SBC is the management consulting arm of Schlumberger. The two entities do not share confidential client information, and they implement strict information security measures to protect client data. Views expressed in Energy Perspectives bear no impact on day-to-day SBC or Schlumberger business, represent the current judg- ment of the authors at the date of publication, and do not necessarily reflect the opinions of Schlumberger.

Printed on recycled paper. Welcome

A World in Need of Transition

A century ago, the world’s population stood at with CCS at a much lower cost? approximately 1.75 billion — about a quarter Instead of pitting one energy source against of what it is now. The gas turbine had just been another, we should focus the debate on how to invented and global primary energy consump- navigate the energy transition in the most tion was a fraction of current levels. Energy economical and rational way. As Lord John sources were limited, power-consuming Browne of Madingley points out, energy appliances were few and far between, and oil transition implies smart, long-term policies that and gas were not the dominant energy sources. address all possible solutions and encompass all Fast forward to today, the world population stakeholders so that no resource goes to waste. has surpassed the 7 billion milestone and It is about making the right decisions, not solely could touch 8 billion by 2035. Primary energy based on past experience and ideas, but through consumption has grown roughly 23 times and a thorough comprehension of where we want to future demand is set to increase substantially, go and how we can get there. particularly in rapidly developing economies. At Schlumberger Business Consulting, we In spite of this rapid growth, about 1.3 billion provide insights on the possibilities for energy people still do not have access to electricity or companies to capitalize on the energy transi- live in energy poverty. Overcoming this energy tion while taking into consideration, among gap will not only require an increase in supply other factors, the current state and future but will also necessitate a metamorphosis in potential of the technologies driving this the global energy mix. And the need for an change. This issue of Energy Perspectives™ energy transition that will decarbonize the touches on the evolution of low-carbon energy global economy is becoming more critical as technologies, the positioning of oil and gas more evidence of the impact of greenhouse companies, and the sustainability of the emissions on climate change comes to light. industry’s resources through the transition. The rate of transition is highly influenced by The energy transition is well under way, but the price and affordability of the energy source. capitalizing on it requires the capability and Oil, although no longer cheap, will continue flexibility to navigate through increased uncer- to play a major role in transportation as more tainty due to market volatility, changing policies tight oil resources are exploited. The abundance and geopolitical agendas, and rapid technologi- of unconventional gas reservoirs dispersed cal change. We believe that today’s energy around the globe confirms the longevity of companies have the balance sheet strength, natural gas. Furthermore, coal will require technical and project management know-how, carbon capture and storage (CCS) technologies and the long-term vision and courage to be the to be cleaner and environmentally acceptable. drivers of this historic transition. Efficient technologies needed for a move toward a decarbonized economy and diversified Regards, energy mix are known, but making this fundamental transformation possible requires a more mature debate on the economic trade-offs. For example, is it reasonable to subsidize offshore wind at around $200 per ton of CO2 avoided Antoine Rostand when we could avoid atmospheric CO2 emissions SBC, Global Managing Director Energy Perspectives

thought pieces

4 Leading the Energy Transition An introduction to low-carbon energy technologies, how R&D investment in power generation methods with renewables and support of CO2 emission reductions will lead the way toward a new era in the world’s energy system. By Olivier Soupa and Amy Long

18 Energy Transition: Oil and Gas in a Prime Position to Capitalize As the world seeks energy security and alternative energy sources produced in more environmentally sustainable ways, the oil and gas industry stands well prepared to unlock supplies, reduce emissions, and monetize the transition. By Antoine Rostand

24 Sustainably Managing a Strategic Resource Water is critically important for the energy industry, especially for oil and gas extraction. Water issues carry significant business risk and must be integrated into the strategic planning of energy companies. By Muqsit Ashraf, Hermes Alvarez, and Rakesh Jaggi

executive summaries

For synopses of articles in this issue, see page 48.

2 SBC Energy Perspectives | Winter 2012 Contents Winter 2012

36 Waste Gas: a Crucial Component of the Energy Poverty Dilemma Recapturing or reducing levels of waste gas could help bottom lines while proving to be a great benefit to energy- poor countries. By Renaud Brimont, Antoine Aris, and Peter von Campe

42 Preparing for Opportunity In order for companies to ideally position themselves for the energy transition, optimal management with an integrated approach toward technology and innovation will be essential in overcoming R&D challenges. By Vivek Chidambaram and Tamas Seregi

interviews

The Challenge Emerging of Transition Markets Lord John Browne of Madingley An interview with Dr. Fatih Birol on the current energy transition of the International Energy Agency on and the challenges ahead energy poverty and emerging markets By Antoine Rostand By Olivier Soupa and Amy Long 12 30

sbc.slb.com | SBC Energy Perspectives 3 Olivier Soupa and Amy Long

Leading the Energy Transition

An introduction to low-carbon energy technologies

his article is an extract from SBC prises a high level annual status of RD&D Energy Institute’s 2011 survey, (research, development, and demonstration) Leading the Energy Transition. from public and private sources in all LCE The full report will be accessible on technologies, alongside a detailed focus on TSBC’s website, sbc.slb.com, in January 2012. specific technologies. The 2011 survey has R&D work is instrumental in ensuring assessed the maturity of LCE technologies, that critical low-carbon emitting technologies funding requirements, role of public and pri- reach commercialization. The Schlumberger vate actors, with a focus on carbon capture Business Consulting (SBC) Energy Institute, and storage and enhanced geothermal a nonprofit energy research foundation, seeks systems (EGS), and sets forth suggestions for to better understand the specific challenges, increasing activity. priorities, and practices of companies developing low-carbon energies (LCEs) like solar, Low-Carbon Energy Technologies wind, biofuels, carbon capture and storage (LCETs) Are Vital (CCS), geothermal, as well as smart grids, en- The world’s energy system is at the onset of a ergy storage and energy efficiency. new era. For over a century, hydrocarbons — On the basis of analysis and interviews coal, oil, and gas — have underpinned modern with more than 70 experts and companies economic development and today account for from all regions and various industries, the 80% of global primary energy demand. Tensions survey Leading the Energy Transition com- in this energy system are mounting. The threat

4 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 5 of climate change, concerns over energy securi- (IPCC) estimates that on the present course, ty, increasing competition over finite resources, we could reach a tipping point by 2020 after and widespread energy poverty highlight the ur- which the effects of climate change would be- gency of reaching a new, more sustainable ener- come widespread and disruptive. Atmospheric gy system. According to the International Energy CO2 concentrations above 450 ppm could result Agency’s (IEA) New Policies Scenario, which in global temperatures rising 2°C above prein- takes into account recently announced commit- dustrial levels,2 in turn setting off a chain of ments and plans to reduce emissions, by 2035 disruption in weather and water patterns that fossil fuels will still account for 75% of the world’s would have devastating effects on food produc- primary energy (see figure 1, page 6) and related tion, ecosystems, and coastal communities (see CO2 emissions will increase by 26% compared to figure 2, page 7). Disturbingly, both CO2 concen- 2009 levels. All the growth is attributed to devel- trations and global temperatures hit record oping, non-OECD countries that rely heavily on highs in 2010, and the past decade was the fossil fuels to meet their energy needs. warmest on record since the late 19th century, In particular, avoiding climate change is in- when global temperature measurements began. creasingly seen as an issue for which time is run- The energy transition from hydrocarbon- ning out. The IEA recently warned that global based economies to a more sustainable model temperature is on course to rise by more than requires coordinating a set of solutions (indi- 3.5°C in the New Policies Scenario,1 and the vidual technologies) across several industries

illustration by Gordon studer illustration Intergovernmental Panel on Climate Change (power, manufacturing, and transport) and

sbc.slb.com | SBC Energy Perspectives 5 Leading the Energy Transition

levels (international, national, company, house- competitiveness, with hydrocarbons — the in- hold), via instruments that appeal to inter- cumbent source of energy. It should be noted sections of the above (regulation, emission that without pricing in the negative externali- restrictions, taxes, and incentives). Action on ties of CO2 emissions, incumbent fuels are not three main levers, each comprising dozens of playing on a level field with LCETs. Addition- LCETs and behavioral changes, is needed. ally, LCET costs are being compared with costs These levers are low-emissions energy genera- for technologies that have experienced 100 tion, end-use, and decarbonization. years of testing and improvement. Neverthe- The IEA estimates that preventing the 2°C less, the persistent gap between the levelized tipping point is possible if we start to reduce cost of electricity3 (LCOE) of hydrocarbons our annual CO2 emissions before the end of versus LCETs shows that, by and large, the the decade. As described in the IEA’s 450 Sce- electricity generated from the latter is simply nario, which minimizes costs to stabilize CO2 more expensive (see figure 4, page 8) — that concentrations at 450 ppm and limits global is without accounting for the cost of building warming to 2°C, the least-cost option requires new transmission infrastructure, which will be actions on all three fronts, with end-use effi- required for large scale deployment of LCETs. ciency and fuel switching contributing 48%, Until LCETs reach grid parity, they will be low-carbon energy generation 30%, and decar- dependent on public-sector subsidies and con- bonization 22% (see figure 3, page 7). sumers’ willingness to pay more for electricity. Another key measure of LCET attractive- Yet Many LCETs Are Not ness is the cost of CO2 avoided or “abatement Commercially Ready cost,” which is a tool for governments rather One measure of commercial readiness for pow- than for private investors. It measures the ad- er generation technologies is how close they ditional cost required to avoid emitting one come to achieving “grid parity,” or economic ton of CO2 by using an LCET instead of an

Figure 1: Share of world primary energy demand by energy type

New Policies Scenario 100% Bioenergy Other renewables Hydro 80% Nuclear

Gas 60%

40% Oil

20% Coal

0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2035

Note: Projection based on International Energy Agency’s “Current Policy Scenario” and World Energy Outlook 2011. Bioenergy includes biomass, biowaste, and wood.

Sources: Vaclav smil “Energy Transitions” (2010), BP Statistical Review, IEA WEO 2010 and WEO 2011; Schlumberger business consulting (SBC) Energy Institute analysis

6 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 7 Leading the Energy Transition

Figure 2: Atmospheric CO2 concentrations and possible consequences Atmospheric CO2 concentrations and possible consequences parts per million (ppm) 450 ppm

550

650 750

+0°C +1°C +2°C +3°C +4°C +5°C

Severe impacts Rising number of people Major declines Food in Sahel at risk from hunger in crop yields Mountain glaciers Water Sea level rise Water disappear shortage threatens major cities Coral reef Collapse of Ecosystem damaged Amazonian rainforest Rising intensity of storms, forest fires, Weather droughts, flooding and heatwaves Melting of Increasing risk of abrupt, Climate Change Greenland ice sheet large-scale shifts in climate system

Sources: Schlumberger business consulting (SBC) Energy Institute; Relation between CO2 concentration and temperature increase are from ipcc “working group III” (2007); Relation between temperature increase and possible consequences are from Stern “Review on Economics of climate change” (2006).

Figure 3: CO2 emissions reductions needed by LCET area by 2035

Gt 38 New Policies Scenario 36

32 2020 2035 30 Efficiency 72% 44% 28 Renewables 17% 21% Biofuels 2% 4% 26 Nuclear 5% 9% CCS 3% 22% 24 450 Scenario Total (Gt CO2) 2.5 14.8 22

20 2010 2015 2020 2025 2030 2035

Source: IEA “WEO 2011”

emission intensive technology. Coal is taken as as the most affordable technologies to decrease the reference plant4 because is the most emit- CO2 emissions. Interestingly, the cost of carbon ting power generation technology. The cost of capture and storage (CCS) abatement is well be- CO2 avoided can be negative, implying that low other technologies that attract much more the LCET is more cost effective than coal, even attention, like wind offshore or solar, whose cost without considering the emissions impact. of CO2 avoided can exceed $200 per ton. This is the case for hydropower and conven- The second insight from figure 5 is that the tional geothermal power. potential of low-carbon technologies to address Figure 5 (on page 9) illustrates the large climate change differs substantially. As repre- variations between LCETs abatement costs in sented by the width of the bars in figure 5, we can the United States. Apart from hydro and geother- see that technologies like nuclear or CCS applied mal, wind onshore, nuclear, and biomass appear to power generation could represent up to 22%

sbc.slb.com | SBC Energy Perspectives 7 Leading the Energy Transition

Figure 4: Average global LCOE estimates for various sources of electricity LCOE (USD per MWh)

1000 The goal: Current LCET positions grid parity (global average) 800

600

400

200

Coal Gas Wave Nuclear Solar PV Coal (CCS) Gas (CCS) Large HydroGeothermal Small Hydro Solid BiomassOnshore WindOffshore Wind

Solar Thermal (STE) Note: Solar PV costs have dramatically come down over the past two years since the IEA survey was conducted, while solar STE costs have largely stayed the same. The effect of this shift is that solar PV is now starting to price solar STE out of the market. Also, since solar PV tends to be much more costly outside the U.S., taking a global average skews solar PV LCOE upward. Lastly, the solar STE data in the IEA survey was limited to three data points, which may not fully reflect the higher cost of solar STE in some locations. These numbers assume a 10% discount rate.

Source: SBC energy institute created global averages using the IEA’s “Projected Cost of Generating Electricity” (2010) and 37% of CO2 abatement in 2050 respectively, scale. For other LCETs, more R&D is needed according to the IEA’s 450 Scenario (the least for breakthrough technologies that can change costly pathway to a 2°C increase). the cost structure itself. Abatement costs are not fixed in time, and In either situation, the level of investment the role of R&D is to make it decrease. There- may serve as a forecast of relative rates of prog- fore it is important to understand where invest- ress between LCETs. In 2010, new investments ments are currently directed to identify gaps in LCETs for energy generation (renewables between the potential of LCETs in terms of CO2 and CCS)5 totaled $219 billion, an increase of abatement and the level of RD&D investments. 32% from 2009 (see figure 6, page 10). This reflects the strength of investment from devel- Investment Levels May oping countries, the boom in household solar Forecast LCET Progress PV installations in Europe, and the rebound For most LCETs, reaching grid parity is a mat- from the 2008 recession. Despite this histori- ter of more projects and/or more R&D. The cally high number, investment falls short of the experience of many industries, such as ship- $750 billion per year through 20306 that the IEA building and semiconductors, has shown that estimates is needed to achieve the 450 Scenar- unit costs fall with capacity installed. This is io. Of the total investment, the IEA estimates because over time, and with successive proj- that $14–28 billion a year is needed for RD&D ects, companies make incremental reductions in renewables and CCS.7 In contrast, SBC En- in the cost structure through operational ergy Institute estimates indicate that RD&D improvements (“learning by doing”), and can levels in 2010 for these technologies totaled take advantage of supply chain economies of approximately $10 billion, reflecting a sizable

8 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 9 Leading the Energy Transition

Figure 5: CO2 abatement curve for power generation lcets

250 239 Share of emissions Range of cost of CO2 avoided relative to coal (coal = 0) reduction potential (%) 203 11% 200 176 8% 182 150 5% 139 92 106 100 4% 90 33% 49 50 67 18 53 8 2% 0 0 9% 22% 0 9 4% 2% -8 -7 100% -27 -37 Hydro Wind Nuclear Biomass CCS CCS Wind Solar Solar Geoth. Onshore (coal) (gas) Onshore PV CSP

Note: Cost of CO2 avoided for CCS (gas) is relative to a fast-fired power plant. One figure from IEA “Projected Cost of Electricity” (2010) has been voluntarily excluded; it gave an abatement cost of only $23 per ton for coal.

Sources: Schlumberger Business Consulting (SBC) Energy Institute. The costs of CO2 avoided are for technologies operating in the united states with current available technologies and derive from 21 studies gathered by the Global CCS institute in “The costs of CCS and other low-carbon technologies,” issues brief, No. 2 (2011); CCS CO2 reduction potential comes from IEA “Energy technology perspectives” (2010)

RD&D gap. Although historically corporate improvements needed are manufacturing and RD&D investment levels have been higher than process optimization in nature, which bears that of the public sector, this trend reversed in relatively low technology risk. As a proportion 2010, reflecting the impact of the recession and of total R&D investment, most solar and CCS stimulus spending. R&D investments are made by the private sec- Historically, the wind sector has attracted tor. In contrast, geothermal and biofuels R&D the highest investment among energy genera- are largely sponsored by the public sector (see tion LCETs. However, the rapid growth in figure 7, page 10). small-capacity distributed solar projects has It should be noted that in addition to direct been remarkable (up 93% in 2010 over 2009), funding of R&D activity, the public sector also to the extent that the solar sector now attracts supports renewables via public support mecha- almost as much investment as the wind sector. nisms such as renewable portfolio mandates, Investments in biomass and biofuels have fall- feed-in tariffs, tax incentives, and so on. The en with oil prices. IEA estimates that worldwide public support In terms of R&D investment, solar is the mechanisms for renewables — which excludes clear winner among energy generating LCETs. CCS — were worth approximately $57 billion in The proportions of R&D spend to project invest- 2009, but need to be increased to $205 billion ment and between private and public sector through 2035.8 Consistent breakdowns for the RD&D spending varies dramatically by technol- level of public support mechanisms and gap for ogy and are due to industry-specific drivers. For each technology were not available but appear example, governments are investing heavily to be highest for the bioenergy sector. Due in in biofuels, driven by energy security concerns part to this uneven level of investment in proj- and high oil prices. In contrast, the private ects and R&D, some LCETs are racing ahead sector is investing heavily in solar R&D, be- of the 450 Scenario in terms of growth rates and cause the market is booming, solar is tantaliz- installed capacity, others are falling behind (see ingly close to reaching grid parity, and further figure 8, page 11).

sbc.slb.com | SBC Energy Perspectives 9 Leading the Energy Transition

Figure 6: History of total new investments in LCETs for energy generation, by LCETs

0 219 Marine 3 Geothermal 3 8 Small Hydro CAGR +24% 8 CCS 12 Biofuels 0 Biomass 2 164 0 163 6 2 2 4 60 Solar small distributed capacity 0 12 4 8 2 132 12 5 19 2 13 21 31 1 30 Solar (excl. small capacity) 2 91 20 4 28 1 11 13 37 21 24 9 96 Wind 12 74 52 64 30

2006 2007 2008 2009 2010

SourceS: BNEF database; Schlumberger Business Consulting (SBC) Energy Institute analysis

Figure 7: Total new investments and R&D investment in energy generation LCETs in 2010 (USD Billions)

Total new investments in 2010 R&D investments in 2010

95 0.5 0.8 1.50 Wind 96 Wind 1.3 1.3 26 60 2.1 1.5 Solar 90 Solar 3.6 3.6 11 0.3 0.3 Biomass 12 Biomass 0.6 .6 6 0.3 2 Biofuels 8 Biofuels 2.3 Asset Finance 2.3 7 PV Small Distributed Capacity 1 0.54 CCS 8 R&D CCS 1.54 1.5 0.03 0.1 Small Hydro 3 Small Hydro 0.13 Corporate R&D 0.03 0.4 Government R&D Geothermal 2.4 Geothermal 0.43

Marine 0.1 Marine 0.01

Sources: Figures for renewables were taken from UNEP “Global Trend in Renewable Energy Investment” (2011); For CCS data, estimates are by Schlumberger Business Consulting (SBC) Energy Institute based on data from BNEF, IEA, and “Commission of the European Communities” (2009)

10 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 11 Leading the Energy Transition

Figure 8: Total new investments in energy generation lcets in 2010

Gap in annual growth rate required Gap in capacity installed by 2010 % GW installed

5% 980 Hydro 2% 1219 Current growth rate 3% Nuclear (5 year average)* 430 4% 512 Required growth rate Biomass 7% in the 450 scenario 54 power 4% 82

Geothermal 4% 11 power 7% 21

Wind 27% 195 12% 575

Solar 60% 21 PV 19% 126

CSP 8% 1 Current status (GW) 50% 42 Blue Map target 2020 (GW) CCS 0 Power 3 GW per year required 28

Note: The current rate for wind and biofuels is the annual average growth rate from 2005 to 2010. For solar PV, biomass, geothermal, and CSP this period is 2004–2009. The current rate and status of nuclear includes capacity under construction on up to 2015.

Source: IEA “input to the Clean Energy Ministerial” (2011)

Conclusion All analyses are available in the SBC Ener- Ultimately, the exact mix of LCETs, not to men- gy Institute’s report Leading the Energy Tran- tion the extent of climate change avoided, sition (2011). ■ will be a question for historians. With the continuing economic fragility, many uncertainties Olivier Soupa and Amy Long work for Schlumberger continue to make the road towards emission Business Consulting (sbc.slb.com). We welcome your comments on this article: [email protected] reduction a long and difficult journey. All actors contribute in positive and negative ways. Most Copyright © 2012 Schlumberger Business Consulting. All rights reserved. governments have adopted inconsistent energy 1. International Energy Agency, New Policies Scenario and policies, fighting climate change in one bill and World Energy Outlook (2011). 2. IPCC Fourth Assessment Report: Climate Change 2007. supporting CO2-intensive industries in the next. 3. The levelized cost of electricity is an estimate of the total For a variety of motivations, companies have be- capex, return on investment, opex, and fuel required to generate gun to change their approach to energy con- electricity over the lifetime of a power plant, as expressed in average dollars to generate one unit (MWh or KWh) of electricity. sumption, but others also lobby against more 4. T. Jamasb and Jonathan Köhler, “Learning Curves for Energy stringent environmental regulation. Public opin- Technology: a Critical Assessment” (2007). The authors note ion also plays an ambiguous role towards carbon that the solar PV industry has experienced faster learning curves emissions reduction by encouraging the use of than other renewable, whereas there is no obvious pattern for the wind industry. certain renewables such as solar and wind, but 5. Throughout this report, LCETs for energy generation consists also preventing instrumental initiatives like on- of renewables (wind, solar, biomass and biofuels, small hydro, shore CCS in continental Europe. LCETs are geothermal, ocean) and CCS. 6. IEA, “Energy Technology Perspectives” (2010). moving forward, some at a reasonable pace, but 7. IEA, “Global Gaps in Clean Energy RD&D” (2010). others are clearly lagging behind. 8. IEA, “World Energy Outlook” (2010).

sbc.slb.com | SBC Energy Perspectives 11 To see video of our interview with Lord John Browne of Madingley, visit our website: www.sbc.slb.com

By Antoine Rostand

The Challenge of Transition Lord John Browne of Madingley on the current energy transition and the challenges and targets ahead

Though change is constant, especially in the energy industry, transitions are slow. The energy transition will play out over the next decades rather than the next couple of years and requires leaders who are capable of combining a long-term vision of the energy future, with a firm grasp of the complexities and realities of execution. In this sense, former CEO of BP, Lord Browne of Madingley, has been a prototype leader in the energy industry. With his role in transforming BP and putting it on the renewables map, he was not only anticipating the changing landscape of the energy system in the 21st century, but actively driving that change. In his current role as Partner and Managing Director of Riverstone Holdings LLC, an energy and power focused private equity firm, Lord Browne continues to push for a more mature debate on the energy transition, which aims to put all energy options on a level playing field. At the Riverstone offices in London, SBC Global Managing Director Antoine Rostand recently discussed the current challenges that the energy sector faces, and how stakeholders can be more successful in navigating this change.

Energy Perspectives: Let’s start with your views before, or it appears to be cheaper. All these on the current energy transition — including ways of thinking need to be thrown up in the climate change and the need to decarbonize the air and people need to start again. energy mix. What can energy companies do? I’ve recently been asked a lot about subsidies Lord Browne of Madingley: The first thing to for renewable energy. I remind people to think remember is that there is no such thing as a about the real cost of a liter of gasoline and the risk-free source of energy. Sometimes people price. The price is roughly three times the cost, argue that one source of energy is better than and the difference goes to the government in tax. another because it’s less risky, we’ve done it A tax is just a negative subsidy, but no one really

12 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 13 Career highlights: ■ Group Treasurer and CEO of BP Finance International

■ CEO of BP Exploration

■ Group CEO of BP

“If you are running an energy ■ Knighted by Her Majesty Queen Elizabeth II company, please don’t imagine that ■ Author of Beyond Business, a memoir the future is simply an imitation of ■ President of the UK Royal Academy of Engineering the past; it is absolutely not.”

Lord John Browne Partner and Managing Director of Riverstone Holdings LLC

complains because there’s no choice. If you tell of “clean” depends on where you stand, both someone that the government will give a subsidy geographically and on the political spectrum. to renewable energy that might increase the Third, can we deliver it affordably? That total bill by 5% or 10%, they will react strongly means the energy isn’t so expensive that we and say, “That’s wrong, we shouldn’t do it.” It’s can’t actually add value by using it. Fourth about establishing a level playing field in terms and finally, can we do it in a way that people of transparency over costs to the consumer. feel comfortable with the risks being taken? Oil and gas companies need to think about Remember that there is always risk to the purpose of what we do in this industry. everything, whether it’s nuclear, drilling in We’re providing energy for people to have someone’s backyard, mining coal, building light, heat, and mobility, to help them offshore wind within cost, or constructing develop. And we’re trying to do it while windmills without damaging the view. satisfying certain criteria. I think the debate needs to be mature and First, can we deliver it securely? As Winston a level playing field needs to be constructed Churchill said, the only security is in variety for assessing the full costs and risks of and variety alone. Second, can we deliver it different forms of energy. cleanly? In Europe, that means without causing climate change. In China it means EP: In London, Paris, or Washington, it is that, but also without causing low-level relatively easy to talk about reducing the pollution. In America, your interpretation carbon footprint and so on, but in Africa,

sbc.slb.com | SBC Energy Perspectives 13 Interview with Lord Browne

India, or China the energy debate is funda- be utilized instead of flared? There is no use mentally different because many people do for such gas at this point in time. Would it be not have access to energy for their basic needs. a natural path for oil and gas players? What can oil and gas companies and large LBM: All oil and gas companies should start corporations do about energy poverty? with a clear understanding that it’s wrong to LBM: When I was chief executive of BP flare gas unless there is an emergency. Setting we did a lot of work in this area: to see if aside that safety issue, people need to work out we could make a contribution, and to move how they can best use waste gas, because there us toward being a sustainable business. is a huge negative externality to flaring it: you The priority was to change the way in which produce tons of CO2, which is almost certainly people used biomass for cooking. Biomass in bad, and you waste a resource. this context really meant very low-energy That resource can be used in a variety of biomass — twigs, leaves, and other debris. ways. It’s impossible to generalize: the most Women — and it was only women in certain common use is power generation, but it can parts of the world such as Africa — would also be used for local heating or local steam spend 4–6 hours of the day collecting this generation for industry. Something can be material, come home, and then cook very done with it. I think that’s proved to be the slowly, with a very low number of calories, in case in Angola, for example. I recall the a house filled with smoke. The consequences enormous resistance of the oil and gas in terms of social structure and health are industry to collecting gas for liquefaction, obvious. We invented little stoves for which we but it is happening. Words of resistance could provide either wood pellets — which when converted into success demonstrate were cleaner burning than the biomass — that you can’t resist all the time. or LPG. This system worked brilliantly and spread by a process of viral marketing. As EP: How do you see the evolution of the women had more time they became sales global energy mix? people for the stove among other women. LBM: It is important to establish a level Renewables, whether biomass, solar, or playing field for choosing between different wind, are very important for distributed sources of energy, in particular being clear energy generation. They are not expensive, about what we really mean by “risk” and why or not as expensive as putting up new we support some technologies and not others. distribution infrastructure, and can deliver For example, nuclear is regarded as very major changes in remote and rural areas undesirable by many people, but not in France, where people are unable to read at night not in China, and not in Russia. When you because there is no light. There are tech- analyze the issues surrounding nuclear, they niques to deliver this distributed generation. are actually about fear: fear of catastrophe. The oil and gas industry and utilities, as part While every life is very valuable, the loss of of thinking through how they develop market life as a result of Chernobyl is far lower than and how they develop a deeper understanding the annual loss caused by mining coal and of these countries, should at least participate the pollution from burning it. There is a deep in discussions about this. fear of radiation, as something you can’t see. We need to think about how we handle that EP: Do you think that oil and gas companies because we need to make the right decisions, should move into power generation in areas not just decisions based on past understanding such as West Africa where associated gas could and past ideas.

14 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 15 Interview with Lord Browne

The same is true with costs. While it’s right people that “it’s our oil so it should be free.” that subsidies go toward renewable energy, As a result, the growth in oil consumption is they shouldn’t go to it forever. Subsidies are going up enormously. important so that economies of scale can be developed and costs reduced. If you can’t see EP: You mentioned fear of radiation, but if we costs coming down, subsidies shouldn’t be used consider the particulates from diesel, that’s because you’re just featherbedding something similar to radiation in so much as one doesn’t that doesn’t actually work. see or feel those particulates. But they have a In reality costs do come down. Take solar huge effect on health. What can we do to start energy for example: the manufacturing cost shifting the public’s perception so that we has come down from $4 per watt five years make the right decisions in this period of ago to $0.75 per watt today. And it will come energy transition? We are talking about down further. Wind cost is also coming down. trillions of dollars of investment, and if we go Turbines are getting bigger and as a result the the wrong way, it will delay the time we end fixed costs per kilowatt are coming down. energy poverty, reach the right energy mix, So a lot of things are changing, and subsidies and have the right decarbonization of our give the industry a kick start. Subsidies have primary energy sources. been used to kick start oil and gas in the LBM: These problems are so difficult to solve North Sea and Alaska, and to kick-start the that everyone always looks to government for semiconductor industry in the United States. answers. When people look to government, So this is not a new idea. We need to develop the solutions become very depersonalized. an understanding of that and say, “It’s fair to do As a result we have never quite reached that.” We shouldn’t be debating the principle equilibrium between what the individual of subsidy, but rather the question of what is does and where the state has to step in. the right energy mix to fulfill the criteria of The balance hasn’t been properly struck security, cleanliness, and affordability. yet. We do need to level the playing field: to understand for each energy source what EP: Recently I’ve seen estimates of subsidies to the externalities are, what the damage is, the oil and gas industry of more than $400 and what the risk is. Let’s try to get the billion a year. There are many countries with risk-adjusted cost equal on the margin; let’s fuel subsidies, but they don’t appear to be have a better policy debate on the margin. benefiting poor families; instead they appear I’m realistic enough to know that given to be mainly helping the industrial sector. the political process (in any country), given the LBM: There are. In Saudi Arabia, 1.5 million vested interests at play (there is a big industry barrels a day of crude oil are used for water involved here), and given the personal impact desalination. I know that people in the King- on people often very close to an election, that dom are deeply aware of this. That’s 1.5 million no perfect solution will ever be reached. But barrels a day that could be used elsewhere. we could move in that direction a bit; Europe is That water could probably be desalinated using certainly doing so. We need to make sure that solar thermal and solar photovoltaic tech- movement continues in the right direction, that niques and the Kingdom is figuring that out. we are expanding choice for the consumer. We To return to the figure of $300–400 billion may not agree with all the decisions made — of subsidies: when you subsidize something I don’t agree with Germany’s elimination of too much, people use too much of it. In the nuclear, because I think it will have conse- Middle East there is a feeling among the quences we may not like, but I can quite

sbc.slb.com | SBC Energy Perspectives 15 Interview with Lord Browne

understand why Germans believe it’s the right EP: From your past experience as CEO of BP, decision. There are lots of things that we need what would be your advice to an executive to do to keep the political process moving of a large player today? forward. The biggest issue to be tackled is LBM: To always remember that the energy whether or not we do something to reduce industry is not static and to understand too the probability of climate change. That is an that to give up or release yourself from your open question at the moment. heritage is a really difficult thing to do. In oil and gas and in energy we deal with infrastructure- EP: In a recent SBC study we found that oil like projects that are very deeply rooted and and gas companies had invested more in require high up-front capital, so legacy — what specific renewable energies, for example happened in the past — anchors the future. You Exxon in algae and Total in solar. They are can’t throw away everything every year and start investing a significant amount of money in again. But you really need to look on the margin these forms of energy, because they want to and ask, “Is that really what I need to be doing? position themselves more as energy compa- Should I, for example, be thinking where real nies. Is there a market and are there opportu- integration is?” In the past in the OECD, we nities for entrepreneurs or private equity to used to integrate upstream with refining and participate in a “new Internet boom” around marketing. But when I joined the industry there clean energy and decarbonization? was a very big surplus of crude oil and it was in LBM: There is always an ecosystem around the hands of the majors, and the only differentia- any part of this gigantic industry called tion was how you sold it as a refined product in a energy — the biggest industry in the world. growing market. This has all changed now in the Whether it’s shale gas, where most of the OECD, so people have to move somewhere else action took place on the entrepreneurial and think about what they are doing on the level, to be rolled up into larger companies integration in the OECD. later, or whether it is tertiary recovery in oil Equally, changes in the electric power fields, which rolls down to the entrepreneurial business, notably with gas and renewables, company from the major, everyone has a role. mean that those who control gas and renew- Everyone gets better by allowing multiple ables need to think carefully about what goes players. There are lots of entrepreneurs doing on beyond their gate and how they change algae; there is also Exxon. There are plenty of their attitude — whether it is getting into the big companies doing wind, which you need big business or changing the way they contract, balance sheets for, but there are also small a lot of changes are taking place. Gas in parti- companies, private equity companies, and cular, which we’ve now identified as more single entrepreneurs. There are people doing ubiquitous than we ever thought: it’s every- electric cars, all part of the same thing, from where, be it in the eastern Mediterranean or the scale of Great Wall Motors and GM shale gas in Europe, North America, or China. through to Fisker and Tesla. I think that is That changes the way the energy business has the sign of a healthy industry. If it were in the to think in the future — contracts, utilization, hands of just big companies, it could get very electric power, all sorts of things. plodding; if it were in the hands of just small companies, it could probably never deliver. In EP: We talked about the legacy of oil and gas the end you need strength, muscle, and big companies. Besides that — and we all know balance sheets to deliver, but you need many that the weight of the investment means that small players to create. you cannot change that overnight — what else

16 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 17 Interview with Lord Browne

can executives of today’s energy companies do? promised it, gas was in short supply and LBM: I think we need to reflect on two things. expensive. So it’s hardly surprising that no one The ever-increasing impact of what now believes anybody in this area, and I think belief appears to be ubiquitous natural gas. Whether should be based only on concrete contracts, we look at the eastern Mediterranean, we look probably with fixed prices, and enough time further on the coast of Australia, we look at the elapsed for people to realize that there will not east coast of Africa, or we look at the shale gas be force majeure — that the reserves are really in the United States, China, and now in Europe, there. That will change the way people think gas is in lots of places and there is a lot of it. about electricity and about gas generally. I This huge volume will change the way the come back to saying that if you are running an energy industry thinks. In a much smaller way energy company, please don’t imagine (I expect for the time being, I expect the cost of gener- most don’t) that the future is simply an ating electricity from renewables to continue imitation of the past; it is absolutely not. reducing rapidly. The second consideration is where demand EP: As an industry we have a relatively good lies and what the future is. Will the world understanding of the potential options for become effectively electrified and what does decarbonization, using gas instead of coal, that mean for oil and gas companies? When I mixing wind and solar with gas, and some started in the industry, there was so much oil nuclear as a base-load. So from a technical around that the main thing you had to do was standpoint we know the scenario in 15 or 20 compete for markets in refined products: there years’ time when we drastically reduce the was growth in demand and everyone loved carbon footprint and liquids are mainly used driving. Cars were a rich person’s toy, now they for transport. How do we transfer this vision are a tool that everybody uses. So the OECD to politics, to the public, and to the NGOs? does not offer those sorts of opportunities. LBM: I think it’s always very difficult. If you sit Rather the OECD is beginning to think more in a seat and someone says, “I want your seat,” about electricity. Do we have enough? What chances are you’ll fight very hard, and that are we going to do? How are we going to provide battle has to take place. There are a lot of it? How much will gas do for us? And what will incumbents who will do all and everything — renewables really do for us? and probably actually do something good in the Those who produce gas, and those who have process — to preserve the status quo. That’s the muscle and the balance sheet to do some- a battle that can’t be won in five minutes; it’s a thing with renewables, therefore, need to think long-term battle to get an energy mix which is whether they should join up either contractu- better, which is cleaner, which is more secure, ally or corporately with the utility companies and which is actually in the long-run more regarding the distribution of electricity. That, affordable, because you don’t have to pay to I think, is the interesting challenge for the clean up the messes that you otherwise might majors. They don’t have to make a decision; have made. That battle has to be continued, maybe people will think that de-integration and I think it is a battle. ■ is the way to go in the future. But there is something about gas that we now have to take Antoine Rostand is Global Managing Director of to another level. I remember when — again in Schlumberger Business Consulting (sbc.slb.com). the United States — we were always promising We welcome your comments on this article at: electric power generators that there would be [email protected]. plenty of cheap gas, and the moment we Copyright © 2012 Schlumberger Business Consulting. All rights reserved

sbc.slb.com | SBC Energy Perspectives 17 18 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 19 By Antoine Rostand

Energy Transition: Oil and Gas in a Prime Position to Capitalize

As the world seeks energy security and alternative energy sources produced in more environmentally sustainable ways, the oil and gas industry stands well prepared to unlock supplies, reduce emissions, and monetize the transition.

he energy industry is at a critical non-OECD emissions will more than offset juncture, at a tipping point where OECD declines. The key challenge for the en- tough decisions will need to be made. ergy industry in the 21st century — if not for By 2035, global primary energy de- the world — will be to overcome this nexus Tmand is projected to increase by more than between energy security and environmental 40% from current levels. This step-change in sustainability, and transition the energy sys- demand will be driven largely (more than tem in the most optimal way. 90% of the growth) by rapidly industrializing non-OECD countries with booming economic Energy Transitions Take Time development. There are no “silver bullet” solutions to the At the same time, there is a strong need to world’s energy challenges. While lots of studies mitigate the environmental impacts that will “prove” that quick mass-adoption of large-scale, result from this unprecedented rise in energy carbon-free energy technologies is possible, demand. By 2035, energy-related CO2 emis- they all ignore one historical inconvenient truth alter Vasconcelos alter sions are projected to rise by more than 20% — energy transitions take a long time to play from current levels, and although OECD emis- out. An “energy transition” is defined as the

illustration by w illustration sions will drop from current levels, the rise in length of time that elapses between the intro-

sbc.slb.com | SBC Energy Perspectives 19 Energy Transition

duction of a new primary energy source or tech- on the global energy system (see figure 2, op- nology and its rise to attaining significant mar- posite page) — and that assumes the technol- ket share (typically 20–30%). The history of ogy lives up to its potential. liquefied natural gas technology highlights the In the 1970s, promoters of nuclear energy reality of energy transitions. It took roughly promised that the United States would gen- 60 years between the scientific discovery of liq- erate 100% of its electricity from nuclear fis- uefaction to the first LNG shipping patent, an- sion by the year 2000, forever banishing coal other 50 years to the first commercial delivery plants. By the year 2000, however, coal was of LNG, and then another 50 years for LNG still generating 50% of all power, while nu- to account for roughly 30% of all natural gas clear power had yet to crack 20%. It’s impor- traded globally (see figure 1, below). tant to be realistic about the time it takes As another example, it took oil roughly 60 for new energy technologies to reach critical years, from the first commercial production in mass, especially during unprecedented lev- the late 1800s, to capture a 10% global market els of global energy demand growth. Just as share, and then another 20 years to reach a dangerous as doing nothing at all about the 30% market share. Similar time spans are seen energy system’s looming challenges is bank- historically for the maturation of other prima- ing on unrealistic expectations. ry energy sources. Currently, there is a lot of hope pinned on alternative energy sources to Transitioning in the Most come to the rescue in the next 10 to 20 years, Economical and Rational Way yet none of these alternatives has yet to reach The right path to a low-carbon energy future a 5% global market share. History points to at involves shifting the energy mix in the most least another half-century before these alter- practical way. The challenge lies in reducing natives even begin to have a material impact emissions in an economically attractive, low-

FIGURE 1: History of transition to LNG technology

Laboratory scale Methane Pioneer Modern LNG carrier liquefaction of gas (first trial LNG delivery)

Breakthrough Air First LNG First trial First LNG accounts in gas liquefaction shipping LNG commercial for ~30% of liquefaction patent patent delivery LNG deliveries natural gas trade

43 years 44 years 46 years

1850 1900 1950 2000 2050

Sources: Vaclav Smil “Energy Transitions” (2010); Schlumberger Business Consulting (SBC)

20 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 21 Energy Transition

FIGURE 2: Share of global primary energy demand by fuel type

60%

50%

40%

Oil 30% Coal Energy transition critical mass Gas 20%

10% Biofuels* Nuclear Hydro 0 Other Renewables 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 *Biofuels includes waste and wood

Sources: Vaclav Smil “Energy Transitions” (2010); BP Statistical review; ieA; Schlumberger business consulting

risk, and technically feasible manner. One way tious 2050 target — an 80% greenhouse gas to achieve this is to decarbonize the power emission reduction. generation sector by switching from coal to gas. The approach reduces implementation risk Gas will be vital because it by reducing dependence on has relatively low CO2 emis- The right path to a technological developments sions, is abundant, requires from emerging technologies low investments, and is a re- low-carbon energy and by placing more reliance liable and proven technolo- future involves shifting on gas infrastructure that gy. The fuel is gaining a lot the energy mix in the is already in place. The ben- of momentum for decarbon- efits of transitioning the Eu- ization in places such as most practical way. ropean energy system in this Europe, a region with ambi- The challenge lies in way are far-reaching — lead- tious emissions reduction reducing emissions ing to significantly lower in- targets. vestments, less risk, and a For example, a recent in an economically reliable and secure energy study presented to the EU attractive, low-risk, system (see figure 3, page Commission highlights the 22). A similar approach has benefits of transitioning and technically fea- to be taken on a global scale, the European energy sys- sible manner. especially in high-impact tem by using more natural countries such as China. gas.1 The study outlines a renewable energy build-out period from 2010–2030 that is Policy Action Likely to Alter complemented by natural gas. The build-out the Energy Landscape would progressively replace coal-fired ca- A practical and sustainable path to a low- pacity and help Europe achieve its ambi- carbon energy future is needed and despite

sbc.slb.com | SBC Energy Perspectives 21 Energy Transition

FIGURE 3: Benefits of transitioning the Eu energy mix by using more gas

Lower Risks and Easier Robust, Reliable, and Lower Costs Implementation Secure Energy System Security of gas supply through Focus on mature technologies Up to 450–550 bn less growth in reserves, surplus € reduces reliance on technologi- investment necessary infrastructure, and increasing cal breakthroughs number of supplies Robust power system due to Allows new technologies 150–250 lower annual cost a balanced technology mix with € such as CCS to mature per household lower reliance on intermittent before implementing technologies Lower country interdepen- 5–10% decrease in profit Less aggressive overhaul of dence due to lower require- margins could be avoided in wholesale pricing required ments for cross-border energy intensive industries interconnection

Source: European Gas advocacy forum

current uncertainties, positive signs are emerg- fuels, and renewables — will rise signifi- ing. The outcome of the United Nations’ land- cantly in absolute terms to meet the world’s mark Copenhagen climate conference in 2009, growing hunger for energy, but the energy in which several countries recognized the need mix will shift. Oil and coal will lose share, to limit global temperatures to no more than while natural gas, nuclear, biofuels, and 2ºC above preindustrial levels, is a step in the renewables will pick up share. These chang- right direction. The 2010 UN climate confer- es will engender opportunities for oil and ence in Cancun further affirmed the world’s gas companies. commitment to the cause by recognizing that current emissions pledges need to rise. In addi- Oil and Gas Industry tion, a fund was created to help developing in Prime Position countries adopt low-carbon technologies. These When it comes to the energy transition, the events hint to a future where new policies will oil and gas industry is in a great position to fundamentally change the way oil and gas com- capitalize. Transitioning the global energy panies operate. system in the most optimal way will not only Fossil fuels, even under the most ambi- involve the expansion of all economic supply tious IEA decarbonization scenarios, will sources (e.g., fossil fuels and renewables), still capture the majority of global primary but also require the development of new energy demand by 2035 (ranging from more technologies that unlock new sources of sup- than a 60% share under aggressive emissions ply and mitigate environmental impacts. reductions targets to as high as an 80% share if no change in government policies takes Employ all economic place). By 2035, the share of global primary sources of supply energy demand taken up by renewable en- The world will need to expand all economic ergy, excluding hydropower, could range sources of supply just to keep up with the from around 3% to as high as 7%, depending step-change in energy demand growth. This on the policies enacted. All sources of opens up attractive opportunities for oil and primary energy — fossil fuels, nuclear, bio- gas companies in areas such as unconven-

22 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 23 Energy Transition

tional oil and gas, the deepwater, and even A New Landscape: from IOC to IEC biofuels and renewable energies as econom- The world’s energy system will experience ics improve. This is especially relevant for significant change over the coming decades. decarbonization of the power sector, where A step-change in energy demand growth, natural gas is emerging as an abundant and coupled with policy action that encourages low-carbon supply source. Also, the rise of low-carbon energy, will dramatically change abundant unconventional gas helps bolster the energy landscape. Battle lines will be the case for decarbonization by switching redrawn and there may be a convergence from coal to gas. of several industries — oil and gas, power, mining, conglomerates, venture capital — Develop new technologies to unlock jostling to take a piece of the energy transi- supply and reduce emissions tion pie. New technologies will be needed to unlock The good news for oil and gas companies supply and mitigate environmental impacts. is that fossil fuels will remain relevant Renewable energy and de- for decades to come. Fur- carbonization technologies thermore, oil and gas com- such as carbon capture and The world will need to panies have the capital, storage (CCS) will be criti- expand all economic project management exper- cal, although most are sources of supply just tise, and R&D capabilities currently in the capital- needed to capture a signifi- intensive R&D stage. Oil and to keep up with the cant portion of the future gas companies, unlike most step-change in energy growth in renewable energy venture capital firms and and low-carbon technology. utilities, have the balance- demand growth. This Just a decade ago it would sheet strength, patience, opens up attractive have been inconceivable for and project management opportunities for oil an oil company to make a savvy needed to drive these major investment in a true large, long-timeline technol- and gas companies. renewable energy such as so- ogy projects. lar power. If Total’s recent We are already seeing the industry taking $1.4 billion investment in SunPower Corpora- action. For example, ExxonMobil recently tion, one of the largest investments ever made invested $600 million to develop next-gener- by an oil company in renewable energy, is any ation algae-based biofuels with biotech- indication, then oil and gas companies are des- nology company Synthetic Genomics. Then tined to become an even bigger component of there’s the Chevron-led Gorgon gas project the world’s energy system as they themselves in Australia, which will capture roughly 40% transition from IOCs to IECs — or international of the project’s CO2 emissions and store it energy companies. ■ 2.5 kilometers below ground. The $2 billion CCS project will be equivalent to taking two- Antoine Rostand works for Schlumberger Business thirds of Australian vehicles off the road. Consulting (sbc.slb.com). We welcome your comments on this article: [email protected]. Companies such as these that take the initiative now to identify future opportunities Copyright © 2012 Schlumberger Business Consulting. All rights reserved. and learn the technology will gain significant 1. European Gas Advocacy Forum, “Optimized Pathways to first-mover advantages as the energy transi- Reach 2050 Abatement Targets with Lower Costs and Improved tion plays out. Feasibility” (Feb. 2011).

sbc.slb.com | SBC Energy Perspectives 23 By Muqsit Ashraf, Hermes Alvarez, and Rakesh Jaggi

Sustainably Managing a Strategic Resource

Water is critically important for the energy industry, especially for oil and gas extraction. Water issues carry significant business riskand must be integrated into the strategic planning of energy companies.

ater is critical to the oil and momentum for energy demand, but also drive gas industry. First, several significant increases in the need for water. Fur- important emerging supply ther compounding this challenge is the interde- sources such as oil sands con- pendency and frequent competition between Wsume large amounts of water. Second, water water and energy — large amounts of water are is a large by-product, and some experts argue consumed to generate energy, and a vast amount that the oil industry is effectively a water in- of energy is consumed to extract, process, and dustry that delivers oil as a secondary output. deliver clean water. As a result, an intense com- For example, in North America, nearly eight petition for water, both from the agricultural and barrels of water are produced for every barrel industrial sectors, is expected to amplify an al- of oil. Global produced water volumes high- ready growing problem: global water scarcity. light the importance of water, especially in These water issues pose a significant business the U.S. (see figure 1a, page 26). The industry risk to oil and gas companies seeking to achieve is currently experiencing a shift to more water- sustainable supply growth. intensive supply sources, which will come at a The following are some of the major chal- significant cost. For example, North American lenges faced by the industry: (1) mature oilfields water expenditures are projected to increase increasingly require water-based EOR methods 60% this decade (see figure 1b, page 27). and produce significantly more water over time; (2) increasing E&P complexity from emerging The Growing Importance of Water supply sources such as unconventional gas is Global population growth and economic expan- driving up water usage; (3) and greater environ- sion will not only create tremendous upward mental and regulatory pressures related to wa-

24 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 25 ter management and water scarcity will create ply disruptions. Yet, events like Hurricane Ka- hurdles for operators (see figure 2, page 28). Oil trina in 2005 and geopolitical unrest in Libya and gas companies must view water as a strate- in 2011 highlight just how susceptible the gic component of their value chain. Water is no market still is to supply shut-ins. Oil sands longer just an environmental issue; it will in- resources, primarily found in Canada, will creasingly be levered to production growth and play a critical role in bolstering supply secu- generate material incremental costs. As a result, rity. However, oil sands extraction methods, water necessitates a strategic approach that el- both for mining and in-situ, require large evates its status as a critical component to cor- amounts of water and face high regulatory porate viability in the oil and gas industry. scrutiny due to environmental concerns over produced water. (For mining extraction, 12 bar- Water Challenges Facing rels of water are required to recover one barrel the Energy Industry of bitumen versus three barrels of water for in- As global competition for water intensifies and situ extraction.) environmental scrutiny grows, so will the strategic implications of water on the oil and gas Unconventional gas business. The following are examples of water The unlocking of large unconventional gas challenges facing the industry: resources in the United States is often described as a “game-changing” event. From 2005 Oil sands to 2010, the U.S. went from expecting a gas Much progress has been made since the 1973– shortage and the need for ambitious LNG

illustration by jon krause illustration 1974 oil crisis to mitigate the impacts of sup- import capacity expansion to the discovery of

sbc.slb.com | SBC Energy Perspectives 25 Sustainably Managing a Strategic Resource

indigenous gas resources equivalent to a 100- and regulatory burdens. This is especially year supply and the option to retrofit LNG prevalent in the water-scarce Middle East, import facilities to accommodate for gas ex- where, for example, the Petroleum Develop- portation. However, hydraulic fracturing, the ment of Oman at one point had to deal with production technique that unlocked the re- an asset with a water-to-oil ratio of 20:1. sources, is water intensive and faces high environmental hurdles in certain parts of the world Strategies to Overcome due to fears of aquifer contamination. the Water Challenges Energy scenarios by most agencies predict that Mature production the oil and gas sector will still be a major sup- As oil and gas fields mature, water becomes an plier of the world’s growing energy needs in the increasingly important issue. First, as easy oil is distant future. One of the major hurdles the in- depleted, operators often employ water for im- dustry will face, along with managing its carbon proved recovery. Historically, the extraction of oil footprint, is managing its water footprint. Water has required between 0.1 and 0.3 barrels of water is a limited commodity that must be managed per barrel of oil produced. However, when water- sustainably and strategically if the industry is to based enhanced recovery methods like thermal overcome the significant water challenges it steam injection or water-flooding are introduced, faces. A holistic approach that encompasses all the number can increase, on average, to more key elements of the oil and gas water value than 35 barrels of water per barrel of oil. chain is needed (see figure 3, page 29). Second, produced water increases as fields mature. Globally, the water-to-oil ratio is esti- Optimal sourcing mated at 3:1. As assets mature, the ratio rises Water supply issues are particularly prevalent dramatically, to 10:1. The increase in produced in arid regions where surface water is lacking water brings with it environmental, economic, and in regions where the demand for ground-

FIGURE 1a: Produced water volumes from the oil and gas sector

Global produced water volumes USA produced water volumes 70 billion bbl/yr (2007) 21 billion bbl/yr

5% Louisiana 6% Kansas 11% Oklahoma 11% Wyoming 12% California 70% 30% USA 20% Other states

35% Texas

Rest of World

Source: Global Water Intelligence

26 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 27 Sustainably Managing a Strategic Resource

FIGURE 1b: North American E&P water expenditures

($ billions)

8 Disposal 7 60% 6

5 Treatment 4

2 Lifting, pumping, reinjection 1 Minimization 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Global Water Intelligence

water from other users (e.g., public, agricul- lons of water (4,000 to 15,000 cubic meters) for ture) may be significant in terms of volume the completion of one unconventional gas well. and social sensitivity. In broad terms, optimal The successful exploitation of this resource water sourcing involves determining the re- type will require innovative methods that mini- quired water balance, locating supply sources mize water sourcing needs. (e.g., surface, aquifer, industrial, municipal), and ensuring both the economic vitality and Produced water management security of the supply. In the case of aquifers, The optimal management of produced water the process involves determining if the aquifer involves three elements — reduction, reuse, and is being recharged at a rate commensurate disposal — and varies in scope, depending on with the proposed abstraction, determining if the oil and gas type. Water reduction involves the aquifer is isolated from the hydrocarbon technologies or methods that minimize the reservoir, and determining if the quality of the amount of produced water managed at the sur- groundwater (i.e., physical, chemical, biologi- face (e.g., seafloor separation, dual completion cal) is compatible wih the water required for wells) and restrict the entry of water into the hydraulic fracturing. wellbore (e.g., mechanical blocking devices, shut- Additionally, optimal sourcing involves the off chemicals). minimization of sourced water, which in the In the case of unconventional gas, reduction case of unconventional gas necessitates drill- requires technologies or methods that minimize ing and completion techniques that reduce the operational footprint (e.g., optimal reser- both the operational footprint (e.g., well sweet- voir characterization to reduce the number of spotting, fracture optimization) and sourced wells, hydraulic fracture optimization to reduce water needs. For example, hydraulic fracturing water volumes), while oil sands reduction re- requires between 1 million and 4 million gal- quires technologies that decrease water usage

sbc.slb.com | SBC Energy Perspectives 27 Sustainably Managing a Strategic Resource

FIGURE 2: GLOBAL WATER SCARCITY AND EXAMPLES OF OIL & GAS WATER ISSUES

Oil sands extraction Shale gas success in promising Unconventional gas resources methods require large Eastern European countries like in gas-hungry China and India amounts of water. Poland will depend on whether show big potential, yet both Regulators are mandating operators can successfully source countries experience signi cant optimal sourcing and water in densely populated areas degrees of water scarcity disposal methods

Shale oil exploration in France was initially put on hold by regulators due to concerns over water contamination

Shale gas basins like the Haynesville require increased water volumes for fracking operations

Mature production in the Coal bed methane Little or no scarcity water scarce Middle East holds big promise for Physical scarcity increasingly requires Australia, yet issues Approaching physical scarcity water-based EOR methods with handling of Economic scarcity and produces more water produced water have Not estimated volumes over time to be addressed

Sources: World Resources InstituTe; Schlumberger business consulting (SBC) Analysis

(e.g., solvent assisted production, once-through from being discharged and is either evapo- cooling towers for upgraders). Water reuse in- rated or injected underground; and produced volves the reinjection of produced water and water from coal bed methane operations can the injection of water for future use through be discharged to surface waters under regu- aquifer storage and recovery. For oil sands, re- latory limits. use involves technologies that improve recycling in in-situ extraction (e.g., evaporators, Environmental sustainability drum boilers) and technologies that improve In general terms environmental sustainabili- recycling in mining operations (e.g., injecting ty involves carrying out a comprehensive en- CO2 into tailing ponds to accelerate separa- vironmental risk assessment that determines tion). Water treatment technologies are a key if operations can have any impact on existing enabler of water reuse. water users or the environment. It also in- Lastly, the disposal of produced water is volves establishing a monitoring and report- relevant when reuse is not a viable option. ing system that ensures sustainability. For The water usually requires treatment before unconventional gas, environmental sustain- it is discharged and the discharge method ability requires the use of advanced technolo- depends on the situation: offshore produced gies such as “self-healing” cement to ensure water is discharged into the ocean in compli- the integrity of the well and the use of eco- ance with regulatory standards; onshore and friendly fracturing chemicals to reduce the coastal produced water is typically prohibited risks of an accidental release.

28 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 29 Sustainably Managing a Strategic Resource

FIGURE 3: SUSTAINABLE APPROACH TO WATER MANAGEMENT IN THE OIL and GAS INDUSTRY

Water Optimal Produced Water Management Environmental Business Challenge Sourcing Sustainability Planning Reduction Reuse Disposal

Oil Sands

Unconventional Gas Mature Production

Solution critical to water challenge Solution is of little relevance to water challenge

Source: Schlumberger business consulting (SBC) analysis

Business planning Sustainably Managing a Resource Integrating water issues into the business plan- Addressing the water challenge will be a stra- ning process is becoming vital for the oil and gas tegic imperative for the oil and gas industry. industry. It should begin with measuring the Water issues are on par with the other major company’s water footprint along the entire val- challenges facing the industry, including ue chain. Water issues will need to be integrated carbon emissions, the “big crew change”, lim- into the governance structure, with appropriate ited resource access, geopolitical instability, roles and responsibilities and close functional and increasing technological complexity. collaboration. For example, operations person- Collaboration between industry stakeholders nel may have the primary responsibility for pro- (e.g., operators, service companies, regula- duced water management, but will have to work tors) will be critical to connecting the dots with the commercial group to understand the and sustainably addressing the implications economic implications of various strategies. of a changing E&P landscape. Water is a limited The business will also have to assess the and critical resource that will influence the physical, regulatory, and reputational risks as- way oil and gas companies do business. ■ sociated with the water footprint and, conse- quently, engage the key stakeholders (e.g., local Muqsit Ashraf and Hermes Alvarez work for communities, non-governmental organizations, Schlumberger Business Consulting (sbc.slb.com), and Rakesh Jaggi works for Schlumberger (slb government bodies, suppliers, and employees) .com/water). We welcome your comments on this as part of the water risk assessment, long-term article at: [email protected]. planning, and implementation activities. Finally, companies will have to become more proactive Copyright © 2011 Schlumberger Business Consulting. All rights reserved. in disclosing and communicating water perfor- 1. Global Water Intelligence, ”Produced Water Market: mance and associated risks. Best-in-class com- Opportunities in the Oil, Shale, and Gas Sectors in North panies will establish an integrated system that America” (2011). ties together all the elements of a sustainable 2. J. Morrison, et al., “Water Scarcity & Climate Change: Growing Risks for Businesses & Investors” (Feb. 2009). water strategy (e.g., sourcing, produced water 3. B. Black, et al., “Managing a Precious Resource,” management, environment, and planning). Oilfield Review (Summer 2008).

sbc.slb.com | SBC Energy Perspectives 29 To see video of our interview with Dr. Fatih Birol, visit our website: www.sbc.slb.com

By Olivier Soupa and Amy Long

Emerging Markets An interview with Dr. Fatih Birol of the International Energy Agency

With the fallout from Fukushima, the rapid developments of unconventional oil and gas resources, oil prices still above $100 a barrel despite the recent global economic slowdown, limited progress on the renewable energies front, and the perseverance of energy poverty for over 20% of the global population, the influence and guidance of the International Energy Agency (IEA) has become more important than ever. Navigating the energy transition not only requires a global perspective of the energy sector, but also a skilled and strong hand to influence global policies that will foster long-term commitment and investments. Dr. Fatih Birol, Chief Economist of the IEA, recently spoke with Olivier Soupa and Amy Long of SBC at the IEA Head- quarters in Paris regarding the state of the energy sector, especially in emerging markets, the global implications of current policies, and the ways to move forward in the energy transition.

Energy Perspectives: In the World Energy one, will be a function of different factors — Outlook 2010 (WEO 2010), you made waves prices, policies, technologies, and so on. by declaring that conventional oil supplies After [this year’s] WEO, regarding peak oil will peak in 2020. Has any new evidence or the decline issue, I can give you two major emerged to change this assessment? messages. The first message is if our price Dr. Fatih Birol: We follow the oil markets closely, assumptions are correct for the next 10–15 we look at the supply side, we look at the de- years, which are a little higher than $100 (per mand side, we look at what will happen with barrel) in real terms, then conventional crude technology, and what will happen with govern- oil peaked around 2008 and more and more ment policies. The global oil peak, if there is unconventional oil will come into the picture.

30 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 31 Career highlights: ■ PhD in energy economics from the Technical University of Vienna

■ Chief Economist of the IEA

“I expect strong oil demand ■ Member of UN Secretary-General’s High-level growth in the years to come, Group on Sustainable Energy for All ■ Chairman of the World Economic Forum’s (Davos) mainly, if not exclusively, driven Energy Advisory Board

by the emerging countries.” ■ Founder and Chair of the IEA Energy Business Council

Dr. Fatih Birol Chief Economist at the International Energy Agency

The second message, which I think is FB: Interest in unconventional oil and gas crucial and is often missed, is that many is growing throughout the world and there is existing fields, especially outside of OPEC, one major driver — price, which translates are in a steep decline. According to the WEO, to profit. With current oil and gas prices, it in the next 25 years about 47 million barrels makes perfect sense in many cases to increase per day of today’s production will go into unconventional production. When we look at decline. That means that in order to compen- the United States, in terms of unconventionals, sate for this decline in the next 25 years, we higher oil prices are driving a second revo- have to find and develop two Middle Eastern lution in tight oil. We will see more and more regions, such as a Saudi Arabia plus Iran plus unconventional oil come to market. Iraq, etc. This is critical just to compensate In terms of natural gas, we have just pub- for the decline in existing fields. The decline lished a major report called Are We Entering will be a major challenge in addition to the a Golden Age of Gas?, and we see that a major growth in oil demand, and therefore there driver of this likely new golden age is not is a need for significant investments. only the increase in unconventional gas from North America, but also from Australia, EP: How do you see investors and govern- China, and other countries. Global growth ments balancing the increasing development for natural gas is expected to be very strong. of unconventional oil and gas and the However, it would be wrong to say that implications for climate change? the increase in natural gas will be enough

sbc.slb.com | SBC Energy Perspectives 31 Interview with Dr. Fatih Birol

to address our climate change problems. a decline. Do you think that oil demand in Although natural gas emits less CO2 than coal, the OECD has peaked, and if so, is it due to it is not completely innocent. We will still need energy efficiency, or just a temporary effect renewable energies; we will still need nuclear of the (2008–2009) recession? power; we will still need to use energy more FB: This is one of the findings in the WEO efficiently; and we will need carbon capture 2011. We think that in OECD countries oil and storage (CCS) to address the issue of demand has probably reached a peak. There sequestering carbon from natural gas and coal. are a few reasons, one being saturation. When you have enough income, you buy a car for EP: Turning to oil demand, this year’s World yourself. When you become richer, you buy a Energy Outlook (WEO 2011) examines second car for the household, for the wife or booming vehicle demand in emerging the husband. When you become richer and countries. Do you think that countries like richer you get a third car, but you can’t buy China and India will follow the same high 10 cars, so there is a saturation effect. The oil consumption pattern as in developed second factor is efficiency; there are efficiency economies, or will they follow a different path? improvements in many OECD countries — FB: I hope they don’t follow what we have cars, for example, are becoming more done because we did not do extremely well, efficient. The third factor is population otherwise we would not be in our current growth, which has more or less stabilized in situation in terms of the energy markets, OECD countries. As a result of these factors, in terms of climate change, in terms of air we do not expect to see OECD oil demand pollution, in terms of traffic congestion, return to levels seen in 2006/2007. and so on. But the bad news is that they are following EP: What do you think will be the consequences us. When you look at the trends highlighted of the Arab Spring on the energy markets, in the WEO 2011, almost all the growth in and will there be any lasting impact? oil demand is coming from the emerging FB: It may be a very important event for the countries and specifically from the transpor- energy sector. According to the WEO 2011, tation sector: cars, trucks, jets, and so on. in the next 20 years about 90% of the growth Yet, to be honest, this trend is justified. In in global oil production needs to come from China, 30 people out of 1,000 own a car, the Middle East and North Africa because the whereas in Europe 500 out of 1,000 own a bulk of the reserves are there. In addition, oil car. In the United States, 700 people out of reserves outside the Middle East are in decline. 1,000 own a car. In China, India, and other On the other hand, demand is growing, coming countries, when individual incomes rise — from China, India, and elsewhere. which is happening now because they are What many people have in mind is that growing strongly — one of the first things the Arab Spring brings the people their is to buy a car for convenience and perhaps economic, social, and political freedom as prestige. This, in turn, fuels oil demand well as a significant increase in the wealth growth. I therefore expect strong oil demand of these countries as a result of their growth in the years to come, mainly, if not natural resources. However, it may well be exclusively, driven by the emerging countries. the case that some of the countries choose a different way, namely not to increase their EP: Looking at OECD countries, it appears oil production significantly, but may leave it that oil demand has reached a plateau, if not for the next generations. This is also

32 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 33 Interview with Dr. Fatih Birol

justified and legitimate, but it is different fact that the bulk of growth in oil supply will from what people expect. So if the produc- need to come from Middle East countries, tion growth in these countries does not who in turn need higher prices in order to increase as significantly as the world balance their budgets. Therefore, I believe market needs, this would mean higher that when the economy is back on its feet, prices. This is highlighted in the WEO 2011, we can have higher prices. where we have analyzed a delayed investment case for MENA (Middle East and EP: Turning now to clean energy and North Africa) countries. We see that if climate change, the IEA has published investment in these countries does not take a number of recommendations aimed place in an adequate and timely manner, at limiting global warming to 2ºC or less, for whatever reasons, it and has stressed that we may have substantial “Today, 800 million need to act soon to avoid implications for the people in sub-Saharan being technologically international oil market, locked in. In a post- which will result in much Africa consume an Fukushima world, what higher prices than we amount of electricity trajectory are we on now? have assumed. equal to that of the 17 FB: We are not doing well in terms of climate change. EP: With continuing million people in the If you follow the current economic fragility and New York Metropolitan policies in place, the global slowing growth in China temperature will increase and India, should we Area — the same by about 6ºC, which will consider that end of the amount of electricity!” have dramatic implications commodities supercycle is for the earth, animals, upon us? human beings, and so on. Two years ago in FB: I am not a big fan of believing — in Copenhagen, we had hope of an interna- the oil markets at least — that the cycles tional, legally binding agreement, which are going to take place forever. I believe that unfortunately didn’t happen. Some countries we have entered an era in which cheap oil have made some pledges, but they are not is over. What we see today is that oil prices legally binding. are rather weak compared with a couple of In the WEO 2011, we have calculated that months ago, mainly because of the weakness even if those countries fulfill their pledges, in the economy. The players in the oil market global temperatures would still increase see that demand may be weaker because of by 3.5ºC. According to scientists, we have a slowdown in the major emerging countries, to limit the increase to 2ºC. We have China and India, or perhaps the risk of analyzed what needs to be done to limit recession in Europe and maybe in the the rise to this level, and here the IEA United States. Therefore, there is currently plays an important role because about a temporary slowing down in oil prices. two-thirds of the emissions contributing Global economic growth is about 3–4%, to climate change come from the energy with OECD countries at about 2% growth, sector. So what do we have to do? We see and emerging countries increasing at 5–6%, four major policy areas. on average. We will see higher oil prices due First, we need to use energy much more to increasing costs of production, due to the efficiently. This is very important. We must

sbc.slb.com | SBC Energy Perspectives 33 Interview with Dr. Fatih Birol

use our cars, trucks, electrical appliances, comes from China alone. When China builds and everything else much more efficiently. a commercial coal-fired power plant it will Second, we have to make more use of be difficult to convince [them] to make it renewable energies — hydropower, solar, CCS-ready and [thus] increase the price wind, and others. Third, we need to make of electricity in the absence of any financial more use of nuclear power, which is incentive. Therefore, there is a need for becoming more and more difficult after an international carbon price, or if not, Fukushima. Fourth, and very crucially, we country-wide or region-wide carbon prices have to see more and more carbon capture in order to provide incentives for clean and storage in the market. Today, the energy technologies and disincentives for backbone of global electricity generation is dirty technologies. coal, and looking at the policies of major I think this is mainly what is needed: countries such as the United States and carbon prices, plus, of course, some strict China, it will remain so in the next few governmental regulations. decades to come. CCS can play an important role here. EP: There has been a huge boom in solar and Looking at international policies on wind industries, but investment in smart climate change, I cannot say that I am grids and energy storage has moved at a very hopeful that we will see a major slower pace. Is this a cause for concern? change in the mood. Unfortunately the FB: In the absence of strong regulation wind is blowing in the wrong direction. worldwide, I do not see a strong penetration I hope that the world leaders will agree by smart grid technology. I see that the on an internationally binding agreement increase of renewables in the global energy and that as a result of that we will see mix makes life a bit difficult because you major steps taken. Otherwise I believe need a lot of [transmission and distribu- the door to 2ºC is closing. tion] investment to link them to the grid. For example in Europe, where there are EP: Let’s go back to carbon capture a lot of renewables, 25% of all investment and storage. The IEA, the G8, and other in transmission and distribution is to link institutions have thrown their weight renewable sources to the energy grids. behind the technology, but large-scale Therefore we need very strong regulation demonstration projects are fewer than [to encourage smart grid investment] and expected. Can we get back on the right I don’t think this is happening for the time track without a climate change agreement being anywhere in the world. in the United States and China? FB: I think that without an international EP: Renewables are often deployed on a legally binding agreement it is going to be distributed generation model; what are the difficult. What we need is a carbon price. implications for energy poverty and also for I can write hundreds of books, give lots of the power structure of the energy industry? interviews, and talk to people, but without FB: This is one of my favorite subjects. Why providing a financial incentive for investors, is it an important subject? Today, 1.3 billion it is very difficult to convince people to go people — about 20% of the global popula- for CCS solutions. tion — have no access to electricity. This is If you look at the markets today, about not about watching television. This is about half the growth in electricity generation not having lights, this is about not having

34 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 35 Interview with Dr. Fatih Birol

an Internet connection to the outside there are two teams and so on, but they world, this is about parents not being able require different skills. In the past, we have to keep medication for their children in a seen some major oil and gas companies refrigerator. It is one way to measure look at the options of renewable energies. inequality in the world. It didn’t work very well at that time, but Today, 800 million people in sub-Saharan that may not always be the case. There are Africa consume an amount of electricity equal hundreds of renewable energy companies to that of the 17 million people in the New York and utilities working in this direction. Metropolitan Area — the same amount of The most important factor is for govern- electricity! There is a big conflict here. We ments to provide the right framework for think there is room for all fuels to play a role renewable energies so that a market in bringing electricity to the people, especially environment is created and both small and in sub-Saharan Africa and in big companies work on South Asia (India, Pakistan, “We have to see more increasing the share of Bangladesh), but 85% of renewables in the energy these 1.3 billion people are and more carbon mix. This is very important in rural areas. In the cities, capture and storage in for the economy, for energy more traditional fuels can be security, and for addressing applied, such as coal and the market. Today, the climate change. natural gas, together with backbone of global renewables, of course. But electricity generation EP: Speaking of smaller when it comes to rural areas, companies, at the AlwaysOn it makes more economic is coal, and looking at GoingGreen conference in sense to have decentralized the policies of major October 2011, Vinod Khosla applications such as solar, countries … it will declared, “Only small wind, and mini-hydro, companies do impressive because there is no need remain so in the next things.” Do you agree? How to invest in transmission/ few decades to come.” do you see the dynamics distribution lines. The between large industrial general rule is that for rural firms and start-ups evolving areas, the renewable technologies — and in the clean energy space? for the cities, traditional plus renewable FB: I have seen many small companies do technologies — are crucial. a great job, not only in renewables but also around unconventional gas, shale gas, and EP: Let’s look at innovators in the clean others. I have also seen big companies do energy space. Oil and gas companies have a great job. I think it is less about the size had an uneven relationship with alterna- of the company and more about how it is tive energy. In your opinion, can oil and managed, particularly if the investment gas companies become energy companies, portfolio is well thought out and well and what approaches seem the most implemented. ■ successful? FB: This is a question of whether a very Olivier Soupa and Amy Long work for Schlumberger good football player can also be a very good Business Consulting (sbc.slb.com). We welcome your basketball player. Of course, he or she can: comments on this article at: [email protected] the games are similar, there is only one ball, Copyright © 2012 Schlumberger Business Consulting. All rights reserved.

sbc.slb.com | SBC Energy Perspectives 35 By Renaud Brimont, Antoine Aris, and Peter von Campe Waste Gas: a Crucial Component of the Energy Poverty Dilemma

Reducing waste gas could help gas-rich regions by adding revenue, reducing cost, and increasing energy availability, but reduction will take more than advances in technology — it will need a strong political will.

nergy poverty is defined as a lack emissions6 from the oil and gas sector. The of access to electricity, heat, or combined flared, fugitive, and vented gas con- other modern forms of power and tributes the equivalent of nearly 1.4 billion it affects about 1.6 billion people metric tons of CO2 to the atmosphere annually7 Ein the world today.1 In addition, the lack of af- (the equivalent of annual emissions from 192 fordable and reliable power supply creates sig- million cars). nificant knock-on effects such as the lack of industry and other income-generating activi- Waste Gas in Areas of Acute Energy ties, thereby impacting economic development Poverty — sub-Saharan Africa and growth. A large share of waste gas is produced in some of Meanwhile, even though gas flaring has de- the most energy-poor regions in the world (see clined by 22%2 since 2005 (despite a 3.4% in- figure 1, page 38). With a current electrification crease in oil production over the same period),3 rate of 31%, some of the greatest challenges in an estimated 130–140 billion cubic meters terms of energy poverty lie in sub-Saharan Afri- (bcm)4 of gas is still flared5 globally every year ca’s oil and gas producing countries. Today, this from upstream petroleum operations, the equiv region flares 35 bcm annually, which could gen- alent of the total gas consumption of U.S. erate nearly 12,000 MW of electricity (half the households. An estimated additional 100 bcm continent’s power consumption). Nigeria, sub- of natural gas is vented or lost through fugitive Saharan Africa’s largest gas producer, has a

36 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 37 multidecade legacy of flaring and is the largest annually)10 to directly benefit populations suf- flarer of gas per barrel of oil produced (0.0155 fering from energy poverty. This illustrates the bcm/MMbbl versus 0.005 bcm/MMbbl for Rus- disconnect between resources in place and sia).8 However, Nigeria’s electrification rate per utilization (see figure 2, page 39), and the capita is particularly low, as recognized in 2010 complexity and challenge of transforming by President Goodluck Jonathan in his remarks waste gas into domestic gas or electricity. Con- on the Nigerian power plan: sequently, it is essential to understand the factors that could help turn waste gas from an “Today less than half of our citizens have access environmental misfortune into a long-term to electricity. We expend about $13 billion every solution for the alleviation of energy poverty. year providing power from diesel generators when we require only about $10 billion per Transforming Waste Gas into Energy year of investment over the next few years to — Technological, Economic, and develop our generation, distribution, and trans- Political Challenges for Africa mission capacities.”9 While marginal routine flaring is associated with the safe conduct of petroleum opera- It is estimated that over 30% of Nigeria’s vent- tions (pressure release for equipment protec- ed and fugitive gas emissions could be cap- tion, emergency flaring), most of today’s

illustration by eva tatcheva by eva illustration tured at a profit ($16.2 billion of sales revenues waste gas is the result of failing to align gov-

sbc.slb.com | SBC Energy Perspectives 37 Waste Gas

ernments and key industry stakeholders While these views are changing both from when addressing the combination of techno- a regulatory standpoint as well as within the logical, economic, and regulatory challenges upstream industry, any move to better value involved in gas monetization; thereby making gas has been slow. Reasons for the inertia flaring the only economically viable option include the cost of retrofitting production for operators. platforms (mostly offshore fields that have platform space constraints, which limit Historical practices, an unsupportive fiscal capability to take gas equipment, especially system, and the weight of legacy if gas recovery was not in the original plat- Unlike today, with increased awareness form design); small associated gas volumes about global warming, associated gas was of individual projects that fail to support historically viewed as a waste product. Pro- monetization considerations; and associated duction contracts and upstream regulatory gas not being seen as a reliable long-term frameworks tolerated flaring and, in many supply source due to fast depletion and po- oil production–sharing contracts, no “rights tential damage to the reservoir’s oil produc- to gas” were specified and there was no eco- tion profiles. As such, associated gas cannot nomic incentive to manage (e.g., reinject) or compete with more reliable and cheaper monetize the gas produced. Project econom- sources of gas, even if it means importing gas ics were dictated purely by oil revenues. to meet national energy demand.

FIGURE 1: waste gas comparative statistics Share of Waste Gas 2010 Rest of billions of cubic meters world 28% World Natural Gas 2010 billions of cubic meters

3,693 3,169 Libya 3% Russia 26% Kazakhstan 3% Angola 3%

Algeria 4%

Rest of West Africa 6% Iraq 7% Iran 8% Nigeria 11% 390 Energy Use per Capita 2010 134 132 105 kg of oil equivalent

Gas gas Flared Africa Gross gas OECD production and venting consumptionGas reinjection GasU.S. consumption, householdsGas consumption,

World

Iraq Iran Libya Angola Nigeria Algeria Russia Kazakhstan United States European Union Rest of West Africa

Sources: BP STATISTICAL REVIEW; NOOA; WORLD BANK; Schlumberger business consulting (SBC) ANALYSIS

38 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 39 Waste Gas

FIGURE 2: Electric Power consumption per capita, gas production/ consumption

Natural Gas (Kwh per Capita) (billions of cubic meters)

9,000 160 8,376

8,000 140 Natural gas consumption 7,000 Natural gas production 120 6,435 Flaring 6,000 100

5,000 4,689 80 4,001 4,000 60 3,000 2,876 2,412 40 2,000 956 189 1,184 1,000 20

127 0 0 OECD* Russia* Kazakhstan Libya World* Iran Iraq Algeria Other Nigeria Africa * Natural gas production not shown: World 3193bcm, OECD 1159bcm, Russia 589bcm * Natural gas consumption not shown: World 3169bcm, OECD 1546bcm, Russia 414bcm

Sources: BP STATISTICAL REVIEW; NOOA; WORLD BANK; Schlumberger business consulting (SBC) ANALYSIS

Technological challenge environments, and requires technological capa- Many technologies for associated gas projects bilities that may not be readily available locally. exist in mature markets, in particular to detect, The technological challenge is compounded measure, capture, and utilize vented or fugitive by highly dispersed gas fields (as is the case in methane emissions. However, their implementa- the prolific oil producing region of West Africa). tion in sub-Saharan Africa is challenged by high Because of the cost associated with the tie-in of a additional marginal costs (i.e., maintenance, high number of fields flaring small volumes of training, advisory), a reluctance to change, and gas, it is difficult for associated gas projects to high dispersions of fields, as well as a lack of reach a critical size to meet economic viability. capabilities to easily absorb new technologies. Furthermore, the integrity of oil pipelines in the region has been compromised numerous Size of gas fields and getting to market times and safety issues concerning gas projects Beyond the technological challenge, there is little are an increasingly prevalent consideration. availability of small size solutions at a reasonable cost. For example, a gas-to-power project that Inexistent gas markets and regulatory commissions an open cycle gas turbine (OCGT) frameworks requires a sizable 50–60 MW power generation Even if numerous wells could be tied-in to create capacity11 to be profitable. The operator can com- a gas hub, the underdeveloped domestic gas and mission smaller technologies such as internal gas products (i.e., LPG, methanol, power) markets combustion engines (ICE) with light capacity that provide little by way of opportunity to sell the go up to 8 MW power generation, but this equip- waste gas. This problem is partly due to the limit- ment is still considered capital expensive. Such ed or inexistent institutional, legal, and regulatory equipment also demands intensive maintenance framework for gas (including associated), which and monitoring, especially in high-temperature creates financing constraints to develop markets.

sbc.slb.com | SBC Energy Perspectives 39 Waste Gas

FIGURE 3: Electricity production from flared gas can substitute for expensive electricity power sources such as oil

Angola Nigeria Rest of Africa Gas Hydropower African Hydropower 58% 16% Electricity 96% Other Production Hydropower 44% Gas 623,811 GWh 27% 28% Oil Oil Oil Electricity Cost 4% 15% 12% reduction Production potential of Potential 3.45% of flared gas from 148% of flared gas 82%* Flared Gas 0.52 163,334 GWh 0.6% of flared gas 8.45 14.65 12.48 0.03 4.05 4.03 * Based on additional $80 per barrel production oil price and Not utilized gas from flaring (bcm) needed $4 per mmBTU Flaring needed to replace oil as electricity source gas price

Sources: World bank; nooa, iea; schlumberger Business consulting (sbc) analysis

Long-term Solutions Require Devel- other incentives for gas recovery and monetiza- opment of a Full Gas Value Chain tion (policy, implementation strategy, industry The availability and affordability of associated structure, regulatory framework, reserves poli- gas is highly dependent on accessible gas infra- cy, national company role definition). African structure with a critical mass to be economic and countries are starting to develop fiscal tools, reliable. Commercial volumes can be achieved such as royalties payable on flaring above per- only through the inclusion of both associated and mitted levels (Algeria), lower taxation with non-associated natural gas, and such an endeav- separate ring-fencing for associated gas proj- or requires a commitment to gas as a long-term ects (Nigeria), or cost recovery incentives to reliable energy source that will ultimately re- develop local gas-to-power generation (Congo place more expensive ones — the immediate Brazzaville), that enable the local oil and gas impact of substituting associated gas for oil into industry to monetize both associated and non- existing electricity production could result in sig- associated gas. nificant cost reductions of up to 82% (see figure Angola’s “no flare” policy, initiated in 2004, 3, above). However, current local initiatives, such was a key driver in the sanctioning of a $4 bil- as small-scale gas utilization technologies or mi- lion12 LNG plant using associated gas that will be croturbines, often address only the use of gas in fully operational by 2012. This represents a ma- the upstream part of the value chain and do not jor step forward for a country that currently consider the processing, transportation, and flares around 70% of its associated gas. Angola marketing of the extracted gas. Initiatives, such LNG is the first to use mostly associated gas as Ghana’s policy on the Jubilee field, where as- gathered from approximately 20 offshore fields. sociated gas is being reinjected, are helpful in It aims to cut offshore gas flaring altogether and reducing gas flaring for the next couple of years, reduce CO2 emissions by up to 32 million tons by but do not enable the promotion of a comprehen- 2012. However, to secure future gas supply, the sive and durable solution to waste gas reduction. project must supplement declining associated Host governments, committed to eliminat- gas production in maturing oil fields with new ing the waste of gas resources, have realized the developments in discovered gas fields nearby. need to support policy solutions with fiscal and Furthermore, care has been taken to identify

40 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 41 Waste Gas

potential export markets for the gas to secure gas provinces currently have the opportunity to the economic viability of the project. take a comprehensive and integrated approach to gas development through a courageous gas Local Gas Value Chains Reduce master plan. The challenges faced by current Energy Poverty in the Long Run African producing countries that lacked the fore- Unless countries and governments look beyond sight in terms of a gas strategy will provide a stark the reduction of wasted gas and commit to the reminder of the necessity to consider gas develop- development of a full local gas value chain, the ment plans in their entirety at an early stage. benefits of waste gas reduction initiatives will Some challenges can be tackled only economical- not translate into the desired alleviation of ly at the earliest stages of field development as the energy poverty and economic growth for local promotion of a structured gas value chain takes populations. In the case of the Angola LNG time and is expensive to retroactively adjust. project, the availability of a reliable gas source To significantly reduce waste gas and allevi- should spur infrastructure development for pet- ate energy poverty in the long term requires not rochemical plants and other industrial develop- only technical ingenuity but also a strong politi- ments, notably with the support of the national cal will and the ability to align the interest of the oil and gas company Sonangol. myriad of stakeholders (government, oil and gas One way to anticipate the requirements of gas industry, utilities, gas dependent industries, and infrastructure, focused on domestic use instead the local population) with the environmental of exports, is through a comprehensive gas master and economic challenges of gas monetization. ■ plan that effectively reduces waste gas and energy poverty while spurring economic growth. Renaud Brimont, Antoine Aris, and Peter von Campe The potential of natural gas needs to be consid- work for Schlumberger Business Consulting (sbc.slb.com). We welcome your comments on this article at: ered for both power generation and residential, [email protected]. commercial, and industrial use. This means anticipating infrastructure needs, such as building Copyright © 2012 Schlumberger Business Consulting. All rights reserved. or increasing gas pipeline capacity, constructing 1. IEA, Energy Poverty Action Initiative Brochure. gas power plants, promoting domestic use for 2. World Bank & NOOA 2010. 3. Rystad Energy. heating and cooking, and investing in gas deriva- 4. NOOA and GGFRP World Bank estimates. tive industries. If these considerations are not 5. Flaring refers to the burning of unwanted natural gas through addressed early enough, excess gas obtained from a pipe (also called a flare). Flaring is a means of disposal waste gas reduction initiatives will end up being used when there is no way to transport the gas to market and the operator cannot use the gas for another purpose. Flaring exported for a quick financial gain, at the expense generally is not allowed because of the high value of gas and of continuing energy poverty in the country. environmental concerns. 6. Venting refers to the act of disposing of natural gas by releas- ing (venting) it through valves or other installations. Key sources New Producing Regions Can Incor- for venting are well, tank and pneumatic equipment venting. porate Waste Gas in a Comprehen- Fugitive emissions are unintended leaks of gas from the process- sive Strategy to Solve Energy Poverty ing, transmission, and/or transportation of fossil fuels and often appear in pipelines and other equipment such as compressors. The new emerging oil and gas provinces of Afri- 7. Global average since 2002. Source: World Bank. 13 ca need to adapt to the global commitment to 8. NOOA, Rystad, and SBC analysis. reduce CO2 emissions and the fundamental shift 9. Address at the Retreat for Power Investors, Abuja (Oct. 14, 2010). in power prices, which have made crude oil an 10. Global Forum on Flaring and Venting Reduction (Estimated at $70 per thousand m3 gas price). expensive power source and natural gas an inex- 11. SBC economic model and analysis. pensive and preferred alternative. 12. Initial value as reported by Downstream Today (Feb. 13, 2008). Exposed to significant energy poverty, some Total LNG project value may have changed. http://www .downstreamtoday.com/news/article.aspx?a_id=8698. nations have started to think about their gas de- 13. For example Ghana, Sierra Leone, or Liberia in West Africa; velopment strategies. Africa’s emerging oil and and Tanzania, Mozambique, or Uganda in East Africa.

sbc.slb.com | SBC Energy Perspectives 41 By Vivek Chidambaram and Tamas Seregi

Preparing for Opportunity

In order for companies to ideally position themselves for the energy transition, optimal management with an integrated approach toward technology and innovation will be essential in overcoming R&D challenges.

he energy industry is at the onset of costs were not the sole determinants of the out- a major transition. First, concerns come. Externalities such as ease of distribution over CO2 emissions and supply se- and availability of supply also played an impor- curity are pushing policy makers tant role in technology adoption. We are roughly Ttoward energy efficiency and renewables. Sec- 30 years into this new energy transition. In the ond, consumers are becoming more environ- next 10–20 years, the environment for invest- mentally conscious, more sensitive to commodity ment will likely become attractive. Furthermore, price spikes, and more prone to conservation. oil companies are in prime position to capitalize History shows that energy transitions take de- when the environment becomes attractive; they, cades to play out. For example, it took 160 years unlike most venture capital firms, have the bal- from the scientific discovery of liquefaction in ance sheet strength and project management 1850 to LNG attaining critical mass on a global savvy needed to drive large, long-timeline tech- scale (approximately 30% of all gas traded in nology projects. Companies that take the initia- 2010). Similarly, it took nearly 100 years for the tive now to identify future opportunities will gasoline internal combustion engine to displace attain significant first-mover advantages. the steam engine and move from an initial maxi- mum efficiency of approximately 3% in 1860 to The R&D Dilemma hitting a plateau of approximately 30% by the Oil and gas companies face an R&D challenge 1950s. In both of these examples, technology and on two fronts when it comes to the energy tran-

42 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 43 sition. First, most energy agencies predict that ties carry significant risks because economic oil and gas will continue to play important roles maturation is difficult to predict (see figure 1b, decades from now. However, previous industry page 45). As companies position themselves for down-cycles prompted oil companies to out- the energy transition they will need to wade source significant parts of their technology and through a myriad of technology investment op- innovation capability. This outsourcing put oil tions (both oil and gas and renewables) with companies at a disadvantage when access to different risks, sizes, capability requirements, resources decreased and technical complexity and benefits. increased. Second, environmental pressures over CO2 emissions are likely to prompt oil Management of Technology and companies to adopt new technologies. For ex- Innovation ample, passage of carbon caps will likely lead Technology and business have a symbiotic to wide adoption of carbon capture and stor- relationship. On one hand, the business situa- age, a technology that is still in the pilot stage. tion drives the technology portfolio. For ex- Furthermore, significant interest and invest- ample, Petrobras’ large portfolio of deepwater ment in renewable energy will likely lower assets led it to craft an R&D strategy almost generation costs in the long term and open exclusively focused on selection of technolo- up attractive new business opportunities (see gies that deal with a distinct set of deep-

illustration by rich lillash illustration figure 1a, page 44). However, these opportuni- water issues (i.e., long distance tie-backs). On

sbc.slb.com | SBC Energy Perspectives 43 Preparing for Opportunity

the other hand, technology breakthroughs rights, addresses unmet needs) are great long- can open up new business opportunities. term bets. Second, once the potential has been For example, hydraulic fracturing and hori- mapped out it is necessary to filter opportuni- zontal drilling technologies in the U.S. opened ties along criteria such as fit with internal ca- up large, previously uneconomic shale gas pabilities, time-to-maturity, risk tolerance, resources. These different situations neces- capital intensity, and organizational align- sitate different approaches. Best-in-class ment. Third, if the opportunity fits then the companies will take an integrated approach right engagement strategy has to be selected to technology and innovation management (either innovator or follower). An innovator that first seeks to identify the right opportu- position aggressively pursues investments to nities and then seeks to optimally manage a determine the true potential of the opportu- portfolio of technology options. nity, makes bigger investments over time once milestones are met, and repeatedly adjusts the Identifying the right opportunities direction as learning results are incorporated. The first step in successful management of A follower position develops monitoring plans/ R&D is to identify the right investment oppor- mechanisms and invests when certain market tunities. First, the mapping of an opportunity’s thresholds have been reached. potential is needed. Opportunities with high ExxonMobil’s 2009 R&D alliance with Syn- market potential (i.e., scale, high barriers to thetic Genomics on the development of algae entry, an ability to monetize) and high techni- biofuels is a good example of how to identify cal potential (i.e., strong intellectual property the right opportunities. First, Exxon identi-

FIGURE 1a: Generating costs for various energy sources

$ per MWh Solar PV 343

Marine 281

CSP 207

Biomass 131

Coal IGCC 121

Hydro 119 CO2 $60/ton Coal Ultrasupercritical 112 CO2 $30/ton

CO2 $100/ton Coal IGCC (CCS) 101 2010-2020 cost Wind 93 Post 2020 cost

Gas CCST 88

Nuclear 72

Geothermal 52

Source: IEA

44 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 45 Preparing for Opportunity

FIGURE 1b: Historical vs. projected cost of wind power

Historical vs. projected cost of wind power Cents per KWh 7 Many unknowns like raw material cost inflation contribute to 6 deviations in expected technology maturation 5 Historical Price 4

3 NREL Projections in 2002 2

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: NREL

fied a high market potential for algae fuels tion). Lastly, Exxon took an innovator’s due to the fact that algae biofuels yield great- approach by making a big bet on the technology er volumes of biofuels per acre of production ($600 million), by creating an R&D develop- than other plant-based biofuels (scale), they ment strategy that incorporates milestone pay- require advanced biotechnology R&D to de- ments, and by ensuring that new knowledge velop (high barrier to entry), and they produce is continuously incorporated through pilot fa- a wide range of products proven for monetiza- cilities that evaluate the most productive algae tion (i.e., gasoline, diesel fuel, jet fuel at the strains and most efficient production methods. same specifications as today’s products). Ex Thus, it is critical for companies to select the xon also identified high technical potential right technology investments for them (see fig- for algae fuels due to the fact that Synthetic ure 2, page 46). Genomics is a technology leader (led by ac- claimed scientist John Craig Venter) with a Optimal portfolio management rich portfolio of patents and due to the fact The second step in successful management that algae biofuels solve several issues that of R&D is optimal management of a portfolio of plague first and second generation biofuels technology opportunities. The most successful (i.e., land needed does not compete with agri- companies make bets across various time hori- cultural uses, consumes large amounts of CO2 zons and risk profiles. Generally there are three to reduce emissions). Second, Exxon deter- types of technology bets — bets that start out as mined that algae biofuels fit strategically be- a portfolio of ideas. First, you have “incremen- cause the end product is molecularly similar to tal” ideas that improve the value or appeal of the petroleum and refined products the com- existing and known technology and processes. pany already produces, and because the end Second, you have “substantial” ideas that lever- product fits with the company’s existing infra- age adjacent technology and design to produce structure (midstream, downstream, distribu- best-in-class new platforms and uses. Third,

sbc.slb.com | SBC Energy Perspectives 45 Preparing for Opportunity

FIGURE 2: selecting the right technology opportunities, example of exxon biofuels investment

Selecting the right opportunities

Map Potential Identify Fit Engage Appropriately

Approach High market Capability Time to • Risk averse potential Maturity • Monitoring plan Follower Low tech. • Periodic Market risk Risk • Bold reviews Potential Tolerance move Low market • Big bet

potential Innovator Capital Strategic • R&D milestones High tech. Intensity Alignment risk • Repeatedly adjust

Technology Potential Example Market potential Algae biofuels are Bold bet (innovator) ExxonMobil • Higher yields (scale) molecularly similar to • $600 million R&D • Advanced R&D (entry petroleum Milestone payments barriers) investment • Easier transition to make • Depend on outcomes of in algae fuels • Wide range of products Algae end products can pilot phases (monetizable) leverage existing Continuous learning Technology potential infrastructure • Pilot facilities evaluate • Rich patent portfolio • Midstream best algae strains and (strong IP) • Downstream production methods • Overcomes challenges of • Distribution second generation biofuels (addresses unmet needs) source: Schlumberger business consulting (SBC) analysis

you have “breakthrough” ideas that nurture and breakthrough. First, CTVI invests in “in truly disruptive technologies, which offer com- cremental” technology that is complementary pletely new value propositions or introduce po- to the core business. For example, CTVI has tentially game-changing applications. Such a invested in Oxane Materials, a company com- portfolio of ideas is best managed through an mercializing advanced ceramic proppant integrated approach that continuously fills the technology that augments oil and gas produc- portfolio with emerging ideas, that converts tion and reduces the environmental impacts ideas into early concepts, and that pushes only of hydraulic fracturing, a technique critical the best concepts into the development stage. for a resource (shale gas) that Chevron The investment philosophy of Chevron has large exposure to. Second, CTVI invests Technology Ventures Investments (CTVI) of- in “substantial” technologies that offer new fers a good example of optimal management solutions by employing technologies from ad- of a technology portfolio. Typically, oil com- jacent industries. For example, CTVI has in- panies identify technologies through internal vested in Silixa, a company developing fiber R&D efforts, joint ventures, and collabora- optic sensing technology, long employed in tions with academia or service companies. the telecommunications industry, for innova- CTVI acts as an alternative platform for Chev- tive applications in the oil and gas industry ron to attain access to important technology (i.e., permanent downhole flow measure- and highlights how the company balances ment, acoustic monitoring in wells). Third, R&D bets along the three dimensions out- CTVI invests in “breakthrough” technologies lined earlier — incremental, substantial, that have the potential to disrupt markets.

46 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 47 Preparing for Opportunity

FIGURE 3: Optimizing creation of a technology portfolio

Approach Balancing risks of R&D investing Optimal Project value Portfolio Risk Key Success Factors Management High Breakthrough Leaders create a balance of substantial bets Substantial • Incremental: improve Medium existing technology • Substantial: leverages Incremental adjacent technologies Low market innovatively potential Low • Breakthrough: disruptive High tech. game-changing technology risk Horizon 1 Horizon 2 Horizon 3 Time

Example Incremental bet Substantial bet Breakthrough bet Chevron (Oxane Materials) (Silixa) (Konarka) Technology • Advanced ceramic • Fiber optic sensing • Plastic photovoltaic Ventures proppant technology technology technology Portfolio • Improves oil and gas • Long used in telecom • Potential to be production industry disruptive • Reduces environmental • Innovatively applied to oil • Low cost impact and gas • Indoor and outdoor • Aligned with company’s • Used for well monitoring usability shale gas portfolio • Fully recyclable

Source: Schlumberger business consulting (Sbc) analysis

For example, CTVI has invested in Konarka, a nology Ventures portfolio companies). This company developing organic photovoltaic comprehensive R&D strategy ensures that technology from plastics that has the poten- companies are best positioned to identify only tial to disrupt the solar market by offering the best opportunities that arise with the en- panels that absorb light at many wave lengths ergy transition — an energy transition that is that work outdoors and indoors (can absorb inherently difficult to predict (externalities), light from light bulbs), and that are made up that will take decades to play out, and that is of fully recyclable plastic materials. Thus, it expected to leverage all viable sources of sup- is critical for companies to create a balanced ply, both fossil fuel and renewable, in order to R&D portfolio (see figure 3, above). satisfy the world’s growing need for energy. Oil companies are in prime position to capitalize R&D and the Energy Transition when the time is right because they have the In the long-term, companies that obtain the balance-sheet strength and project manage- right level of exposure in areas where they ment savvy needed to develop high-risk, long- have an ability to execute will ultimately timeline technology projects. ■ win out. As we have seen, a successful R&D strategy first identifies opportunities that fit Vivek Chidambaram and Tamas Seregi work strategically with the business (i.e., Exxon in- for Schlumberger Business Consulting (sbc.slb.com). We welcome your comments on this article: vestment in algae biofuels) and then manages [email protected] a portfolio of opportunities with different risk profiles and time horizons (i.e., Chevron Tech- Copyright © 2011 Schlumberger Business Consulting. All rights reserved.

sbc.slb.com | SBC Energy Perspectives 47 Executive Summaries Leading the Energy Transition By Olivier Soupa and Amy Long | pp. 4–11 With the ongoing global economic fragility, many uncertainties continue to make the road toward emissions’ reduction a difficult journey. Governments have adopted inconsistent energy policies, fighting climate change one day and supporting CO2-intensive industries the next. In a business-as-usual scenario that assumes no policy change after 2010, fossil fuels will still account for 80% of the primary energy supply by 2035, and related emissions will increase 43% from 2008 levels. In 2010, low-carbon energy technologies (LCET) investment for energy generation — renewables and carbon capture and storage (CCS) — reached a historic high at $219 billion but fell short of the $750 billion needed per year through 2030 to achieve the 450 ppm Scenario (a 50% chance that global temperatures will not rise more than 2˚C). SBC Energy Institute estimates indicate an RD&D gap of $4–18 billion for renewables and CCS and a persistent gap between the levelized cost of electricity from hydrocarbons versus LCETs, with the latter simply being more expensive. However, it should be noted that LCET costs are being compared with those for fossil fuel technologies that have 100 years of testing and improvements.

Energy Transition: Oil and Gas in a Prime Position to Capitalize By Antoine Rostand | pp. 18–23 The world’s energy system will experience significant change over the coming decades. A step-change in energy demand growth, coupled with policy action that incentivizes low-carbon energy, will dramatically change the energy landscape. However, while studies suggest that quick mass-adoption of large scale, carbon-free energy technologies is possible, they ignore one history-proven inconvenient truth — transition takes time. It took roughly 160 years from the discovery of liquefaction in 1850 to LNG attaining global scale, and it took oil roughly 80 years from first commercial production in the late 1800s to reach 30% market share. Currently, hopes are pinned on alternative energy sources to come to the rescue in the next 10 to 20 years, yet none has reached 5% global market share. Unrealistic expectations are just as dangerous as ignoring the looming challenges. The right path to a low-carbon energy future involves shifting the energy mix in the most practical way and reducing emissions via economically attractive, low-risk, and technically feasible solutions. Oil and gas companies are well positioned to capitalize on the transition with their strong balance sheets, patience, and project management know-how, which is needed to drive large, long-timeline technology projects.

Sustainably Managing a Strategic Resource By Muqsit Ashraf, Hermes Alvarez, and Rakesh Jaggi | pp. 24–29 One of the major hurdles the industry will face, along with managing its carbon footprint, is managing its water footprint. The industry is currently experiencing a shift to more water intensive supply sources, which will come at a significant cost (e.g., North American water expenditures are projected to increase 60% this decade). As a result, oil and gas companies must view water as a strategic component of their value chain and not just an environmental issue. Major challenges faced by the industry include (1) mature oilfields increasingly require water-based EOR methods which produce significantly more water; (2) increasing water usage due to E&P complexity from emerging supply sources (e.g., unconventional gas); and (3) greater environmental and regulatory pressures

48 SBC Energy Perspectives | Winter 2012 sbc.slb.com | SBC Energy Perspectives 49 and hurdles related to water management and water scarcity. Best-in-class companies will establish an integrated system that ties together all the elements of a sustainable water strategy (e.g., sourcing, produced water management, environment, and planning). Furthermore, technologies or methods that minimize the use of water (e.g., seafloor separation, dual completion wells, mechanical blocking devices, and shutoff chemicals) will significantly enhance their production costs. Finally, water issues will need to be integrated into the governance structure, with appropriate roles and responsibilities as well as close functional collaboration.

Waste Gas: a Crucial Component of the Energy Poverty Dilemma By Renaud Brimont, Antoine Aris, and Peter von Campe | pp. 36–41 Reducing waste gas in natural gas–rich regions would add revenue, reduce costs, and increase energy availability, but reduction will take more than advances in technology — it will require a strong political will. Sub-Saharan Africa’s oil and gas producers flare 35 bcm of gas annually, which could generate 12,000 MW of electricity (half the continent’s power consumption) and directly benefit populations in energy poverty. However, there are significant barriers to waste gas monetization, such as cost of retrofitting production platforms, small associated gas volumes per field, and perceptions of an unreliable long-term supply source due to fast depletion. African countries are starting to develop fiscal tools, such as royalties payable on flaring above permitted levels (Algeria), lower taxation with separate ring-fencing for associated gas projects (Nigeria), and cost recovery incentives to develop gas-to-power generation (Congo Brazzaville), that enable local industry to monetize associated and non-associated gas. However, unless governments look beyond the reduction of waste gas and commit to the development of a full gas value chain through a comprehensive master plan, the benefits of waste gas reduction initiatives will not translate into the alleviation of energy poverty.

Preparing for Opportunity By Vivek Chidambaram and Tamas Seregi | pp. 42–47 Oil and gas companies are seeing an R&D challenge on two fronts as they face the energy transition. First, previous industry down-cycles led to a significant outsourcing of technology and innovation capability. Second, environmental pressures over CO2 emissions are likely to prompt the adoption of new technologies. Best-in-class companies will take an integrated approach to technology and innovation management that identifies opportunities and optimally manages a portfolio of technology options. As companies position for the energy transition they will review a myriad of technology investment options (both oil and gas, and renewables) with different risks, sizes, capabilities requirements, and benefits. Identifying the right investment decision requires mapping an opportunity’s potential, filtering opportunities along criteria, and selecting the appropriate engagement strategy. The most successful companies optimize their portfolio of technology opportunities by staggering their options across various time horizons and risk profiles. Such a portfolio is best managed through an integrated approach that continuously fills the portfolio with emerging ideas, converts ideas into early concepts, and pushes the best concepts into development. In the long term, companies that obtain exposure in areas where they can execute will ultimately win out.

sbc.slb.com | SBC Energy Perspectives 49 sbc.slb.com

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