Also in this issue:
Transitioning to a low Oil and gas prospects for Supply chain moves to carbon future 2017 and beyond improve bottom line
The magazine for oil and gas professionals February 2017
Decommissioning conundrum Many investors regard decommissioning as a 'wild card'
Magazine of the Hosted by:
International Petroleum Week 21 - 23 February 2017
Speakers include:
H.E. Dr Mohammed Mohammad Sanusi Barkindo Igor Sechin Bin Saleh Al-Sada Secretary General, Chief Executive Officer, Chairman of the Minister of Energy & Industry, OPEC Management Board, Deputy Chairman State of Qatar of the Board of Directors, Rosneft
Saif Humaid Al Falasi FEI Gretchen Watkins Tim Dodson Group Chief Executive Officer, CEO, Executive Vice President, Emirates National Maersk Oil Exploration, Oil Company (ENOC) Statoil
Dr. Hoesung Lee Robert S. Franklin Hendrik Gordenker Chair, President, Chairman, Intergovernmental Panel ExxonMobil Gas & Power JERA on Climate Change (IPCC) Marketing Company
Patricia Espinosa Julia Ross Andy Brown Executive Secretary, Head of Corporate Finance Upstream Director, UNFCCC & Marketing, Shell Tullow Oil
View the latest programme and speaker line-up at: www.ipweek.co.uk
IP Week Dinner Guest of Honour and Speaker: 23 February 2017 PATRICK POUYANNÉ Chairman and CEO, Total
In partnership with: IP Week Gold Sponsors: VOLUME 71 | NUMBER 840 Contents Editor Kim Jackson MEI Also in this issue: t: +44 (0)20 7467 7118 Transitioning to a low Oil and gas prospects for Supply chain moves to carbon future 2017 and beyond improve bottom line IN THIS ISSUE… e: [email protected] Front cover:
The magazine for oil and gas professionals February 2017 Fairfield Energy Deputy Editor Hosted by: Brian Davis is focusing This month’s issue of Petroleum Review t: +44 (0)20 7467 7142 attention on begins with a look at how the international e: [email protected] the decommiss- oil and gas sector is looking to transition to Editorial Assistant ioning of a low carbon future. We assess how central Anna Cole-Bailey its North Sea banks are positioning themselves to regulate t: +44 (0)20 7467 7117 Dunlin field e:[email protected] the process, and highlight a call for fossil fuel companies to disclose potential greenhouse
Editorial enquiries gas emissions from their reserves as t: +44 (0)20 7467 7118 Decommissioning investors look to more accurately determine e: [email protected] conundrum Source: Fairfield possible downside risks. We also review Many investors regard decommissioning General enquiries as a 'wild card' Magazine of the Energy some of the strategies, innovations and t: +44 (0)20 7467 7100 e: [email protected] technologies being adopted by key players in the drive to decarbonise. Advertising For advertising opportunities Ahead of his keynote presentation at please contact: Luigi Fontana IP Week on 21–23 February 2017, OPEC International Petroleum Week EI Business Development Manager Update & regulars Secretary General Mohammed Sanusi t: +44 (0)20 7467 7182 Barkindo provides his view of the role of e: [email protected] OPEC and fossil fuels in the future energy 21 - 23 February 2017 Magazine subscriptions 2 Perspective mix. Chris Baker MEI We also look at the impact of shifting t: +44 (0)20 7467 7114 3 Upstream e: [email protected] oil prices on the markets, and outline some of the reasons producers can begin to be Membership 5 Downstream For all membership enquiries please hopeful of better times ahead. That said, Speakers include: contact e: [email protected] 7 Industry decommissioning is seen to remain a ‘vexing’ or visit www.energyinst.org issue despite a partial recovery in the oil H.E. Dr Mohammed Mohammad Sanusi Barkindo Igor Sechin 10 Energy Institute price. Bin Saleh Al-Sada Secretary General, Chief Executive Officer, Chairman of the Meanwhile, make sure to visit our website Minister of Energy & Industry, OPEC Management Board, Deputy Chairman to view two online features looking at the State of Qatar of the Board of Directors, Rosneft role of gas in decarbonising Europe’s energy Abbreviations markets, and how sources of financing will The following are used throughout Petroleum Review: help electricity network companies evolve to Saif Humaid Al Falasi FEI Gretchen Watkins Tim Dodson embrace new and disruptive technologies. Group Chief Executive Officer, CEO, Executive Vice President, mn = million (106) t/d = tonnes/day 9 3 Kim Jackson, Editor Emirates National Maersk Oil Exploration, bn = billion (10 ) kW = kilowatts (10 ) 12 6 Features Oil Company (ENOC) Statoil tn = trillion (10 ) MW = megawatts (10 ) cf = cubic feet GW = gigawatts (109) cm = cubic metres kWh = kilowatt hour b/d = barrels/day km = kilometre Low carbon future Finance and investment boe = barrels of oil sq km = square Dr. Hoesung Lee Robert S. Franklin Hendrik Gordenker equivalent kilometres 12 Systemic risk or greenwashing? 28 Reasons to be cheerful Chair, President, Chairman, t/y = tonnes/year Maria Kielmas Maarten van Wesemael JERA Intergovernmental Panel ExxonMobil Gas & Power No single letter abbreviations are used. on Climate Change (IPCC) Marketing Company Abbreviations go together 14 What’s at risk? 30 The decommissioning conundrum eg 100mn cf/y = 100 million cubic feet per year. Stephen Russell Nick Cottam Andy Brown Patricia Espinosa Julia Ross 16 Big Oil plans for a low carbon future Supply chain management Executive Secretary, Head of Corporate Finance Upstream Director, UNFCCC & Marketing, Shell Printed by Geerings Print Ltd Brian Davis 32 Oil price slump boosts logistics Tullow Oil Magazine of the innovation 18 On the radar Nnamdi Anyadike Nova Garabetian EI Technical 61 New Cavendish Chief Executive: IP Week interview View the latest programme and speaker line-up at: www.ipweek.co.uk Street, London Louise Kingham OBE FEI 34 Diesel filterability issues W1G 7AR, UK 20 OPEC and the future Ian Mylrea Mohammed Sanusi Barkindo Terms of control: Petroleum Review is circulated free of charge to all paid-up members of the Energy Institute. To libraries, organisations and Market prospects IP Week Dinner Guest of Honour and Speaker: persons not in membership, it is available on a See also online. single subscription of £310 for 11 issues in the UK 22 Anticipating sea change and £480 for overseas subscribers. Single issue £30 Future of gas in decarbonising 23 February 2017 PATRICK POUYANNÉ (UK), £45 (overseas). Agency Commission – 10%. Adrian Del Maestro and Craig Stevens ISSN 0020-3076. European energy markets Energy Institute Registered Charity No.1097899, Professor Jonathan Stern Chairman and CEO, Total 61 New Cavendish Street, London W1G 7AR, UK. 25 Lower pressure on the Gulf Visit bit.ly/2k4Vte4 © Energy Institute 2017. The Energy Institute as a Karim Nassif body is not responsible either for the statements made or opinions expressed in these pages. Unless specifically stated, the magazine is not a partner The role of capital in facing with, agent of, or in any other way affiliated with In partnership with: IP Week Gold Sponsors: any of the advertisers in the publication; nor does disruption it endorse any of the products of such advertisers Matt Rennie or external inserts included with the magazine. Those readers wishing to attend future events Visit bit.ly/2jDfzze advertised are advised to check with the contacts in the organisation listed closer to the date, in case of late changes or cancellations. To view the full conditions of this disclaimer, visit http://tinyurl.com/pdq4w7d Perspective
PERSPECTIVE As much about oil as solar
othing symbolised the planet will be among those who in which objective facts are less shifting tectonic plates will drive the development of the influential in shaping public N in energy technology alternatives we now need for our opinion than appeals to emotion more in 2016 than CEO Elon Musk future low carbon existence. and personal belief’. unveiling Tesla’s solar roof tiles This reference to global politics on the former set of TV show Reach, influence and relevance might seem a million miles away Desperate Housewives. This context puts a premium on an from our day jobs, but we have The cost of manufacturing one organisation that has international seen empirical evidence distorted watt of solar PV cell capacity fell reach and influence in the policy and proven expertise called into from a staggering $77 in 1977 to making arena and expertise and question closer to our own field. an equally staggering 36 cents in knowledge that spans the entirety Witness the alarmism that has 2014 (according to Bloomberg New of the energy system – what the surrounded technologies such as Louise Kingham OBE Energy Finance). Indeed, costs are IEA describes as the ‘trade-offs, co- onshore wind, shale gas, deepsea FEI, Chief Executive, forecast to fall even further, benefits and competing priorities oil production, as well as attempts Energy Institute between 40% to 70% by 2040 (IEA that need to be untangled across to discredit climate science. World Energy Outlook, 2016). the energy sector’. This is why I believe we are Factor in a similarly rapid drop The Energy Institute intends to vital, as individuals and, through in the cost of storage and it is easy position itself as that organisation, the Energy Institute, as a to see why smart innovators are with a new strategic programme professional and learned group piling into the territory, putting over the next three years aimed at right across the energy sector. In integrated, zero carbon lifestyle growing internationally, engaging this age of 140 character solutions into a price bracket actively in the policy debate and communication via Twitter, we accessible to mainstream supporting the low carbon must have pride and confidence in consumers. transition. ourselves, of what we know, what But tectonic plates move slowly; More specifically, by 2020 we we do and how we do it. this is no overnight transition. The will aim to have expanded our The public deserves an energy IEA’s World Energy Outlook is clear international reach into four debate that is evidence based, not – even in a post-Paris world aiming regions we are currently headline grabbing. We must do to limit global average temperature developing and a further four new what we can to enlighten the rises to 2oC, and despite the current ones globally to support hundreds, debate, to replace opacity with challenging oil price – fossil fuels if not thousands, of energy clarity and to call out opinion will continue to be ‘a bedrock of professionals we don’t currently where it is masquerading as fact. the global energy system for many reach. This underscores the decades to come’. We will be a recognised body of importance of the values newly Some 60% of the investment expertise valued for its objectivity adopted by all of us at the Energy needed globally in energy by 2040 and ability to be a safe, honest Institute, which will come to the will still be in fossil fuels. Gas place to ask – and look to answer fore in delivering our strategy. We consumption in particular is – the difficult questions. We will will act with integrity, objectivity projected to increase, with also support members and and professionalism; our work will investment in LNG leading to the partners to identify the skills, be forward-thinking and creative; creation of a global market. knowledge and good practice we will seek to demonstrate our Consumption of oil in freight, needed to make the low carbon knowledge and competence; and aviation and petrochemicals, transition and address these issues we will do so collaboratively. where there are as yet few in those sectors where we don’t At the EI Awards last November alternatives, will also continue currently work within the next President, Jim Skea CBE FEI said: to grow. three years. ‘Energy fuels human progress and All of this will be founded on is delivered by highly skilled The journey ahead the knowledge, skills and good people whose dedication helps to So, contrary to the often polarised practice on which professionals develop and sustain society, often public debate around energy, across the industry already rely. We with little visibility to those that the co-existence of high and will continue to deliver on familiar, benefit.’ I believe it is our job to low carbon is inevitable for the valued work such as the Energy improve that visibility and foreseeable future. While Paris Barometer, the Energy Systems celebrate the work energy sealed the discussion about the conference and our annual awards professionals do, now so more than destination, the journey there is as and other key events – but it will ever. ● much about using hydrocarbons also mean doing things differently, wisely and efficiently as it is about including a significant shift to renewables, nuclear and disruptive online learning. technologies. Furthermore, many of the Strong values in a ‘post-truth’ world people whose skills and ingenuity The Oxford Dictionaries’ word of have successfully harnessed oil and the year in 2016 was ‘post-truth’, gas from some of the most an adjective defined as ‘relating inhospitable environments on the to or denoting circumstances
2 Petroleum Review | February 2017 UpstreamUpdate Sudanese oil agreement renewed Landlocked South Sudan has renewed a contract allowing it to continue using a Sudanese pipeline to export oil
udan and South Sudan recently agreed to extend S an oil deal originally negotiated in 2012, which will enable landlocked and troubled South Sudan to continue utilising a Sudanese pipeline to export its crude, reports Andrew Green. ‘We have agreed to extend it for another three years,’ Sudan’s Petroleum and Gas Minister Mohamed Zayed Awad told local news agencies after signing the deal. Under the renewed deal, Juba (the capital of South Sudan) has to pay to use the pipeline, in addition to paying transit and transportation fees – the original agreement included a $3bn Source: Isaac Billy / UN Photo transitional financial arrangement (TFA). In total, Juba originally paid Sudan President Omar al-Bashir (left) arrives in South Sudan ahead of that country’s official independence in Khartoum (the capital of Sudan) 2011 and greets his southern counterpart, Salva Kiir (right) about $25/b. As global crude oil prices fell, Khartoum agreed in forced cuts from 220,000 b/d to an have a significant impact on early 2016 to float that fee. estimated 130,000 b/d. global markets. Details on the renewed ‘In the last two years, we’ve Oil has been a flashpoint since arrangement are still scarce, seen repeated statements from the South Sudan seceded from Sudan including how much money South South Sudanese government that in 2011. It took with it 75% of the Sudan still owes toward the TFA. production will increase again,’ former united Sudan’s oil reserves, South Sudan’s only official says Luke Patey, a senior researcher although it had no means of export statement came after the signing, at the Danish Institute for aside from the pipeline through when its Petroleum Minister International Studies, who the successor state of (northern) Ezekiel Lol Gatkuoth pledged authored a book on the oil industry Sudan. The two states were cooperation with Khartoum. in the two countries. ‘I’m not initially unable to reach an The deal comes as South Sudan, confident that it will actually occur agreement and in January 2012 mired in a three-year internal civil this year.’ If production figures South Sudan abruptly stopped oil conflict, has struggled to maintain remain low, Patey does not expect production. The September 2012 production levels. The fighting has South Sudan’s oil to agreement ended that stalemate.
Exploration and production OGA publishes EOR delivery programme The UK Oil and Gas Authority (OGA) line with their field development economics – ensuring the recently published its Enhanced plans (FDPs). economics of marginal EOR Oil Recovery (EOR) Delivery projects do not stifle investment. • Maximising economic recovery Programme, which expands on its (MER) for future EOR projects • Advance next EOR and support earlier announced EOR Strategy. – ensuring EOR opportunities CO storage – ensuring that, According to the OGA, there is still 2 are identified early enough in while prioritising polymer and a ‘significant prize’ to be gained by the field life cycle to maximise low salinity EOR, other EOR increasing recovery from existing economic recovery. technologies are not neglected. UKCS oil fields. However, the average recovery factor is projected to be • Workgroups and industry • Knowledge management around 46% at the end of field life. partnerships – ensuring that EOR – ensuring EOR knowledge is Through advocating and facilitating technology and implementation widely available, improving the use of tertiary EOR techniques, lessons are shared. awareness and knowledge OGA seeks to support the extraction transfer. • Technology development and of up to 250mn boe. deployment – gaining additional • Communication and stakeholder The Delivery Programme buy-in from EOR technology plans – ensuring investment in describes eight areas of focus: providers and operators to EOR projects is not limited by • Existing EOR projects – ensuring develop and then deploy lack of senior industry leadership current polymer and low salinity economical EOR technology. buy-in to the deployment of EOR technology. EOR projects are progressed in • Creating value – improving
Petroleum Review | February 2017 3 UpstreamUpdate
Exploration and production Cypriot well could be transformative for Eastern Med
Driven by the success of Eni’s economics.’ potentially commercially viable. major Zohr feld gas discovery The Zohr Field is one of the The competitive landscape in the offshore Egypt in 2015, companies largest conventional gas discoveries region has already begun to change are rethinking the Eastern of recent years. It has in-place in anticipation of the potential. In Mediterranean region’s gas resources of 32tn cf of dry gas, November 2016, BP purchased a potential, according to new analysis with possible recoverable resources 10% equity stake in the Shorouk from IHS Markit. Furthermore, of about 20tn cf, according to offshore block (including Zohr) from Total’s announcement that it will Eni statements. Phase 1 of the Eni, with the option to acquire a drill a 2017 exploration well in its field development is due to come further 5% stake. deepwater block 11 located offshore onstream in 2017. Meanwhile, the December 2016 Cyprus indicates the growing ‘The existence of a carbonate announcement of results from interest in the wider region. reef play, which Zohr has proven Cyprus’s Third Offshore Licensing Indeed, the market analyst to be, is very different from the Round confirmed the interest of company believes that Total’s turbidite sand-play discoveries in established and new companies in Cypriot well will be one of the ‘most the Israeli Levantine Basin and the the Eastern Mediterranean region’s critical wells drilled globally in 2017 Egyptian Nile Delta Basin,’ Bliss growing gas potential. Eni extended for the E&P industry, especially given said. ‘If the Zohr carbonate play its key role in the region with its the slowdown in exploration drilling extends northward into Total’s award of offshore Cyprus worldwide’. block 11, then the potential for block 6 (north-west of block 11) with Total’s offshore Cyprus block a significant discovery in block partner Total, as well as offshore 11 is located to the north of Zohr’s 11 exists, resulting in profound block 8 (north-east of block 11). Egyptian Shorouk offshore block, implications for the region. A major ExxonMobil won the bid for offshore which, according to Graham Bliss, find would provide competition block 10 (which Total had previously Senior Director of Plays and Basins with offshore Israel gas fields to relinquished). The ranks of larger Research, IHS Markit, is the first fulfill Egypt’s rising gas demand, and companies in the region have now time in the region that a carbonate, within the complex jigsaw puzzle swelled to include Total, ExxonMobil rather than a sand, reservoir has of gas supply and demand in the and Rosneft, in addition to the been targeted. ‘The carbonate Eastern Mediterranean, could even established players Eni, Shell and BP. reservoir that comprises Zohr is potentially lead to gas exports to While gas is the primary target of particularly high quality,’ he Turkey,’ for the Total Cyprus block 11, the said. ‘As such, it will likely enable IHS Markit research has also IHS Markit analysis suggests there development using a minimum concluded that direct pipeline is some potential for a deeper, but number of wells and, therefore, exports from the Eastern unproven, Cretaceous target, which reduce costs and enhance project Mediterranean to Greece are could have oil potential.
IN BRIEF
ADNOC has awarded BP a 10% 18 Nigerian companies secured in Uganda, with Tullow retaining interest in Abu Dhabi’s onshore oil contracts, 11 traders, five foreign a 11.76% interest in the upstream concession operated by ADCO, the refiners, three government-backed project and pipeline, which Abu Dhabi Company for Onshore companies and two trading units would reduce to 10% when the Petroleum Operations. As part of of NNPC. All of the contracts are government of Uganda formally BP’s interest in the concession, for 32,000 b/d, apart from NNPC’s exercises its right to back-in. The it will become asset leader for Panama-registered Duke Oil unit, Lake Albert project is expected to the Bab integrated asset group which won a deal for 90,000 b/d. achieve around 230,000 b/d when it within ADCO. It is hoped the new Meanwhile, NNPC has reiterated its reaches plateau. partnership model will bring intent to proceed with two new LNG technology, expertise and financing projects in Nigeria – Brass LNG and The Veolia and Peterson partnership aimed at maximising the value of OK LNG – describing both as ‘priority has been awarded two platform the resources and supporting the ventures’. decommissioning contracts for transfer of knowledge. BP joins recycling at its facility in Great Total of France, Inpex Corporation Ashurst is advising Tullow Oil on a Yarmouth (see pic below). With an of Japan, and GS Energy of South substantial farm-down of its assets aim of reaching 96% recycling rates Korea as shareholders of ADCO and in Uganda to Total E&P Uganda. the work to recycle materials and the onshore concession, who each Under the terms of the agreement, assets is expected to begin in spring own a 10%, 5% and 3% interest Total will acquire 21.57% in the 2017 when the platforms arrive respectively. ADNOC will continue to Lake Albert development project onshore. explore opportunities with potential partners for the remaining 12% stake of the 40% earmarked for foreign partners.
Nigerian National Petroleum Corporation (NNPC) has awarded contracts to 39 companies for crude oil offtake in 2017–2018. According to Global Energy Research, Source: Veolia
4 Petroleum Review | February 2017 DownstreamUpdate Ghanaian power generation shift Investment support from the World Bank Group is to help Ghana transition to a low carbon future
FC and MIGA, members of the World Bank Group, have I committed $517mn in debt and guarantees to support Ghana’s Sankofa gas project, an integrated offshore oil and natural gas project that will provide a source of reliable, affordable energy in the West African country. The project will fuel up to 1,000 MW of power generation, helping Ghana meet its growing energy needs and displace oil-fired power generation with a clean-burning alternative. The $7.7 bn Sankofa project will be developed by Vitol Ghana and Eni Ghana, in partnership with Ghana’s National Petroleum Corporation. IFC has committed a loan of $235mn to Vitol Ghana and is arranging another $65mn in Source: Vitol debt from the Managed Co-Lending Portfolio Program, a loan- The Sankofa project involves the development of multiple syndications initiative that enables subsea wells tied back to a FPSO which will be connected to third-party investors to participate shore via a gas export line passively in IFC’s senior loan portfolio. The IFC financing is part the road each year or planting emissions and provide a clean of a $1.35bn loan facility provided 152mn trees. source of power for generations.’ by commercial banks, including Sankofa is expected to generate MIGA Executive Vice President and HSBC, Société Générale, ING, $2.3bn in revenues for Ghana’s CEO Keiko Honda, added: ‘The Standard Chartered Bank, UKEF, government and provide a stable, natural gas from the Sankofa among others. MIGA has long-term source of domestic gas project underpins the nation’s committed these commercial that will help solve the country’s transition to a low carbon future.’ lenders with up to $217mn in chronic gas supply constraints. With this announcement, IFC political risk guarantees. Phlippe Le Houérou, IFC and MIGA support brings World Ghana’s government has Executive Vice President and CEO, Bank Group financing for the identified the Sankofa project as a said: ‘Ghana will require significant Sankofa gas project to transformational project that will power generation and approximately $1.217bn, building help the country achieve its COP21 infrastructure to meet the growing on a $700mn guarantee package commitments for climate needs of its young and expanding from the World Bank announced mitigation. Once it starts to population. This project last year that will help Ghana’s produce gas in early 2018, the demonstrates that private capital National Petroleum Corporation project is expected to reduce can be mobilised on a large scale to ensure timely payments for gas carbon emissions in Ghana by an contribute to the country’s energy purchases and that has enabled the estimated 1.6mn t/y as gas security. Developing Ghana’s project to secure financing from its displaces heavy fuel oil – domestic natural gas resources will private sponsors. equivalent to taking 1.2mn cars off help the country reduce carbon
Fuel retailing BP and Woolworths agree fuel retail partnership BP is to establish a strategic of its kind for Australia’s growing programme will expand the Metro partnership with Woolworths, one convenience sector, bringing at BP format across more than of Australia’s largest supermarket together BP’s quality fuels, 200 sites. retailers. The deal includes BP Woolworths’ Everyday Rewards, fuel The acquisition of Woolworths’ acquiring, rebranding and operating discount dockets and a new range of fuel and convenience sites will add Woolworths’ existing 527 fuel and high-quality, ready-to-eat and take to BP’s existing network of 350 convenience sites, as well as an home fresh food products, reports company-owned retail sites across additional 16 sites currently under the oil major. Australia. BP also supplies fuel and construction, across Australia for a Initially, the partners will launch branding to a further 1,000 sites total consideration of $1.3bn. a Metro at BP pilot programmes owned by independent business A new fuel and convenience across 16 BP fuel and convenience partners. offer, Metro at BP, will be the first sites and phase two of the
Petroleum Review | February 2017 5 DownstreamUpdate
Gas distribution Ukraine lifts regulatory restrictions on gas exports Ukraine has amended legislation restricted by regulatory obstacles to pay the tariffs for using Ukraine’s that previously restricted exports such as licensing (issued by the gas system exit capacity at those of natural gas and anthracite. Ministry of Economy) and quotas interconnectors. Such tariffs are ‘This represents an unexpected (such quotas being determined on calculated and approved by the move for a country which is a net the basis of the Annual Gas Balance, Ukrainian energy regulator (the importer of natural gas,’ comments usually equal to zero), explains CMS. National Commission on the State international law firm CMS. ‘If As a result, Ukrainian gas producing Regulation of the Energy and Public it achieves its desired aims the companies (both state-owned and Utilities Sector) for each particular Resolution will mark a significant private ones) have not exported exit point in $/1,000 cm. ‘At present, step towards the liberalisation of natural gas from Ukraine since 2011. the relevant exit tariffs are only the natural gas market in Ukraine, It should be noted, however, established for a number of exit enabling the flow of natural gas that due to Ukraine’s recent switch points and vary from $16.74 to from European Union countries with to a system of tariffs for entry/ $32.8/1,000 cm depending on the which Ukraine has interconnectors, exit capacity at Ukraine’s gas exit point in question,’ notes CMS. and also from Ukraine to them.’ interconnectors with neighbouring Since 2006, the export of gas of EU countries, exporters of natural Ukrainian origin has been heavily gas from Ukraine are now required
IN BRIEF
BP and PTT have entered into a sales price changes also reflect seasonal time, a long-term brand licence and purchase agreement under movements in international oil agreement has been renewed with which BP will provide PTT with product prices, as diesel prices have Shell soVivo Energy will continue to approximately 1mn t/y of LNG. responded to higher demand during operate under the Shell brand. Vivo The term of the agreement is 20 the Northern Hemisphere winter. Energy, the company behind the years. LNG supply will commence in As Brazilian law guarantees pricing Shell brand in Africa, was created 2017 and will be sourced from BP’s freedom in the market for fuels by Helios, Vitol and Shell in 2011 diverse portfolio of LNG, including and oil products, the refinery price when Shell divested its majority the Freeport LNG project in the US. changes made by Petrobras may or share in its downstream operations Commercial terms of the agreement may not be reflected in consumers’ in 14 African markets. Since then, its have not been disclosed. end prices. This will depend on price shareholders have made significant changes made by other players in investments in people and assets, In line with the pricing policy the fuel chain, especially distributors expanding the retail network announced by Petrobras in October and gas stations. If the adjustments from 1,300 to 1,700+ stations and 2016, the company raised the price made are fully passed on and no its presence to 16 countries. Vivo of diesel sold at its refineries by 6.1% changes take place in the other Energy plans an additional $300mn on average, in January 2017. The elements that make up the end price of investment over the next three price of gasoline sold at its refineries for consumers, diesel prices could years. remains unchanged. The decision increase by 3.8% or around R$0.12 is mainly due to the effect of the per litre on average, notes Petrobras. Energy UK recently reported that continued, although modest, rise in overall in 2016, some 4,822,885 oil prices in international markets, Helios Investment Partners and UK consumers switched electricity the strengthening of the Brazilian Vitol have agreed the acquisition supplier, an increase of 26% real since the last price review, of Shell’s 20% shareholding in Vivo compared to 2015. and adjustments to Petrobras’ Energy for $250mn. On completion competitiveness in the domestic in 1H2017, Vivo will be owned 100% gasoline and diesel markets. The by Vitol and Helios. At the same EW banner.qxd:P33_MEMBANNER 19/1/17 14:12 Page 1
In next month’s Energy World:
• Storage and solar – a route to power system sustainabilty? • Japan’s power liberalisation meets its big energy players • Lessons learned on business energy efficiency • The role of capital in facing disruption
Energy World is the monthly sister publication to Petroleum Review, covering renewables, power generation and energy efficiency. As an EI member, you can subscribe to Energy World for £45, saving up to £140. For more information visit www.energyinst.org
6 Petroleum Review | February 2017 IndustryUpdate Fossil fuels aren’t going away soon Fossil fuels will provide nearly 80% of global energy demand in 2040, according to ExxonMobil’s latest Energy Outlook
lobal population growth of nearly 2bn, a doubling of G worldwide economic output and rapid expansion of the middle class in emerging economies are all expected to contribute to energy demand growth of about 25% from 2015 to 2040, according to ExxonMobil’s 2017 Outlook for energy: A view to 2040. Efficiency gains across economies worldwide are expected to play a significant role in limiting the growth in energy needs. Energy demand in member nations of the Organisation for Economic Co-operation and Development (OECD) is likely to be flat to 2040, while demand in non-OECD nations is expected to increase 40% as prosperity expands and access to modern energy increases. Growth in global energy demand will be led by greater electrification of the global economy. Some 55% of the energy economy will improve from about • Oil will provide about one-third It will take all energy types demand growth over the next 30 miles per gallon (m/g) to nearly of the world’s energy in 2040, to meet demand in 2040 50 m/g, reflecting significant – oil, natural gas and coal quarter century will be tied to remaining the No. 1 source of are expected to account for power generation needed to strides in efficiency of fuel, with growth driven by 77% of the energy mix at support the increasingly digital conventional vehicles and a shift commercial transportation and this time and plugged-in lives of society, in the fleet mix favouring hybrid chemicals demand. Average Source: ExxonMobil Energy according to the company’s annual vehicles, the report shows. global fuel economy for new Outlook 2017 long-range supply-and-demand Global energy-related carbon light-duty vehicles is expected energy forecast. dioxide (CO2) emissions are to improve by about two- Average electricity use per expected to peak during the 2030s thirds. household will rise about 30% and then gradually decline. This is • Carbon intensity of the global between 2015 and 2040. The share supported by an increasing shift to economy is likely to be reduced of the world’s electricity generated less carbon-intensive energy for by 45% through 2040, reflecting by coal is expected to fall to about power generation and higher significant gains in the energy 30%, from approximately 40% in energy efficiency across all sectors. efficiency of economies 2015 as the use of lower-emission Key findings of the ExxonMobil worldwide and a gradual energy sources including natural report include: transition to lower carbon- gas, nuclear and renewables • From 2015 to 2040, global intensive energy types. increases. demand for energy is expected ‘As economies expand around • Global energy-related CO to increase by about 25% – 2 the world, energy demand will emissions are likely to peak roughly equivalent to the total increase as more people seek during the 2030s and begin to energy used today in North higher standards of living,’ said decline, even as global America and Latin America. William Colton, ExxonMobil’s Vice economic output doubles from President of Corporate Strategic • In 2040, oil and natural gas are 2015 to 2040. Planning. ‘Humanity’s dual expected to make up nearly • North America, which for challenge is to meet growing 60% of global supplies, while decades had been an oil energy demand while managing nuclear and renewables will be importer, is likely to become a the risk of climate change. Our approaching 25%. significant net exporter by Outlook for energy can help people • Natural gas demand will 2025. understand factors influencing expand significantly, future energy supply and demand • India is likely to surpass China accounting for about 40% of and inform industries and as the world’s most populous the projected growth in global governments as they consider nation by 2025. The two energy demand. future energy policy.’ countries are expected to With the global middle class • Nuclear and renewable energy account for about 45% of the more than doubling to about 5bn, sources – including bio-energy, growth in global energy the number of cars, sport-utility hydro, geothermal, wind, and demand. vehicles and pickups are expected solar – are also likely to to increase about 80% to 1.8bn account for 40% of the growth vehicles by 2040. During the same in global energy demand to period, average new car fuel 2040.
Petroleum Review | February 2017 7 IndustryUpdate
Finance and investment France launches more than €20bn in green bonds France has announced it is launching in this area – even as noted climate more than €20bn of green bonds, in change sceptic Donald Trump a move that follows hot on the heels becomes US President. of Poland, which became the first However, there are legal country to do so as 2016 drew to a challenges and obstacles to close, writes Robert Follie of law firm overcome if sovereign green bonds Holman Fenwick Willan. are to take off and thrive. These According to France’s debt challenges are mainly caused by agency, the country will issue the a lack of common definition and green bonds over two to three years, legal framework; for instance, including 2017 – with an initial no monitoring mechanism is in offer at the start of January raising place to ensure that the funds Source: Pixabay at least €2.5bn. At the close of raised are actually used to finance 2016, the Polish government issued environmentally friendly projects. €750mn of sovereign bonds. The French government has difficult to achieve. This may Green bonds are distinctive in tried to address these issues and discourage investors from investing that their proceeds are earmarked avoid ‘greenwashing’ criticisms as they perceive the bonds as being for use in financing projects or by implementing two innovative less liquid than other assets. initiatives that have environmental mechanisms: To tackle this issue, France and climate benefits. Indeed, has developed the Transition according to Bloomberg, French • an ex-ante control based on the Energétique et Ecologique pour Finance Minister Michel Sapin intervention of an independent le Climat (TEEC) label. It comes emphasised in early January 2017 rating agency (Vigeo Eiris) and in addition to the Green Bonds that the government expected the the issuance of an annual report Principles (GBP) or the Climate green bond market to promote by the French government on Bond Initiative (CBI), the two main ‘climate awareness by all actors, the allocations of the funds international voluntary frameworks bankers, companies and states’. invested; and used to label green bonds. France and Poland are making • an ex-post control based on the Finally, it must be noted that their first forays into the green bond opinion of a committee of most of the green bonds are held markets against the backdrop of the experts in environmental issues. by institutional investors. A way Paris Agreement on climate change, forward could be to ease individual which came into force in November However, some uncertainties investors’ access to the market. 2016. The agreement obliges 195 remain and the committee For these reasons, with hope that countries to hold global warming members selection process is yet developments in France and Poland to no more than 2oC above pre- to be determined. Moreover, these represent a new era, there is more industrial levels. monitoring measures are limited to progress to be made in terms of The global market is currently France and will have little impact bringing legal certainty on a global dominated by development banks, globally. perspective. businesses and local authorities, and Another consequence of the it is hoped the entrance of powerful lack of common definition is state bodies could build momentum standardisation might be more
IN BRIEF
Wood Group has secured a and 10 – Total. Some mid-tier but also for aerial photography, five-year, multi-million dollar NOCs appear to be struggling, with surveying and security. The framework agreement to continue Mexico’s Pemex down three places technology is particularly attractive to provide engineering and to 18th and Libya’s National Oil for its use in improving safety. For project management services to Corporation sliding two to 33rd. example, sending unmanned aircraft Saudi Aramco’s onshore capital Spain’s Repsol jumped seven places instead of people into confined programmes in the Kingdom of following its acquisition of Canada’s spaces to conduct inspections Saudi Arabia. Effective immediately, Talisman. Meanwhile, headwinds reduces risk, and is also effective and the contract also includes three, in shale hit US independents, with efficient. We expect their usage to one-year extension options and will Anadarko dropping five places and grow.’ The new guidelines aim to be delivered locally in Saudi Arabia. Chesapeake three. achieve consistency with the high safety and operating standards Energy Intelligence has released its A new publication to help guide the already adopted on the UKCS for annual ranking of the world’s 100 growing use offshore of unmanned offshore oil and gas production and largest oil and gas companies, which aerial systems (UAS) – also known helicopter flight operations. ‘The compares private sector firms with as drones – has been published intention is to encourage offshore national oil companies (NOCs). The by Oil & Gas UK. According to operators planning on using this Top 10 companies in this year’s Mick Borwell, Health, Safety and emerging technology to think about rankings are 1 – Saudi Aramco; Environment Director with Oil & Gas the whole operating and safety 2 – NIOC; =3 – CNPC and UK: ‘A small but increasing number system offshore and not just the air ExxonMobil; 5 – PDVSA; =6 – BP of oil and gas operators are using vehicle,’ concluded Borwell. and Rosneft; 8 – Shell; 9 – Gazprom UAS for inspections predominantly,
8 Petroleum Review | February 2017 Hosted by
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Watch your inbox in January for an invitation to share your views. The survey will follow in February. knowledge.energyinst.org/barometer EI News IP Week 2017 to assess impact of eventful past year on industry future
n the wake of the UK vote to ‘Over the years, IP Week has leave the European Union, become an unmissable event for I the ratification of the Paris oil and gas industry executives as a Agreement on climate change, global platform for thought- Donald Trump’s election to the leadership on the issues affecting US presidency; and with further the sector,’ says Louise Kingham political and economic milestones OBE FEI, Chief Executive, Energy ahead, International Petroleum Institute. ‘This year will be of (IP) Week – hosted by the EI in Barkindo, OPEC’s Secretary General, particular interest considering the London from 21 to 23 February – Dr Hoesung Lee, Chair of the significant events of the past few will offer a timely forum to assess Intergovernmental Panel on months. We are entering a new era the future impact of these events Climate Change (IPCC), H.E. in international relations and on the global oil and gas sector. Dr Mohammed Bin Saleh Al-Sada, trade, and IP Week 2017 will It will also debate the effect of Minister for Energy and Industry, represent a particularly valuable industry-specific issues such as the State of Qatar, alongside leaders opportunity to gauge the mood challenging oil price environment from many major oil and gas and expectations of the oil and gas and OPEC’s production cuts. operators, including Igor Sechin, industry in these challenging Over the three days of CEO of Rosneft. Those attending times.’ conferences, roundtables and the prestigious IP Week dinner on social events, delegates will receive 23 February will also hear from To find out more about this year’s event and register, visit ipweek.co.uk insights from distinguished figures Patrick Pouyanné, Chairman and including Mohammad Sanusi CEO of Total.
IN YOUR AREA Queen’s Honour for EI Vice- North East YPN visit Drax Power Station In October, the EI North East Young President Dr Bernie Bulkin FEI Professionals Network (NEYPN) organised a visit for 25 members to the Drax Power Many congratulations to the EI’s Vice- Station in Selby, North Yorkshire, which President Dr Bernie Bulkin FEI who has supplies around 7% of the UK’s power at any been made an OBE in the Queen’s New one time. Having been welcomed by Phillip Year Honours List for services to the Batty of Haven Power, the delegates were energy industry. given a summary of operations at the power Dr Bulkin has been an eminent and station, from the supply chain behind the influential voice in the energy world fuels used on site (coal and biomass), to Drax for many years, having served across work towards cleaner power generation. industry, policy and academic circles. He has had an extensive portfolio of roles ranging from Chief Technology Officer of BP Oil and then as Chief Scientist of BP to Member of the DTI Energy Board (2006 – 2009) and Chair of the Office of Renewable Energy in Department of Energy and Climate Change (2010 – 2013). As an academic, Dr Bulkin has been Honorary Professor at the University of York and Professorial Fellow at Cambridge, where he co-founded the They then toured the facilities, including ‘Environment on the Edge’ lecture series. companies AEA Technology and Pursuit the national grid HV infrastructure, cooling Some of the lectures were published Dynamics. towers, biomass storage systems and control by the UN Environment Programme Following the publication of his room. The turbine sheds were particularly and programmes on the theme were book Crash Course in 2015, he currently awe-inspiring for the visitors. The branch broadcast on Voice America. coaches companies in leadership would like to thank Drax Power Station and Dr Bulkin has also worked as a techniques as a senior partner of UK Haven Power for helping organise the event, venture capitalist, first as a partner in US consultancy Refresch. Newcastle University for their financial firm Vantage Point, and more recently Dr Bulkin joined the EI Council in help, and Marcelo Calispa Aguilar for the for Ludgate Investments Limited. He 2012 and was appointed Vice-President photography. has been a Non-executive Director of at the latest AGM in June 2016. We For more detailed reports from the EI branches Severn Trent and currently serves as a are honoured and grateful to enjoy network, including speaker presentations, and further Non-executive Director of US firm ATN the support of such a respected figure information about forthcoming activities and events in International. He chaired UK public toward our work. your area, visit energyinst.org/branches
10 Petroleum Review | February 2017 EI News
IN BRIEF
Certificate of Appreciation for EI Aviation 2015), supervising the production of seven New EI eLibrary titles Committee Chairman publications, hosting technical seminars for The following titles have been recently international stakeholders and resolving added to the EI’s extensive eLibrary feedback from stakeholder review. collection – one of the most valuable resources from the EI Knowledge Service, 2017 Energy Barometer alongside the Energy Matrix, Information The 2017 Energy Barometer survey will be sheets and access to periodicals. emailed to EI College members this month. Dodson, Jago, et al. Planning after If you accepted your invitation this year, petroleum: preparing cities for the age or completed the survey for the first time beyond oil. 2017. last year, you will receive a link to complete FitzRoy, Felix; Papyrakis, Elissaios. An the 2017 questionnaire online. The survey introduction to climate change economics. enables a number of EI members to share 2016. their insights and concerns about the future of the UK energy system with policymakers. Navanietha Krishnaraj, R.; Yu, Jong-Sung. In a recent blog (blog.energyinst.org), Bioenergy: opportunities and challenges. Dr Joanne Wade FEI, Chair of the EI Energy 2016. Dr Anthony Kitson-Smith (right) receives certificate of Advisory Panel, reflects on the impact of Newton, David E. Fracking: a reference appreciation from Martin Hunnybun MEI, Technical last year’s report and how the EI was able handbook. 2015 Team Manager, Energy Institute to build on its findings to further inform Henderson, Harry. Nuclear power: a reference The EI has presented Dr Anthony Kitson- energy policy. The 2017 report will be handbook. 2nd ed. 2014 Smith with a Certificate of Appreciation in published in June. Adaramola, Muyiwa. Wind resources and recognition of his much valued services as knowledge.energyinst.org/barometer future energy resources: environment, social Chairman of the Aviation Committee, and economic issues. 2015 2015 – 2016, and significant contribution Energy Efficiency conference and workshop to the field of aviation fuel quality and 29 – 30 March 2017 Visit knowledge.energyinst.org to explore energy handling. The EI’s popular Energy Efficiency conference information and data, and access the e-Library. During his tenure, Anthony has returns next month with an additional demonstrated considerable leadership, workshop taking place the following day. Sadly, we have been notified, over the past been responsible for significantly Under the theme ‘Embedding behaviour few months, of the deaths of the following progressing key projects, represented the change to unlock efficiency potential’, the members: EI at a number of stakeholder events and conference will discuss how to reduce Born devoted a lot of his time to committee carbon emissions and lower operational Mr G Cardinal FEI 1947 activities. Highlights include establishing costs, and explore the issue at the heart Mr T M Jensen FEI 1938 the committee’s highest priority items of effective energy management: people. Mr K Gladstone-Millar FEI 1921 and focusing available resources on their Topics will include behaviour change, Mr C H D Lamb MEI 1945 completion; updating the committee on management strategy and performance Mr N A Osbourn CEng FEI 1924 IATA Fuel Forums, UK MoD Aviation Fuels monitoring. The workshop will build on Mr G G Pyett MEI 1932 Committee meetings, a National Institute the conference outcomes and focus on the Mr S P Redgrave MEI 1948 of Storage Tank Management conference latest behaviour change techniques and Dr W Stockdale FEI 1945 (Orlando) and Joint Inspection Group solutions. Find out more at energyinst.org/ Mr G Williams CBE FEI 1917 workshops, representing the EI as part of events an IATA technical mission to Beijing (April
Help inspire the next generation 2017 Hawley Award of scientists and engineers: open for entries A prestigious annual engineering award supported join the Big Bang Crew by the Engineering Council has launched its 2017 campaign to recognise the most outstanding The organisers of the 2017 Big Bang collect extensive careers information. engineering innovation that delivers demonstrable UK Young Scientists & Engineers Entry is free and the Crew’s role is to benefit to the environment. Fair are calling for volunteers to join ensure that the exhibition is accessible The Hawley Award is open to individuals who the ‘Big Bang Crew’ and help inspire to visitors of all ages – but especially have undertaken after graduate or post-graduate school children into studying STEM the very many young ones. degree work and have at least reached a stage disciplines. The Fair, which takes place Roles available include helping with where a prototype or a proof of concept has been in Birmingham on 15 – 18 March, events, activities, career information developed, with the expectation of commercial is the largest celebration of science, and the judging of projects (the latter implementation. Candidates must be members technology, engineering and maths requires STEM career experience). of a professional engineering institution and for young people in the UK, with within ten years of starting a professional career over 70,000 young people, teachers Further details on how to get involved can as an engineer or scientist in either academia or be found at thebigbangfair.co.uk/play-your- and parents expected to attend part/volunteering. The official deadline for industry. Individuals can put themselves forward and enjoy theatre shows, engage applications is 29 January 2017 but the EI has for the award but must have the support of a in interactive workshops, discover secured a few days’ extension to enable its supervisor. The winner’s cash prize is £5,000. members to apply. science and engineering projects and The entry deadline is 18 April 2017. Interviews for shortlisted candidates will be held on 3 or 4 May 2017. Full details can be found at engc.org.uk
Petroleum Review | February 2017 11 Low carbon future
FINANCE
Systemic risk or greenwashing?
Market awareness Central banks are poised to regulate both the Richard Tol, Professor of the Economics of Climate Change at transition to a low carbon economy and the Sussex University, disagrees. ‘Do we really believe that governments are environment, writes Maria Kielmas. secretly preparing a climate policy and the suckers on Wall Street are not aware of this? There is no limate change is the a new financial powder keg. bubble.’ Government energy and tragedy on the horizon,’ Carney in particular has come climate policies affect companies, ‘C warned Bank of England under fire since Britain’s June 2016 he adds. This was seen when Governor Mark Carney in vote to leave the European Union the ExxonMobil share price rose September 2015 when addressing for ‘overreach’, straying into the when the market anticipated that members of the Lloyds of London political arena and claiming a say with former ExxonMobil CEO Rex insurance market. His aim was to in environmental regulation. Tillerson at the State Department, highlight how climate change is Underpinning the central the US may lift sanctions against a risk to global financial markets. bankers’ concern about climate Russia, thus enabling growth in His speech followed one by Paul risks is the ‘carbon bubble’ thesis. ExxonMobil’s Russian investments. Fisher, Bank of England Executive First proposed in 2011 by London- But Tol does not believe that there Director of Insurance Supervision, based environmental advocacy is a risk of climate policy causing that the insurance sector faces group Carbon Tracker, this states mayhem. ‘Sensible governments major losses if it continues to that the world must keep within a won’t do this,’ he said. Although
invest in fossil fuel-based assets ‘carbon budget’– the CO2 volume noting that ‘Germany is the should governments take action that may be emitted to avoid exception,’ referring to Germany’s to cut greenhouse gas emissions global mean temperature from energiewende, the transition to in line with recommendations rising 2°C above pre-industrial renewables that has had profound from the United Nation’s levels by 2050 – to avoid a effects on utilities such as RWE Intergovernmental Panel on catastrophic climate change. This and E.ON. These companies were Climate Change (IPCC). Speaking benchmark was recommended by left with stranded hard coal, in Berlin one year later, Carney the IPCC and endorsed by the 2016 though not lignite, and gas-fired said that ‘climate transition and Paris Agreement. If this logic is power generation plants and laid green finance can help resolve’ this followed, then up to 80% of world off thousands of workers. But the looming tragedy. proven oil, gas and coal reserves combination of state subsidies Underpinning central Reactions to the Bank of would be unproduceable without and unlimited access to the power bankers’ concern about England statements ranged from expensive carbon capture grid for renewable producers climate risks is the ‘carbon bubble’ thesis, which states positive from the insurance and technology, left ‘stranded’, and lead irrespective of demand has led that the world must keep reinsurance industries to vitriolic to a collapse in the market value of at times to negative wholesale within a ‘carbon budget’– from capital markets players who all fossil fuel-based companies. electricity prices. The surplus the CO2 volume that may be emitted to avoid global blamed central bank policies of Proponents of this thesis claim passed free to neighbouring mean temperature from quantitative easing since the 2008 that this is comparable, but worse, Austria and Switzerland, but rising 2°C above pre- financial crisis for suppressing than the housing and sub-prime Germany had to pay for its industrial levels by 2050 – to avoid a catastrophic climate market interest rates, artificially mortgage bubble whose collapse disposal and consumers face ever change inflating asset prices, contributing was one of the causes of the 2008 increasing domestic retail power Source: Shutterstock to wealth inequality and creating financial crisis. prices.
12 Petroleum Review | February 2017 Low carbon future
Slow transition change are strongly exaggerated,’ could be illustrated by a series of London-based consultancy group he adds, ‘they are decades in the scenario analyses for different IHS Markit is another critic of the future and have been discounted in levels of global temperature rise carbon bubble thesis. In a series the stock markets.’ He believes that and emissions. These should of reports addressing the Bank of companies should be preparing for include political and technical England comments, Vice Chairman weather, not climate, risks. development as well as evolving Daniel Yergin and Analyst Elena physical and liability risks. Praventoni noted that there is Renewable investment drive IHS Markit was concerned that little risk of oil and gas companies Nevertheless, a combination this new disclosure framework being overvalued by any potential of shareholder pressure and would be a preface to more climate policy restrictions. sensitivity to consumers and regulatory action and that the Barring some as yet unrealised reputations is driving oil and gas unintended consequences of the technological breakthrough, no companies to invest in renewable disclosure framework are high. one expects oil to be a minority energy. Total hopes that within Risk analysts emphasise that any source of energy before 2050. 20 years some 20% of its portfolio kind of scenario modelling Energy transitions unfold over will be renewable or low carbon depends on the initial assumptions decades and do not constitute a business. Shell and Statoil are made by the researcher, usually on systemic risk to the financial investing heavily in wind power. the basis of past trends and system. In any case, they argue, China plans that 15% of its power information as well as personal some 82 global oil companies mix will come from renewables by prejudice. If the past is no guide to burned off 42% of their value 2020 and hopes to invest $361bn the future, as Carney points out, between June 2014 and December to that purpose. Even the Trump future climate trends can be 2015, or about $1.4tn in market administration in Washington is anything the analyst wants them capitalisation. In addition, the Dow unlikely to halt plans to expand to be. The upshot could be that Jones Industrial Average has risen renewables in many states where climate risk disclosure becomes a 6% since the oil price dipped below the industry is supported by the work of fiction. $100/b. local Republican Party, and federal But Andreas Spiegel, Head of It was puzzling, Yergin said, that subsidies for renewables are Group Sustainability Risk at the a central bank would identify this scheduled to end over the next five Zurich-based Swiss Reinsurance sector as a systemic risk when years. The most likely change by a Company, and a member of the there are more immediate and Trump administration would be Task Force, refuted this, saying that obvious risks such as mounting a withdrawal of the US from the the disclosure requirements are Asian debt, disruption of global Paris Agreement. not prescriptive. ‘The disclosures trade and cybersecurity. In are voluntary and have nothing to addition, not all financial Task Force report do with regulation.’ It is important regulators agree. Central bankers are not shifting to think in the long term. He views In a February 2016 report from their view, although their scenario assessments as valuable on climate risks by statements conflate climate, tools in dealing with decision Finansinspektionen, the Swedish weather and the atmosphere. ‘Once making uncertainty but the financial supervisory authority climate change becomes a clear scientific discussion about noted that the experts’ view of and present danger to financial attributing climate change to climate risks diverges widely and stability, it may be already too human activity is over. that taking action to reduce late to stabilise the atmosphere Tol believes that the whole climate risks creates risks of its at 2°C,’ Carney said in September move towards climate risk own. Faced with the prospect of 2016 in Berlin. Climate related disclosure is another form of successful climate change catastrophes are increasing in ‘greenwashing’ – appearing more mitigation policies on the part of frequency, the past is not prologue, environmentally friendly than government, fossil fuel companies and ‘the catastrophic norms of the reality – and a way of producing may be encouraged to exploit their future are the tail risks of today’. job opportunities for consultants. resources faster so that they do not The solution, he said, is to build In his view, most impacts of remain stranded. In such an a market in climate related climate change fall on poor people eventuality, fossil fuel prices will financial risk to enable a smooth in poor countries not rich people in fall but there is no certainty that adjustment to a low carbon rich countries. Today’s climate alternative low carbon energy economy, as well as corporate policies are about the enrichment supplies will be available at a low disclosure of climate related of the ‘happy few’, he says, adding: enough cost to make any transition financial risks. This was laid out in ‘It’s a kind of low level nepotism. economically feasible. Realistically, a December 2016 report by the The concept of systemic risk opens the transition risk to a low carbon Task Force on Climate-Related up job possibilities. Over 20–25 future could resemble that of Financial Disclosure, a division of years of European climate policy demographic and technological the Financial Stability Board (FSB) there has been no structural changes which can be significant that is a forum for central bankers change, no fall in emissions but but do not usually lead to a crisis. and governments of the G20 group has created a big diesel emission Human-induced climate change of major economies. It called on falsification scandal.’ The final FSB and its mitigation are fraught with companies to mainstream Task Force report on climate risk uncertainty, the report concluded. quantified climate risks in disclosure will be presented at the Richard Tol agrees, stressing obligatory financial statements. G20 heads of government summit that the magnitude of human These would include not just this year in Germany. It means that influence on the climate is a hotly current carbon footprints but also the central bankers’ move into disputed subject, the instrumental how these impact on existing and environmental regulation and its record does not contain enough future business lines, their politics has begun. ● information for reliable risk governance, management and estimates and that things can be corporate mitigation strategy, manipulated to a fraudulent financial planning, R&D, and degree. ‘The impacts of climate capital expenditure. All of these
Petroleum Review | February 2017 13 Low carbon future
emissions are expected to increase. FOSSIL FUELS Measuring and breaking down upstream emissions as a percentage of overall life cycle emissions indicates which reserves are the most energy-intensive to produce, and provides a clue as to What’s at risk? which reserves are likely to be stranded. Furthermore, when combined with data on reserve Stephen Russell, from the World Resources Institute, size, potential emissions can act as an indicator of the carbon intensity explains why fossil fuel companies should disclose the of future production. potential greenhouse gas emissions from their reserves Moving to disclosure as investors look to determine potential downside risks. Currently there is no requirement that companies report on factors that could contribute to untapped, their valuations could stranded assets and, as a result, decline steeply – that is, unless individual shareholders could these companies preemptively unwittingly be at risk. However, adjust their businesses strategies voluntary disclosure of these to avoid these risks, for example by potential challenges is on the diversifying holdings to include rise as investors demand more more low or zero carbon energy information about downside risk sources like wind, solar and in their investments, especially geothermal. fossil fuels. New analysis by Reuters shows that 48% of the Risk assessment world’s 4,400 largest companies If prices of alternative energy, report their emissions to investors including wind and solar power, and other stakeholders. continue to drop as expected, the This trend toward disclosure is financial incentives for extracting likely to continue as part of the existing fossil fuel reserves push for socially responsible To help prevent global ecause the value of fossil shrinks. Given the popularity of investing that has grown 10-fold warming it is estimated that over 80% of current coal fuel companies is based on clean energy across the political since the 1990s and continues to reserves will need to remain the size of their reserves, it spectrum, and the need for $90tn outpace other strategies. Investors unused through 2050 B may seem counter-intuitive to see worth of infrastructure investment are most concerned about the Source: Parolan Harahap some of these assets as potential over the next 15 years, it makes future performance of companies, risks. But changes in market or sense to aim that investment and data on potential emissions economic conditions can make toward low carbon projects. from reserves offer valuable some reserves too expensive to One way to encourage this kind information about a company’s tap, leaving them stranded – and of enlightened self-interest in future prospects. Climate their owners more vulnerable than investing is to help shareholders protection policies, like Canada’s the size of their reserves would and other stakeholders understand carbon tax, could affect the value of indicate. Even majors such as the risk of potential emissions to their assets and eventually profits, ExxonMobil are not immune – the fossil fuel reserves. so it is essential for investors to company recently announced that The connection between know the potential emissions so it no longer considers 20%, or 4.5bn potential emissions from fossil fuel that they can calculate the barrels, of its proved oil reserves reserves and climate change is expected liability. And now that to be extractable. This reduction substantial, with enough carbon climate change has secured a applies mostly to the company’s oil stored in untapped reserves to bust permanent slot on the world’s sands deposits in Canada, which the carbon budget, which is the priority list, policies to curb are expensive to extract and use, amount of emissions allowed emissions are destined to and therefore particularly sensitive before the 2°C goal is exceeded. propagate and strengthen. to dips in oil prices. The write- Preliminary analyses show that Investors have already down could be the largest single- the 200 publicly traded companies collaborated on a number of company revision in the history of with the largest reserves of oil, gas initiatives to standardise the the industry. and coal have enough carbon in disclosure of carbon-related data However, the high cost of their proved and probable reserves and make data more readily extraction is only one factor that to equal 156% of the carbon available in the fossil fuel industry can create stranded fossil fuel budget. This figure is based only on – and these initiatives are now assets. Another is the worldwide fuel burning and doesn’t count the likely to include potential accepted goal to curb emissions to considerable emissions from fuel emissions. By reporting potential keep global temperatures from production and processing. These emissions from their reserves, rising more than 2°C above upstream sources account for companies can reassure their pre-industrial levels. To realise this between 5% and 37% (an average investors that they are goal, an estimated one-third of all of 15%) of fossil fuels’ total acknowledging the emergence of oil reserves, half of all gas reserves emissions, from exploration to climate protection policies and and over 80% of current coal consumption. As the world’s market signals driving the world reserves need to remain unused conventional fields get depleted towards a low carbon future. through 2050. If fossil fuel and companies turn to fields that Alarmingly for investors, not a companies are required to leave a require more energy to extract, single fossil fuel company significant bulk of their reserves such as oil sands, upstream currently discloses potential
14 Petroleum Review | February 2017 Low carbon future
Figure 1: Upstream emissions are expected to increase as the world’s conventional fields become depleted and companies turn to more energy-intensive fields. Upstream emissions account for 5–37% of fossil fuels’ overall greenhouse gas emissions – to date, analyses of potential GHG emissions have not taken this into account Source: http://oci.carnegieendowment.org/ emissions from reserves. But that reaffirmed their resolve to push will already have much of the data could change. The Financial forward as well. they need. First, you start with Stability Board – made up of the 20 The private sector has heeded reported reserve quantities, which most powerful central bankers and the regulatory and physical risks represent the amount of finance ministries in the world – related to climate change and has hydrocarbons available for sale or recently called for companies to made significant strides to address transfer to downstream operations. disclose climate-related risks, both it. For example, more than 200 Then you adjust these quantities to financial and physical. companies have committed to set reflect losses or usage in upstream Part of the challenge is that science-based targets to curb production and processing until now there hasn’t been a emissions in line with the global operations, or activities that can consistent, credible methodology effort to keep temperature rise store carbon and reduce potential for them to calculate their under 2°C – including NRG Energy, emissions. This data offers all you potential emissions. To address this Wal-Mart, DuPont and other heavy need to convert to potential challenge, the World Resources hitters. In addition, 640 companies emissions, which then can be Institute (WRI) recently launched and investors have committed to reported in using a standardised the first comprehensive climate action through the ‘We template for disclosure to investors methodology to measure and Mean Business’ coalition. and other external users. report potential emissions from oil, Despite a decline in the price of gas and coal reserves. oil and gas, the shift to cleaner, At a nexus These trends are occurring zero emissions energy is underway Fossil fuel companies are at against a backdrop of dramatic and seems destined to continue. the nexus of two major trends. political change and a shifting Clean energy investment broke Governments around the world international landscape. As part of new records in 2015 and is now are committing to ever more the Paris Agreement on climate seeing twice as much global aggressive targets for curbing change, which entered into force in funding as fossil fuels. The desire carbon emissions, presenting November 2016, nearly 200 to bring back US jobs to heartland risks that some reserves will countries committed to states is already being realised in become stranded. And investors significantly cut their greenhouse states like Florida, Kansas and are demanding increasingly gas emissions and take other Colorado, where over 21,000 more information on emissions actions necessary to avoid the factory workers are making the to support risk analyses and worst consequences of climate majority of domestic wind farm investment decisions. Being change. Although US President components. The number one fast open about potential emissions Donald J Trump has hinted he is growing job in America this is central to how fossil fuel less than committed to the pact, decade? Wind turbine service companies respond. We expect the rest of the world has shown technician. The solar industry is that potential emissions data will steely determination to push growing fast as well, creating jobs become part of standard disclosure forward. California Governor Jerry at a pace 12 times faster than the practices, not only through Brown, who oversees the sixth rest of the US job market. government mandates, but mainly largest economy in the world (it So, how can a company measure because corporations will realise surpassed that of France last year), and report potential emissions the benefits of less business risk, has vowed that the state will not from their reserves? The WRI happier investors and a more back down from its aggressive methodology mentioned earlier is sustainable world. ● efforts to lower emissions and based on industry standards for tackle climate change. Other US estimating and disclosing the size states and major cities have of reserves, ensuring companies
Petroleum Review | February 2017 15 Low carbon future
INNOVATION
McConnell. ‘Whereas, the Europeans are moving more aggressively into this new market.’ Big Oil plans for a Historically, the majors have made similar moves in the past with varying degrees of success. BP’s ‘Beyond Petroleum’ campaign was launched with big fanfare low carbon future then quietly dropped. McConnell recognises there are risks on both sides of this pathway. ‘On the one hand there is the risk of moving Big Oil is under pressure to prepare for a low carbon too quickly or aggressively into a future. What are the risks and opportunities, and what new marketplace, which is traditionally not a comfortable initiatives are underway? Brian Davis reports. place for oil and gas companies. On the other hand, moving too slowly could miss an important window he Oil and Gas Climate new skills to be developed by the of opportunity. However, the Initiative (OGCI)*, including majors, mostly through joint biggest risk is to do nothing, and be T several of the world’s biggest ventures or acquisitions. left exposed to investors that make oil companies, announced plans Gas is seen as the prime up their own minds.’ last November to invest $1bn over transitional fuel strategy. Notably, If oil prices recover and the the next 10 years to develop low BP achieved the biggest increase in switch to a lower carbon demand carbon technologies to capture its share over the past year (2016), phase doesn’t materialise as and store greenhouse gases, reduce with its strategy to diversify into quickly as anticipated, ‘there is a emissions and improve energy gas value chains. While Shell risk of destroying shareholder efficiency (see Petroleum Review acquired BG. value and going down the wrong Dec 2016/Jan 2017). But this is only path’, warns McConnell. part of the picture. What is the Strategies for success Investment in renewables by the reality, given that each company Three different strategies ‘The majors are majors is still less than 2% of has its own agenda and initiatives are emerging – ‘decarbonise’, under pressure upstream capital expenditure. He underway? ‘capitalise’ and ‘grow’. ‘Decarbonise’ to de-risk their reflects: ‘It’s very small change compared to core oil and gas In a recent report (November is about looking at legacy oil and existing business 2016) on how oil majors are gas operations but doing it in a activities – none [of the majors] responding to the transition to low low carbon way by investing in models and has invested more than $2bn in carbon energy, Wood Mackenzie technologies like carbon capture diversify into this space in recent years, which suggests that up to 50% of the and storage (CCS). ‘Capitalise’ low carbon reflects a level of caution.’ While there is strong rhetoric on production of oil majors could be is about using the expertise strategies. hit by carbon costs in the next developed in the upstream sector diversification into renewables, the decade if legislators extend carbon and moving that into different However majors are yet to follow it up with pricing policy to the upstream business opportunities, such as diversification an appropriate scale of investment. sector. Indeed, new greenhouse gas offshore wind. ‘Grow’ calls for into renewables Total is the exception, with the acquisition of SunPower, a solar emission-limiting policies are investment in renewables by will be being considered across the world investing in companies involved panel manufacturer and a battery following the COP21 agreements. in solar power, energy storage and challenging as storage company called Saft. Wood Mackenzie anticipates new technologies which sit far returns from low The drivers for change are that natural gas and zero carbon outside usual oil and gas business carbon energies government policy and technology. ‘The policy component is arguably fuels will satisfy at least 60% of the competencies. lag far behind rise in global energy demand to For the most part, the majors less important than in the past, but 2035. Renewables could grow have embarked on different routes those in the technology (like electric vehicles) nearly 500% in the next 20 years, to achieve their chosen strategy or upstream sector.’ has matured much faster than 20 while coal and oil demand could strategies. years ago,’ says McConnell. peak before 2035. Total is the most ambitious (so Paul McConnell, At present only 15% of global Paul McConnell, Research far) and aims to have 20% of its Research Director emissions are covered by carbon Director of Global Trends for Wood assets in low carbon businesses by of Global Trends for pricing. The oil companies are Mackenzie, says: ‘The majors are 2035. Statoil has increased its Wood Mackenzie mostly using a shadow carbon under pressure to de-risk their exposure in offshore wind energy price to help value their assets existing business models and but it is still relatively small scale, internally, which ranges from diversify into low carbon with Shell on a similar path. The $6–$80/t. ‘That’s not to say that all strategies. However, diversification remaining majors are focusing on assets will be subject to carbon into renewables will be decarbonisation or using venture pricing, but they are certainly challenging as returns from low capital to spread their bets – which being risked as if they will be carbon energies lag far behind underlines the challenge of picking under some scenarios,’ says those in the upstream sector.’ He the winning technology. McConnell. ‘It remains to be seen maintains: ‘It will be difficult to ‘US companies are moving more how policymakers will expand the justify allocating already scarce reluctantly towards role of carbon pricing to cover capital into low-returning projects, decarbonisation, believing rightly upstream assets of the future.’ and transformation of existing that oil and gas will be a significant Meanwhile, CCS projects are not business models will not be easy.’ component of the energy mix for moving ahead as fast as McConnell stresses the need for the foreseeable future,’ notes anticipated. Shell has invested in
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CCS, but it has not yet been proven companies in the study losing an producer Sunpower and battery ‘Remuneration commercially and the cost will average 6% of their natural gas maker Saft. The company aims to of chief remain high for the foreseeable production through flaring, have 60% gas in its hydrocarbon executives in the future. McConnell says it is difficult methane venting and leakages. portfolio by 2035 and has set up ‘Responsible resource business units to address low oil majors is still to see CCS as a large-scale solution to excess emissions in the short management will affect demand carbon investment. orchestrated term. ‘Generally, we see strong for the sector’s products in their Shell’s acquisition of BG makes around growth in renewables but from a downstream use,’ says the report. it the only company listed to production levels very low base, and the growth In addition, 40% of onshore oil and produce more gas than oil. Shell gas upstream production is has also published pathways to net or reserve won’t be big enough or soon enough to offset the need for gas in currently located in areas of zero emissions and recently set up replacement countries where the move away medium or high water stress, a ‘New Energies’ division. It has metrics. Perhaps from coal is a priority.’ which could have implications for wind energy operations in the US, if they had some future financial performance. invests in biofuels, small hydrogen- There are three broad areas fuel initiatives and CCS projects. climate metrics In the pipeline In its latest report In the pipeline, which impact how companies are Shell has committed to spend or reserve- CDP (formerly Carbon Disclosure lining up for a low carbon future, $200mn/y on energy alternative energy Project) introduces a league explains CDP Senior Analyst Tarek solutions. replacement table for oil and gas company Soliman. ‘First is how much gas BP has the second highest gas companies have relative to oil in production, and has released a ratio taken into performance linking emissions- related metrics to earnings. The their portfolios, and how much oil ‘Faster Transition’ scenario for account on their report highlights those companies sands.’ European companies are world energy use which details energy assets as best preparing for transition to a significantly stronger in gas versus global peak emissions in the late well as low carbon economy. The highest oil than US operators. Another area 2020s. It has the largest alternative is spend on low carbon assets or energy business, including onshore hydrocarbons, ranked companies are Statoil, Eni and Total, while the lowest ranked alternative energy. ‘Here again wind in the US. that would give are ExxonMobil, Suncor and there is a noticeable Occidental performs best in more incentive Chevron. outperformance by European capital flexibility because of a bias to transform.’ The report shows a clear companies relative to US, from towards unconventionals. transatlantic divide, with European solar and wind power to biofuels Although it has no alternative Tarek Soliman, CDP majors coming out on top across and battery technology. European energy assets, the company is Senior Analyst most key areas. European majors’ companies are diversifying and involved in a number of CCUS portfolios have a higher percentage accumulating more assets in this projects for enhanced oil recovery. of gas relative to their American space,’ says Soliman. peers. Differing exposure levels to Thirdly, there is performance The big question ‘risky’ oil sands is further evidence. around climate change governance ‘A lot of people might question There is also a divide in terms of and strategy. European companies whether oil and gas companies climate governance and strategy. are outperforming North have the expertise to transform European companies are more Americans in climate policy themselves faced with a low active investors in alternative engagement to the extent that carbon future,’ remarks Fletcher. energy and low carbon technology, they integrate climate ‘But they have this option with like battery development and consideration into management their huge balance sheets that carbon capture, use and storage remuneration, internal use of enable an acquisitive strategy like (CCUS). But low carbon spend is carbon price and other initiatives. Total, for example. Others may like dwarfed by upstream capital CDP analyst Luke Fletcher also to see managed decline of their expenditure. For the 11 companies sees the oil major’s capex on low fossil fuel production, returning in the report with total capex for carbon initiatives as ‘a drop in the capital back to their shareholders. 2016 of about $160bn, only about ocean’ compared to E&P There’s a huge scope of options 1.5% is linked to low carbon expenditure upstream. But there available. In the past the majors investment. are signs of light. had a view of growth based on Current business models things like reserve replacement. continue to rely heavily on finding Key company focus That mentality will be questioned and proving reserves. The report Statoil has the highest percentage more and more.’ argues: ‘This resource-ownership of gas in its proved reserve base This also touches another issue focus is unsustainable and will and has increased gas production mentioned in the CDP report, need to adapt for low carbon in recent years. The Norwegian remarks Soliman: ‘Remuneration of transition. Traditional industry company has the lowest upstream chief executives in the oil majors is performance metrics such as emissions intensity, and has also still orchestrated around reserve-replacement-ratio and made recent commitments on low production levels or reserve reserve-life are potentially carbon energy, focused on offshore replacement metrics. Perhaps if outdated; with peak oil demand wind projects. they had some climate metrics or expected to occur in the coming Meanwhile, Eni’s future reserve-energy replacement ratio decade investors might reconsider potential production is dominated taken into account on their energy their importance.’ by conventional resources, but it assets as well as hydrocarbons, that Furthermore, the oil and gas has no oil sands production. Eni would give more incentive to majors face key short- and also has large gas projects on the transform.’ ● long-term strategic decisions to horizon, such as Zohr in Egypt, secure their future business which is due to come onstream *The 10 member companies that comprise the OGCI are BP, China National Petroleum models, rebalancing portfolios in later this year (see p4). Eni is also Corporation (CPNC), Eni, Pemex, Reliance coming years and considering committed to eradicate routine Industries, Repsol, Shell, Saudi Aramco, wider diversification or managed flaring. Statoil and Total. Together, they represent one fifth of the world’s oil and gas decline over the coming decades. Total aims to have ‘20% low production. Operational efficiency also carbon assets in 20 years’ and remains an issue, with the 11 recently acquired solar panel
Petroleum Review | February 2017 17 Low carbon future
INNOVATION On the radar
Low carbon power generation striving towards a low carbon is a large appetite for new and future.’ emerging technology in both technologies will continue to see major LR’s report is based on the nuclear and renewables. This investment and innovation – but more insights of the nearly 600 can partly be seen as an effect of executives and experts surveyed COP21, which nearly two-thirds standardisation is needed, according to across the low carbon industry, of respondents believe has had a new research, writes Nova Garabetian, from energy utilities and major impact by not only bringing distributors, through to equipment about carbon reduction objectives Marketing Lead, Low Carbon Power manufacturers. Respondents were but also highlighting the growing Generation, Lloyd’s Register. asked to rate a number of urgency around climate change. technologies in terms of their However, after cost, deployment potential impact on the low carbon continues to be seen as the major sector, the amount of time it would barrier to the implementation of n the wake of COP21, and take for these technologies to hit both nuclear and renewable despite suggestions of the market, and how likely they are technologies. Most respondents I wavering political commitment to be adopted once they do. identified themselves as ‘fast in some regions, low carbon According to the findings, the followers’ rather than ‘early energy continues to attract record innovations likely to have the adopters’, which reflects typical levels of investment. The latest largest impact in the short term project economics. Indeed, few Lloyd’s Register Technology Radar include: players can afford to take on the – Low Carbon report finds that risks that come with testing new a low carbon future is looking • Renewables – solar cell and emerging technologies, while increasingly viable thanks to technology securing sufficiently low technological advances and borrowing rates. • Energy storage – software and growing confidence across the (in the longer term) electrical sector. Who’s driving innovation? technology advances Research demonstrates Lloyd’s Register’s (LR) Energy According to LR’s research, the progress that has Director Alasdair Buchanan says: • Transmission and distribution manufacturing companies are been made in recent years towards a diverse energy ‘The research demonstrates the – smart grid software the richest seam of innovation mix that includes low progress that has been made in at present. Contributing to the • Nuclear – waste recycling carbon sources as well recent years towards a diverse report, Brent Cheshire, UK Country as innovative fossil fuel innovation technology. Through this energy mix that includes low Chairman of DONG Energy, combination, communities carbon sources as well as agrees and credits DONG Energy’s across the globe can enjoy innovative fossil fuel technology. The innovation context relationship with OEMs (original security of supply whilst striving towards a low Through this combination, According to those polled for the equipment manufacturers) as carbon future communities across the globe can research, innovation is gathering a key success factor. ‘If you are Source: Lloyd’s Register enjoy security of supply whilst pace across the sector and there a first implementer, you have to
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work closely with OEMs because A question of affordability down cost per unit.” The challenge the technology investment is As an emerging field, energy is that you have opposing not yours but theirs. So we have storage technologies are receiving regulatory regimes in different many iterative conversations with significant government support to parts of the world that operate them around costs, market and drive investment, development and against standardisation.’ pipeline size, in order to drive that adoption. But this is not a long- Serge Gorlin, Head of Industry investment.’ term solution and any successful Cooperation at the World Nuclear Policymakers and regulators did technology must eventually be Association (WNA), agrees: ‘For not feature highly as drivers of self-sustaining. For example, after almost a decade now, the WNA has innovation for any sub-sector. years of debate about subsidies and advocated a more harmonised Interestingly, renewables policy support, there appears to be regulatory system, so that the respondents highly rated utilities growing consensus that renewables whole process of reactor design as innovators, unlike nuclear are starting to pay their own way. evaluation, for example, in one respondents, perhaps reflecting the LR’s research largely reflects this, country does not have to be infrastructural challenges that with 70% agreeing that renewables repeated in another country.’ have been tackled to make are reaching cost parity with fossil Similarly, as power markets renewables sources viable. fuels. At the same time, nuclear, continue to move towards Energy storage is another area despite its cost premium, is seen decentralised generation, with a strong innovation agenda. by the majority as a necessary and governments need to encourage Players throughout the value chain long-term source of energy supply. innovation in grid infrastructure, to have an interest in seeing storage Development costs, however, are facilitate a pathway for alternative technologies reach maturity in still seen as the main barrier to low suppliers. order to harness the potential of carbon generation – 74% of The research demonstrates that low carbon sources. Governments renewables respondents and 61% of there are still major roles for have begun to recognise this, and nuclear respondents are of this government to play. Moreover, to encourage growth through opinion. On the renewables side, step back too soon could easily investment and policy. LR’s this is more strongly felt in the damage investor confidence and research highlights that energy Asia-Pacific (85%) and North reverse the progress that has been storage is seen across the sector as America (84%) than in Europe made to date. a major innovative force and one (61%). The Middle East is the region that is likely to have impact sooner least likely to consider cost a What’s next? as well as later. significant barrier. Instead, Middle LR’s research highlights that, Although many energy storage East respondents cite stringent although there is huge global technologies have yet to reach regulations as the leading obstacle. appetite for decarbonisation, maturity, what is unquestionable In Europe, cost is felt to be much this will only be translated is that the increasing mix of power less of an issue for implementing into outcomes if that appetite generation technologies has and nuclear technology than in North is nurtured by innovation and will continue to drive the growing America. Only 47% of respondents investment. Renewable energy need for large and small scale in Europe consider it to be the main sources, particularly solar and energy storage technologies, which barrier, compared with 80% in wind, have achieved vast efficiency are essential for the emergence of North America, 69% in the Middle improvements in recent years – a more dynamic and smarter East, and 58% in the Asia-Pacific. enough to compete with fossil fuels controlled distribution. To support Instead, the research indicates, and, in an increasing number of this, we are now seeing the European respondents feel that the cases, reach grid parity. The races emergence of an increasingly biggest barriers to progress are to capture new offshore energy complex array of technologies, public opinion (17%), too-stringent capacity and to build the next some of which will have profound regulations (17%) and deployment generation of solar panels have impacts on the energy landscape challenges (16%). inspired several new technological and society as a whole. breakthroughs. However, increased In the short term, according to Government role innovation around market the research, it is likely to be LR’s research suggests that many structures, regulatory frameworks, software advances that drive across the sector believe there transmission and distribution forward innovation in energy is more that governments and infrastructure, and energy storage storage, with opportunities to regulators could do to accelerate systems is still sorely needed to quickly enhance the performance progress towards low carbon integrate the new supply that has of existing systems and energy – and it is not limited to been created. infrastructure. Electrochemical subsidies, policy and investment. LR’s Buchanan concludes: ‘We storage technologies are felt to be For renewables, standardisation are really encouraged by the close to maturity, but are less likely has driven down the cost curve, research, but it also shows that to have as much impact as and facilitated the growth of none of us can afford to be innovations that have the potential solar and wind technologies. But complacent. Clearly, there is no to improve economies of scale of according to the research, this has single answer to the economic, existing batteries. In fact, the yet to happen to the same extent environmental, technical and social storage technology that in the nuclear sector, which has challenges facing today’s global respondents believe will have the held back deployment of innovative communities but, as the Technology biggest impact is electrical technology and, by extension, cost Radar – Low Carbon research shows, technology such as reduction. the combination of solutions supercapacitors, which will rapidly In the report, David Scott, presented by low carbon speed up charging times for large Executive Director of Economic and technologies and fossil fuels batteries. Amongst the Energy Affairs at the Abu Dhabi provides opportunities for real and technologies that are felt to be Executive Affairs Authority, says: sustainable change.’ ● least likely to have impact are ‘There’s been a cry for a long time thermal storage innovations and from people saying, “If we could For the full LR report visit info.lr.org/techradarlowcarbon mechanical storage innovations. just standardise, we could drive
Petroleum Review | February 2017 19 IP Week interview OPEC and the future
How do you see the role of OPEC in sources in the overall energy mix is a rapidly changing mixed energy expected to grow from environment? approximately 18% in 2015 to 22% For more than half a century, by 2040. OPEC’s member countries OPEC has remained steadfast in support this development, and delivering on its original mission many of them are already of acting as a consistent, stabilising benefiting from their own force in the energy industry, while bountiful renewable resources. acknowledging the interrelated This also supports their transitions issues of providing oil, promoting to more diversified economies. prosperity and protecting the As far as non-OPEC supply goes, environment. we see a decline during 2016 and Looking towards the future, oil 2017 due to recent lower oil price and gas will continue to play a very levels, but then a gradual increase Source: OPEC important role in supplying the to 2021. From the long-term world’s energy needs, making up perspective, we expect non-OPEC an estimated 53% of the global Mohammed Sanusi Barkindo, OPEC supply to continue to rise steadily, energy mix by 2040, according to reaching a high of 61.4mn b/d our recently published World Oil Secretary General, provides insight into in 2027, before dropping to Outlook. the role of OPEC and fossil fuels in the 58.9mn b/d in 2040. The outlook on global oil This all points to the fact that demand is also positive. It is future energy mix ahead of IP Week on OPEC will be needed to fulfill most estimated to increase from roughly 21–23 February 2017, at which he will of the additional long-term oil 93mn b/d in 2015 to over demand. For crude, this means an 109mn b/d by 2040. In relation to be giving a keynote presentation. estimated 8.9mn b/d between natural gas, demand is set to rise 2015 and 2040, and for all liquids, from around 350bn cf/d in 2015 to 12.6mn b/d. The share of OPEC 590bn cf/d in 2040. readily apparent in the decisions crude in the global liquids supply is This positive outlook, of course, taken at the end of last year by forecast to increase from hinges on huge investments being OPEC member countries, as well as approximately 34% today to 37% made to not only increase some non-OPEC producers, to by 2040. production from new areas, but adjust their production in order to At the same time, OPEC also to compensate for existing achieve oil market stability in the recognises the issue of climate fields on the decline. Between now interest of both producers and change and its potential threat to and 2040, an estimated $10tn in consumers. the environment. We welcome the oil-related investments will be COP21 agreement made in Paris in required, and for gas, roughly $6tn. What are the key challenges for 2015 where our member countries OPEC’s member countries are OPEC in the coming years given the played a valuable role in drafting ready to make the required rise of US shale gas and potential the agreement. OPEC remains investments in production, as well production from the Arctic and other committed to this process, which as research and development sources, coupled with moves towards can be viewed in its member (R&D), so as to ensure that the decarbonisation due to climate countries playing a full role at the future requirements of consumers change? recent COP22 meeting in are met in a timely and sustainable We see a future energy Marrakesh, and it will continue to manner. Over the past two years, environment that is sure to support the successful and though, the industry has seen have its fair share of challenges, comprehensive implementation of dramatic drops in investment due but it will also present many the Paris Agreement to ensure a to the fallout from the price crash opportunities. ‘win-win’ outcome for all. that hit the industry in mid-2014. One thing that you can count In this regard, we should also Spending on global oil and gas on, though, is that the world will remind ourselves that the Paris exploration and production need more energy in the coming Agreement is under the UNFCCC declined by around 26% in 2015, years to fuel a global economy that and should continue to be guided and an additional 22% decrease is is expected to more than double by its principles and provisions. In forecast for 2016. between now and 2040. Add to particular, the unique situation of Some have suggested that it is that the exponential growth in the developing countries should be possible that we may see a third world’s population, which is given the top priority it deserves. year of investment cutbacks, which forecast to expand by 1.7bn to would be unprecedented in the reach a staggering 9bn by 2040, How long do you see the oil price history of the oil industry. and it is clear that our work is cut remaining an effective tool for This is one record we do not out for us. change? And how has OPEC helped want to see broken. The fact is our To meet this demand, all forms return stability to prices and balance industry needs a steady flow of of energy will be required, to the market? ongoing investments to ensure the including a significant and In January of last year, the OPEC required supply gets to consumers increased contribution from Reference Basket price dropped in both the medium and long term, renewables, such as wind and to $22.48/b, a decline of 80% over and OPEC will be instrumental in solar. According to our World Oil the period since the oil price crash making this happen. This was Outlook, the share of non-fossil fuel hit in June 2014. It is the largest
20 Petroleum Review | February 2017 IP Week interview
percentage fall in the five cycles pledge from some non-OPEC is one of many cycles, both up and of sharp price declines we have producers to adjust their down, but it has always recovered observed over the past three production at a joint ministerial- and come back stronger. decades. This oil price decline level meeting between OPEC and a I believe there are many reasons exerted a severe blow on the number of non-OPEC producers in why we should be optimistic about industry, resulting in hundreds Vienna on 10 December. This the industry’s future. Firstly, it is of thousands of jobs being cut, underlined a shared and deep clear that oil and gas will continue investments being deferred or resolve to return much needed to be fuels of choice. And secondly, cancelled, and R&D, in some cases, stability to the market, and the I have no doubt that through coming to a halt. industry, as a whole. innovation, human ingenuity and With this in mind, it is technology, the industry will important to consider the crucial What are the key opportunities become more efficient, more relationship between prices, going forward? resilient and more nimble. This demand and supply. If these three Given the developments at the will enable it to continually factors are in balance, we will see end of last year, we will continue transform itself to overcome the the industry regain its footing and to work closely with our fellow challenges it faces, and unlock the begin to invest at adequate and industry stakeholders. This many opportunities before it in the necessary levels again to ensure includes further strengthening the years ahead. that future energy needs are met. consultations between OPEC and For example, many of OPEC’s However, if these factors remain non-OPEC oil-producing countries, member countries are embracing out of equilibrium, then we could as well as evolving existing and new opportunities to boost see further negative consequences developing new dialogues to help efficiency and innovation in their for jobs, investments and R&D. No better understand the challenges operations through one in the industry likes to see and opportunities we face. In this environmentally friendly carbon severe boom and bust cycles. These regard, let me stress that it is vital capture and storage initiatives, as are undesirable for all that we have open channels of well as enhanced oil recovery stakeholders. In this respect, both communication so that we are efforts to optimise extraction of oil prices levels and the volatility of able to take timely and pro-active valuable resources. prices are important factors. measures to ensure a balanced oil This is a great example of a Given that oil and gas will market on a sustainable basis. negative being turned into a continue to play a vital role in It is evident that the current oil positive. The cyclical challenges we providing energy in the years to market has presented our industry are experiencing at the moment come, we must continually focus with tremendous challenges, but have presented us with new on providing balance and stability we should remember that ‘tough opportunities to improve as an in the market. Achieving market times’ are nothing new for the industry, and we are optimistic stability is one of the main reasons industry. The story of our industry that a bright future lies ahead. ● OPEC was founded, and it will continue to be the central aspect of our strategy going forward. This was evident during the Events Book now second half of 2016 when it became evident that producers, as well as most consumers, began to EI Energy Policy Debates 2017 fully comprehend the gravity of the current oil cycle that began in Government’s Industrial Strategy - mid-2014. We saw extensive can policy keep up with the consultations with many OPEC energy market? ministers and non-OPEC ministers, as well as some heads of state and governments engaging in the process of rebalancing the oil market, and expressing their views EI Member on the need to see sustainable Creating an industrial strategy that rate only stability return. responds to the challenges of climate £30+VAT From OPEC’s perspective, this change and addresses the economic situation of a post-Brexit Britain is no small led to the landmark Algiers Accord endeavour. Our panel will review key Date that was agreed by all OPEC priorities and reflect on whether policy is 28 March 2017 member countries at the 170th still relevant to the energy market.
(Extraordinary) Meeting of the Location OPEC Conference in Algeria on Speakers London, UK 28 September 2016 and the historic Paul Massara, Chief Executive Officer, North Vienna Agreement, adopted on Star Solar More information Contact Francesca Ferrari 30 November 2016. The agreement Richard Howard, Head of the Environment & Energy Unit, Policy Exchange +44 (0)20 7467 7192 focused on the urgent need to [email protected] stimulate the acceleration of the Chair Michael Gibbons CBE FEI, Chairman, Elexon drawdown of the stock overhang, Sponsored by to bring the market rebalancing forward and ensure that much needed investments return to the industry. It all underscores OPEC’s continued commitment to stable markets, in the interests of both producers and consumers. energyinst.org/Energy-Policy-Debates What followed soon after was a
Petroleum Review | February 2017 21 Market prospects
OILFIELD SERVICES Anticipating sea change
scar Wilde once said: ‘We are all in the gutter, but some of How will the oilfield service sector emerge from O us are looking at the stars.’ the latest downturn to position itself for future And to some extent that sentiment must resonate with many oilfield success in a new world? ask Adrian Del Maestro, service (OFS) companies. The past Director of Research, and Craig Stevens, Senior two years have been a torrid time for the sector. With operators across Manager in Oil & Gas, at PwC. the global oil patch scaling back dramatically on upstream capex prepare for the ‘stars’? Here are just OFS companies, such as Siemens spend and deferring major projects, a few thoughts to consider: and GE Oil and Gas, who are the OFS sector has responded competing with the likes of by pulling the traditional cost Double down on innovation – Halliburton and Schlumberger. reduction levers in a downturn Innovation and R&D are at the These technology companies use – cutting capex and headcount core of the OFS business. Yet due to their experience in other industries massively, while minimising financial distress triggered by the and versatility to leverage digital operating expenditure. Margins oil price decline some of the major technologies to address remote have been eroded and many OFS OFS companies are scaling back operations and collaboration. Some companies are still in financial R&D spend. Compared to 2014 all OFS companies may do well to distress. The outlook looked grim. the big four OFS companies saw consider strategic partnerships Now, however, there appears to R&D spend shrink, as shown in with these new entrants to deliver be light at the end of the tunnel. Figure 2. Given the importance a whole new set of capabilities to With supply and demand seeking a of innovation, it is essential OFS operators (the proposed merger gradual equilibrium, the oil price companies protect investment between GE Oil and Gas and Baker has recovered a little. Among some levels in this core area. Moreover, Hughes is a case in point). companies there is a growing the technology demands of players confidence that perhaps we have in this environment will also Bridging the capability gap – The reached the trough. That said, if we influence the type of technology human cost of this downturn are poised for a potential recovery, being sought. It is unlikely cannot be over-estimated. it is likely to be uneven. advances in seismic technology According to some industry will have the scale of impact in estimates between 230,000 A brave new world beckons the market given the drop in and 350,000 jobs have been As companies emerge from this exploration spend and reduced lost in the oil and gas sector period of distress, the world activity compared to growing globally since 2015. Moreover, they operate in has changed demand for improved production the ability to retain and recruit dramatically since June 2014, as technology. new talent to the sector will be illustrated in Figure 1. Oil prices no rendered much more difficult. longer have a mythical ‘structural Explore partnerships to In our conversations with the floor’ of $100/b, with Brent hitting aggressively push ‘big data’ sector, some respondents noted a low of $28/b in January 2016. analytics – The innovation theme their biggest concern was the Operators are less ‘bullish’ and is broader than R&D spend. The lack of people and capabilities we see some retreating from sector has an opportunity to available to OFS once the upturn those challenging technical really push on data analytics. If materialises and this may stoke frontier plays, as well as reduced we look at the digital oilfield for the next cost escalation cycle. exploration activity. Saudi Arabia’s example, there are some pioneers Facing this significant capability role as the traditional swing in the industry but digital oilfields gap, what should OFS do? Clearly producer is being challenged by US have yet to take off. This is partly there is no single silver bullet but tight oil, a segment that has proved because the sector has been companies will need to consider a to be extraordinarily resilient. slow to adopt and deploy these range of strategies ranging from Meanwhile, the lifting of new technologies at scale. One the application of technology, to sanctions in January 2016 paved industry player described the pursuing partnerships with the way for the return of Iran, as it sector’s conservative approach to selected providers to outsourcing grew production. There is also the technology as ‘glacial’. To be fair services and operations and renewed momentum for a lower to the oil and gas sector, the risk improving workforce diversity. carbon world and a greater sense of catastrophic failure is a major of urgency post COP21 for the need reason why companies are wary of Reduce complexity of operations to decarbonise our energy system. rapid adoption. – Companies should review their Finally, we see a relentless focus on Nevertheless, with the business structure and operations cost reduction across the whole oil industry’s relentless focus on cost to reduce complexity. The value of and gas sector. reduction and the impact of digitisation has long been heralded headcount attrition and loss of but little real progress has been Preparing for a recovery capability, technology has the made in this area. Baker Hughes So, while OFS companies may still opportunity to succeed. is one exception, exploring the feel their feet are firmly planted in There are now new entrants in application of artificial intelligence the ‘gutter’ what should they do to the sector not traditionally seen as to manage back office invoicing.
22 Petroleum Review | February 2017 Market prospects
companies will also need to decide their optimal portfolio through the lens of their client base. As oil and gas activity picks up, OFS companies will need to have a view on the plays they will focus their efforts on going forward. This may have a number of dimensions ranging from geography, offshore versus onshore, asset type from gas to oil, and conventional versus unconventional, to potentially the type of corporate client from national oil companies to independents.
Working smarter – As we head towards a future, particularly in mature basins, dominated more by late life and decommissioning, it is clear that innovative solutions will play a greater role as upstream companies seek to minimise their decommissioning spend. Consortia of service companies providing Figure 1: Evolution of the global oil market – selected drivers Source: PwC Strategy& research packaged solutions through aggregation of skillsets could be Aside from digitisation, OFS management focus, are costly to the way forward. These solutions companies might consider business execute and may add complexity need only be ‘good enough’ to models where they share pools to the business. However, the ensure that the job gets done and of resources more effectively. In upside from well thought the inherent risk transfer from the same way Premier floated through and planned M&A can operator to service company is the concept of pooling back office be significant. For larger players minimised through intelligent functions across some operators a major M&A transaction can ‘demolition’ protecting both the in the UK North Sea, OFS might be be the means by which they asset and people. able to replicate a similar approach. can differentiate themselves Schlumberger and Halliburton quickly. Alternatively, companies Looking ahead already pioneer services and can explore limited ‘bolt on’ There is a sense that a balancing solutions that manage assets on acquisitions that deliver value of industry fundamentals is behalf of operators (respectively added services and capabilities in a approaching which should support called Production Management and region or technology. But given the a limited oil price recovery. And Integrated Asset Management). complexity of executing an M&A while we are unlikely to see $100/b This enables service companies to deal successfully, there are other prices returning in the near to optimise operations and innovate, options. Pursuing partnerships and medium term at least, a more while creating flexibility for the alliances with other companies robust price in the $60 to $70/b operator to release its own talent to develop capabilities is a cost- range should be realised in the and capital to redeploy to newer effective way to deliver added next few years. This will trigger and more prolific basins. services and perhaps may serve an increase in upstream capex as a precursor to a targeted M&A spending and broader activity Be mindful of M&A deals and deal. levels which, in turn, will improve know your future client portfolio This focus on portfolio the fortunes of the OFS sector. – The risk of any major M&A optimisation should not only be But this recovery will be uneven. transaction is that they distract viewed through the M&A lens. OFS Moreover, we are unlikely to witness a return to the boom period as prices recover. Operators are in cost reduction mode and are embedding a culture that ensures the business model is more resilient at lower prices. This will mean the OFS sector has to adapt its own business to this new reality. It is essential, therefore, that OFS companies maintain their focus on cost reduction, but with one eye on the future. Those players that can operate efficiently and profitably in the current environment, while investing in core business areas for future growth, will be the fittest to emerge from the turmoil and most likely to reach for the stars. ●
Figure 2: Decline in R&D spend for selected players, 2015 vs 2014 Source: Bloomberg; PwC Strategy& research
Petroleum Review | February 2017 23 Events Call for abstracts
4th biennial conference Human factors application in major hazard industries
This conference returns in 2017 to explore the Date practical application of human factors in the 17-19 October 2017 management of major accident hazards (MAH). The event will focus on two key themes: Location • Safety II - Safety as success not failure: London, UK exploring human factors in improving Deadline: performance rather than focusing on human Contact failure. Exploring human factors outside of Stuart King 27 February safety. +44 (0)20 7467 7163 2017 [email protected] • Good safety is good business: safety is the outcome of a well-managed process. Safety therefore goes hand in hand with good business. The organising committee is now inviting submissions for presentations to be given at this two-day event. Past clients include: Enter• your abstractRBS Mentor at: •energyinst.org/HF2017 Carillion Facilities Management • Co-operative Group • Emirates National Oil Company (ENOC) • Yorkshire Water • Nottingham City Council • EDF Energy • BT
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FINANCE
downstream oil and gas companies to varying degrees, depending on existing contractual feedstock Lower pressure arrangements. Smaller and midsize private operators especially, have been highly exposed in the weak operating environment. Dubai- on the Gulf based oilfield services company Shelf Drilling Holdings Ltd, for example, was downgraded twice in Shifting oil prices in 2017 should reduce Oil and gas companies have also 2016 to ‘CCC’ from ‘B’. felt the effects, although GCC Unlike the smaller private pressures on Gulf governments and government related entities (GREs) players, large government related producers. S&P Global Ratings’ Associate and national giants that are backed entities have, without doubt, been by government support have been better positioned to withstand low Director, Karim Nassif, explains. better placed to weather low oil oil prices – state-owned companies prices better than smaller private like Qatar Petroleum, Industries oil companies. Qatar QSC and International ast year, 2016, was tough for Looking ahead to this year, Petroleum Investment Company the global oil and gas industry. 2017, and the outlook for oil prices have all seen their stable credit L The Gulf Cooperation Council is more positive – which may bring ratings maintained in line with (GCC) region – comprising Saudi some relief for GCC governments their sovereign’s rating. Arabia, Qatar, Oman, Kuwait, and producers that rely on its Yet even large enterprises in the Bahrain, and the United Arab revenue. oil sector have begun consolidating Emirates – has been particularly in order to reduce costs and affected by low oil prices and lost Oil price repercussions improve efficiency. Most revenue, given that it holds nearly GCC oil and gas companies have importantly for credit quality, 40% of the world’s oil reserves. certainly felt the repercussions there has not yet been a trend for Indeed, government deficits are of the low oil price, including GREs to increase shareholder expected to average about 10% of a decrease in financial support distribution – which is key to GDP annually in Bahrain, Kuwait, for energy producers and delays underpinning credit rating Oman, and Saudi Arabia between or cancelations of many of the performance strength. 2016 and 2019. region’s infrastructure projects, In response, GCC governments previously a major driver of local Shifting financial markets have had to make rigorous efforts economic growth. Fiscal tie-backs, as a result of low to control expenditures and In 2016, S&P Global Ratings oil prices, have also led to a shift address growing fiscal challenges took negative credit rating actions in financing markets. While low- through increasing sector-specific on one third of the corporate and priced bank loans continue to be taxes, implementing cost-reflective infrastructure companies that it an attractive option for corporate tariffs, and cutting energy rates in the GCC region. Energy and infrastructure financing (loans subsidies. At the same time, subsidy reform across the GCC, as a proportion of total corporate governments have been forced to placed to deal with lower and infrastructure funding rose to source new creative methods of commodity prices and fiscal 90% for the first eight months of financing the region’s large deficits, has weakened the 2016 from 74% in 2013), it is likely infrastructure projects. operating performance of that access to affordable long-term funding is set to reverse as bank liquidity in the region tightens. Indeed, corporate loan rates from the days of stronger oil prices and large deposit inflows have not yet been repriced, contributing to competitive lending prices in the bank and corporate loan market. Moreover, with bank liquidity drying up, sovereign governments in the region have begun issuing large syndicated loans via international lenders to combat rising deficits. In 2016, Saudi Arabia issued $10bn in the capital markets, with Qatar issuing $9bn and Abu Dhabi a further $5bn. Figure 1 shows how GCC bond issues grew in 2016 compared to 2015 – most of this can be attributed to sovereign governments’ bond issues. Over the longer term, S&P Global Ratings recognises that GCC Figure 1: GCC capital market issuance, 2015 vs 2016. *year to 30 September Source: Standard & Poor’s Financial Services administrations may have to
Petroleum Review | February 2017 25 Market prospects
increasingly rely on more creative against oil price headwinds, pick up. Even at $50/b, shale methods of raising funds for S&P Global Ratings expects a production in the US is economical, infrastructure and utilities slight rebound in 2017. OPEC’s as demonstrated by the increasing financing due to still-low oil recent decision to cut production rig count and increase in hedge revenue income. This may come in by 1.2mn b/d in tandem with volumes this past year. the form of public-private a reduction of 558,000 b/d by Significant production cost partnerships, and bonds known as non-OPEC members, should bring deflation currently taking place in ‘sukuk’ – bonds that are structured the market closer to a balanced the industry represents another to generate returns to investors position and support higher factor in the coming year’s price without interest and, thus, are prices. This is also in the context assumptions. A decade of cost compliant with Islamic law. of expected oil demand growth inflation is drawing to a close Indeed, total GCC sukuk issuance projections of about 1.3mn b/d thanks to engineering (including corporate and for 2017, as reported by the optimisation, improved drilling infrastructure, financial International Energy Agency (IEA). efficiencies, and production cost institutions, and sovereigns) Accounting for these factors, reductions – especially in the once expanded to $9bn for the first eight S&P Global Ratings has increased high-cost US shale industry. months of 2016. its average oil price expectations Drillers, forced to improve More recently, Saudi Arabia- for 2017. Both Brent and West production costs due to low prices, based International Company for Texas Intermediate (WTI) are have introduced new drilling and Water and Power Projects (ACWA expected to average at $50/b in fracking techniques that have Power) issued its first senior 2017. resulted in more permanent secured sukuk for $1bn, to which However, because the OPEC production cost reductions. S&P Global Ratings assigned a agreement only lasts for six Because oil prices are expected preliminary ‘BBB-’ rating. This is months – and given that OPEC’s to rise as we move into 2017, the the first senior secured sukuk members have not always financial performance of oil and rating we have in our global complied with its agreements – the gas companies is expected to portfolio. oil price rise may curve and later stabilise. However, the However, as a relatively new slope back downwards. Nigeria and continuation of rising prices and financing tool, sukuk will require Libya, which are exempt from the hope for smaller private oil further standardisation to limit agreement, have already raised companies will depend on issuance costs which remain output since October, and will producers’ continued commitment higher than those associated with probably continue to post higher to mutually cutting supply in the conventional bonds. average production rates in the long-term. ● future, which will ultimately Rising global prices counter-attack OPEC’s cutbacks. Although oil companies and A price increase may also governments continue to brace encourage US shale production to
Events Call for abstracts
Asset 2017: integrity, ageing and life extension for oil and gas assets
Submissions are being invited for presentations Date at the EI’s next annual asset integrity October 2017 management conference. Location This year’s conference will explore the latest Aberdeen, UK industry strategies, best practice, research, Deadline: lessons learned and innovative thinking Contact Rebecca Richardson 10 April surrounding the wide range of issues that affect +44 (0)20 7467 7174 2017 oil and gas assets. [email protected] Key topics of interest • Corrosion Management • Ageing and Life Extension – including fatigue • Fabric Maintenance • Efficiency and innovation • Operational challenges and lessons learned
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European Union. Oil being traded in US dollars has shielded – and in some cases helped – London- headquartered majors. Meanwhile, in the UK, the decision by new Prime Minister Theresa May to move energy policy into the business department – resulting in the new Department for Business, Energy and Industrial Strategy – is seen by some commentators as welcome recognition of the strategic role the oil and gas industry plays in the country’s economy.
Silver lining Compared to the drama of the past two years, therefore, the current environment can be viewed as relatively stable, with the oil price settling somewhat in 2016. Most significantly in recent months, after an OPEC deal to cut production in member countries, struck at the very end of November, oil reached near 18-month highs of $55/b in a boon for producers (see Petroleum Review, December 2016/January 2017 issue, and this issue p20). Reasons to be Despite this the price remains well below the highs of early 2014, although in operating terms the low price has had one positive impact, the redundancies cheerful notwithstanding. While the North Sea was previously seen as one of the colossal impact the low oil the least efficient operating areas After a torrid few years which have hit price has had on how the sector in the world, the requirement to investment levels, there are reasons operates globally and in high-cost, adjust to a lower price has pushed less efficient regions like the North producers and explorers to become to believe that oil producers have Sea. leaner and more efficient. This can better times ahead, says Maarten van The actions taken by producers only be beneficial in the long-term, to adjust to the new ‘lower for particularly from the perspective of Wesemael, Head of Oil and Gas at longer’ environment – as BP Chief attracting investment to the UKCS. Lloyds Bank Commercial Banking. Executive Bob Dudley has memorably described it – are Attracting investment well-documented but have In fact, in our view there are generally entailed reducing costs currently a number of other by cutting investment and making reasons to be optimistic about he general thinking is that redundancies. In the North Sea, the sector’s ability to continue prices can’t collapse, prices investment, which was a record to attract investment from both ‘Tcan touch $60 or a bit £14.8bn in 2014, was expected to international majors and smaller, lower for some months, then come be about £9bn in 2016, according to newer players alike. back to an acceptable level, which Oil & Gas UK (see Figure 1). The first and most fundamental is $80/b.’ This comment, from an The Shell-BG deal, meanwhile, reason is the world’s ongoing and OPEC source quoted by Reuters in which was seen by some as a vote growing thirst for energy. We December 2014, exemplifies how of confidence in the sector, welcome the increasing focus of producers, buyers and corporates nevertheless led to a energy firms on renewables, were caught somewhat off-guard rationalisation of investment. particularly given the need to help by the oil price slump. The price, According to Shell, its capital combat climate change and the which had already dropped from spending was expected to be $29bn increasing scarcity of fossil fuels. nearly $100/b earlier in 2014 to in 2016 – a vast sum but, around This is reflected in Lloyds Bank’s $60/b, was about to experience an 40% less than Shell and BG commitment to funding renewable even more dramatic fall. By early combined invested two years energy across the UK alongside our 2016 the price had plummeted earlier. ongoing support of the UK oil and to below $30/b, while Goldman Nevertheless, after the tumult of gas sector. Sachs was warning that barrels the past two years – which has Nevertheless, as nations Now may be an appropriate could soon be selling for as little as even pushed some lenders out of continue to embrace renewables time for firms to review their options and investment $20/b. the sector – the oil industry can at and increase the share of energy strategies and, for some, to While this near-apocalyptic least take some solace in being produced by greener sources, oil raise finance prediction ultimately didn’t more insulated than most others demand is expected to grow to Source: Pixabay materialise, there is no doubting following the UK’s vote to leave the help support the rising global
28 Petroleum Review | February 2017 Finance and investment
demand for energy, driven in the main by emerging nations like the BRICS countries (Brazil, Russia, India, China and South Africa). Indeed, the International Energy Agency (IEA) predicts that demand for oil will continue to grow and may not peak until 2040, suggesting producers have up to a quarter of a century of robust prices to look forward to. With that in mind, oil firms are likely to remain an attractive ‘defensive’ stock for investors, particularly if the very largest continue their commitment to Figure 1: Investment in offshore UKCS, in $bn Source: Oil & Gas UK generous dividends; most commentators do not expect this to change. Meanwhile, those both private equity firms with decommissioning. The UK’s operators which look to increase experience in the sector and decommissioning relief deeds, their share of revenue from bespoke companies with the introduced by the Treasury in renewable sources are also likely to backing of funds in the hunt for 2013, have also proven to be be favoured investors, who view North Sea assets. effective in encouraging operators diversified income streams as a For example, Neptune Oil & Gas, to invest in maturing assets, while hedge against the potential of an acquisition firm backed by offering a degree of comfort to new future shocks – such as another oil Carlyle Group and CVC Capital investors who may be considering price drop. Partners and headed by former entering the North Sea market. Secondly, the monetary Centrica Chief Executive Sam environment in most rich Laidlaw, was created to invest in Risks remain but outlook optimistic economies, such as the UK and US, assets in key energy locations After more than two years of oil is particularly conducive to raising worldwide, the North Sea included. price instability and uncertainty, finance. Interest rates remain at This market is fuelled by a the global industry is now a very historical lows, making borrowing number of factors. For one, as different place. This has inevitably cheaper than the long-run average. already highlighted, these affected the behaviour of explorers Inevitably, larger, savvy players are investors are attracted by the and producers and changed how taking advantage of this – BP, Shell strong fundamentals of oil and gas investors view the sector. and Total have all issued bonds – robust demand underpinning Yet while risks remain – (denominated in US dollars or reliable returns. However, this is principally the oil price and, in euros) during 2016. These have also a buyer’s market, with many particular, how it is impacted by proved popular and attractive to of the oil majors putting assets up the actions of OPEC – there is a investors hunting reliable, for sale, either to raise cash, shed view that the industry is now more long-term yields. More bonds are non-core assets or pay down debt. stable and, certainly, more efficient. likely to be issued by oil majors in This creates an environment in The high oil price enjoyed for so 2017. which the key groups driving the long before 2014 arguably resulted In the UK market, demand has alternative investments – private in complacency among some also been boosted by the Bank of equity firms – can cut deals and producers, leaving them ill- England’s decision to include assets prosper. equipped to cope in the ‘lower for from the oil and gas sector in its longer’ environment. That bond-buying via its quantitative Some questions, some answers complacent inclination has been easing programme. This is further, The wildcard in oil and gas shaken, resulting in generally welcome recognition of the investment – and, again, leaner, wiser oil and gas strategic role played by the particularly in the North Sea – is businesses. industry – and particularly the decommissioning. According Now, therefore, feels like an North Sea – in the UK economy. to figures from Oil & Gas UK’s appropriate time for firms to Decommissioning Insight report, review their options and New kids on the block decommissioning is a growing investment strategies and, for There is also increasing evidence market in the UKCS, now some, to raise finance. With that non-traditional investors accounting for 5% of investment, evidence that the oil price is continue to eye up oil and gas up from 2% in 2010. Yet there settling and a benign backdrop in assets, especially in the North Sea. are still some questions to be which to raise funding, it may be As mentioned earlier, the region answered about who ultimately the optimum moment for is still seen as less efficient than foots the bill for decommissioning, producers and those in the supply international counterparts, with creating some uncertainty and, chain to invest in new areas and high costs offering the potential potentially, stymieing investment. push for growth. to make operators leaner – and (See also p30.) There is every reason to believe therefore more profitable. That said, there are encouraging – and hope – that 2017 will be a These ‘alternative investors’ signs which should act as turning point for the global oil and have been present in the North Sea incentives to investment in even gas industry. ● for a number of years now (and we maturing assets over the next have previously written about decade or so. For example, Lloyds them in the pages of Petroleum and other banks have worked Review). Yet they have increased in closely over recent years to develop number in recent years following tailored financial products aimed the oil price slide. They include at pulling funding into North Sea
Petroleum Review | February 2017 29 Finance and investment
DECOMMISSIONING The decommissioning
Decom Energy, the parent company of wholly owned subsidiary conundrum late-life operator Fairfield Energy. ‘They want to understand their liabilities and they want to plan for them differently.’ While the North Sea will present a challenging environment for decommissioning over the next 20 years, so too will other parts of the world such as the Gulf of Mexico, Africa and Asia-Pacific. ‘Decommissioning has been going on for a while, for example in the shallower waters of the Gulf of Mexico,’ notes Hem. ‘But it is deeper water installations and harsher weather conditions, such as in the North Sea, which will throw up the most significant challenges in the future.’
Higher North Sea costs This is in part a symptom of the way the oil and gas industry has developed over the past 40 years or so. First came easier pickings in a region like the Gulf of Mexico, A partial recovery in the oil price during gathering momentum, operators where around 4,000 mainly recognise that cost, timing and shallow-water platforms have been 4Q2016 did little to ease industry overall approach will all be decommissioned over the past 10 concerns over the vexing issue of important factors to securing years. Many of the remaining 1,000 future success. or so Gulf of Mexico installations decommissioning, writes Nick Cottam. will prove more challenging – Investing in P&A and more costly – according to ‘It’s an evolving market because so Hem and his team. Historical report by the Nasdaq-listed much is new,’ says Bjorn Hem, a decommissioning costs for rigs information company senior analyst with IHS Markit and in the region have been in the A IHS Markit predicts that one of the authors of the report. $500,000 to $4mn range, while spending on decommissioning ‘One area in which we see very in the North Sea where costs are projects will increase from around high costs is P&A (plugging and typically higher, decommissioning $2.4bn in 2015 to $13bn/y by abandonment). If you look at some budgets at the top end of the scale 2040. What’s more, Oil & Gas of the big projects like Brent Delta, are likely to reach $2bn and more. UK’s Decommissioning Insights typically around half the costs are ‘While North America is the 2016 report notes that the associated with [P&A of] the wells.’ largest market for decommissioning market in Innovation, according to Hem decommissioning, the European both the UK and the Norwegian and others across the industry, is region has the highest level of continental shelves has expanded essential in order to drive down offshore decommissioning from 2% of total industry spend project costs and make the task of spending, based on size and in 2010 to 5% in 2015 – and the plugging wells and dealing with volume of the structures being market is likely to exceed 12% of associated structures a less commissioned in the North Sea, spend in 2017. daunting one. ‘There will be a need including concrete gravity-based In other words, what has been a for more efficiency and more structures (GBSs),’ says Grigorij trickle of decommissioning spend specialist equipment,’ says Hem. Serscikov, Senior Manager for has every chance of becoming a ‘This is the way to bring costs Upstream Oil Gas at IHS Markit. Fairfield Energy has taken the unusual step ripple and then a wave of activity. down.’ of reinventing itself as a No wonder the issue is attracting Increasingly cost-conscious Decommissioning operator decommissioning operator, industry attention, not to mention operators agree with him. ‘The For its part Fairfield Energy entirely focused on winding up its North Sea Dunlin field a burgeoning portfolio of special downturn has been so long and so has taken the unusual step and associated structures reports, meetings and conferences. severe that operators are now of reinventing itself as a but also potentially looking According to the IHS Markit report, thinking about decommissioning decommissioning operator, at opportunities to work with other operators in the an extra 2,000 projects will be in a different way,’ comments entirely focused on winding future commissioned between 2021 and Graeme Fergusson, Managing up its North Sea Dunlin field Source: Fairfield Energy 2040. And as the wave keeps Director of the North Sea company and associated structures but
30 Petroleum Review | February 2017 Finance and investment
also potentially looking at industry needs substantial ensure this starts to happen as the opportunities to work with other investment from an innovation market gathers pace over the operators in the future. ‘We’re a and from an R&D perspective.’ This coming years. new type of operator,’ says Graeme is born out by the IHS Markit Fergusson, who leads Decom report which sees Net environmental benefit Energy but also sits on the board of decommissioning as a significant A key risk and potential cost as its Fairfield Energy subsidiary. ‘The operational challenge in a whole Shell and others will testify is HSE next phase for me is building a range of areas. (health, safety and environment) commercial model around what is – protecting the environment already a strong technical model.’ Finding the right security and keeping people healthy and Chairman Ian Sharp agrees that ‘This is quickly becoming a safe as you start to dismantle the company has an opportunity business priority for offshore these end of life structures. The by harnessing expertise and operators,’ says Hem. ‘Rig rates OSPAR convention, which has 13 know-how as a decommissioning have come down over the last few signatory states, puts the onus operator. ‘We set out to make this a years (from $700,000/d to around on the operator to dismantle and vibrant, exciting, committed $300,000/d) but you are still remove platforms and associated organisation to get this job done as talking about very high costs – and structures – although pipelines successfully as we could,’ he says. the more difficult the environment, are exempt. ‘In the UK a clean sea ‘Having made the decision to do the higher the cost.’ bed is the base case,’ explains Will this there have been no competing Glenn Legge of the US law firm Hazel, a Partner in charge of the priorities and we have been able to Legge Farrow puts Aberdeen office of international demonstrate to the relevant decommissioning into the ‘perfect consultancy ERM. ‘There’s a authorities that this has been the storm’ of increased regulatory lot of industry talk around net right decision for all parties.’ compliance and the lower oil and environmental benefit, although What sets Fairfield apart, gas price – plus the need to sort what that actually means for certainly for the moment, is its sole and manage assets in some of the different projects can be open to decommissioning focus. When the world’s deepest waters. ‘This debate.’ oil price started to fall back in means more investment and more What it has meant in parts of 2014, the company moved quickly security to acquire assets,’ he says, the Gulf of Mexico is turning to cease production from its 45 noting that in contrast to the North certain rigs into artificial reefs platform wells plus a further 16 Sea: ‘There’s no tax payer bail-out which can benefit the environment subsea wells and associated in the US. You must provide the with the formation of a new infrastructure. The prime aim, right security assurances to ecosystem and avoid the cost of says Sharp, was to turn government agencies.’ One option, wholesale dismantling and decommissioning into a positive he believes, could be tapping into disposal. While this may appear to move, keeping a confident the London insurance market with run counter to OSPAR in terms of organisaton together and presumably an insurance product total clean-up and removal, Ian garnering new skills as they were introduced to cover excessive Watts of Forum for the Future asks needed. At this stage neither Sharp decommissioning costs. the question: ‘What is the natural nor Fergusson are prepared to put Tom Walters of the environment when a region such a price tag on the work involved international law firm HFW as the North Sea is already totally – suffice to say that they will be believes that standardising the transformed by human activity?’ working in line with the UK Oil & different types of contract between Another factor, he says, is whether Gas Authority’s (OGA) strategy to different parties would help to some of the money saved by reduce individual project costs by drive down costs – going some way turning rigs into reefs could be up to 35%. towards meeting the OGA target used for conservation and to help ‘You start, you get in, you learn for the North Sea. ‘There needs to communities which are going to and you apply new technologies as be better risk allocation,’ he says, lose out once the oil activity ceases. appropriate,’ says Sharp. ‘The unit ‘between the operator, the costs are starting to come down contractors and the marine salvage A new mindset but this particular phase of the operators.’ Cost pressures should Beyond North America and Europe, we must look to countries such as Angola, Nigeria, Australia, Brazil and Mexico for a sharp rise in future decommissioning spend, notes the IHS Markit report. In facing up to the decommissioning issue a country such as Brazil, for example, has yet to put the appropriate regulatory structure in place. $mn Operators must prepare themselves without knowing quite what will be required of them. Even in the North Sea, where cost and approach are now an urgent focus, ‘we need to change the technology we use and we need to bring a new mindset to the market’, says Fairfield Energy’s Sharp. Changing your company into a decommissioning operator might well be a step in the right Figure 1: Decommissioning spending by project type Source: IHS direction. ●
Petroleum Review | February 2017 31 Supply chain management
TECHNOLOGY Oil price slump boosts logistics innovation
But for the oil and gas industry, will continue to force greater which is still a decade or more collaboration within the industry behind these other industries to maintain innovation. Almost when it comes to the supply chain, half of upstream companies are there is much catching up to do. understood to have increased The oil and gas industry’s standardisation. This is an supply chain – which links area where the DNV study has exploration, production, refining, identified ‘vast’ opportunities marketing and the consumer – is a across the value chain, from data global one. It includes both collection to design, drilling and IT. domestic and international Getting to grips with the Companies are increasingly looking to transportation, as well as ordering various supply chain management and inventory visibility and challenges within the oil industry, supply chain management processes control, materials handling, in what is still a fairly low price to improve their bottom line. Nnamdi import/export facilitation and environment compared with five information technology (IT). years ago, is difficult. Bank of Anyadike reports. Inevitably, there are several Scotland (BoS) research suggests strategies for improving supply that a worrying number of North lobal oil prices are now well chains in the oil and gas sector. For Sea oil and gas companies appear on their way to recovery, example, companies may choose to to be looking towards G having ended 2016 above become fully integrated and own implementing staff layoffs and $50/b for the first time in two all the value adding steps in the other short-term cutbacks as the years. There is also every prospect production of their product. Or as preferred means of reducing their of a sustained $70/b oil price an alternative they may plump for costs in 2017, rather than level being achieved in 2017. The outsourcing, whereby some introducing greater supply chain oil price decline that began in aspects of the product-service efficiencies. In response to a query 2014 forced many oil companies bundle are contracted out to third on how they plan to meet the cost to reconsider the way in which parties. Whatever the strategy, the challenges in the North Sea over they organised and managed goal of supply chain management the next 12 months, ‘making their supply chain and to adopt (SCM) must be to provide day-to-day operational efficiencies’ enhanced logistics. However, maximum customer service at the such as staff cuts came ahead of the oil price recovery is unlikely lowest cost possible. Because cost is ‘rationalisation of the supply chain’ to mean that supply chain and the common issue facing all the in the BoS survey of 141 firms. logistics restructuring by the oil complex links that involve Among the report’s key findings, industry will be rolled back or shipments of widely diverse over half of the companies placed on the back burner. On the equipment from pipes, valves, surveyed have already cut jobs. contrary, supply chain innovation cranes, chemicals, cement and steel However, investing in the is arguably more important now to drilling rigs. supply chain is a far more cost- than ever before. effective strategy when operating Last year, 2016, proved to be a Cost-cutting strategies in a period of price uncertainty, critical year for the oil industry. It Moves that were begun in 2016 rather than simply slashing the was the year when all sectors, from have largely been positive. company payroll. At the recent the upstream through to the Research carried out by DNV ‘Intelligent Energy’ conference in downstream and retail, finally GL showed that cost reduction, Aberdeen, speakers from Shell, began to look in earnest at other including in the supply chain, ConocoPhillips, Chevron, BP and similar sized industries for was the top priority for oil and IHS Cera’s Upstream Group, spoke examples of where it should be gas companies. The supply chain of the growing realisation within heading. Comparable industries is understood to have accounted the industry about the important such as retail and defence all take for 10–15% of the total 20–30% role of digital tools in achieving advantage of technologies such as average costs reductions for cost-effective results and the internet of things (IoT), operators in 2016. This continues enhancing supply chain automated asset tracking, 3D the trend from the previous year performance. Greg Hickey, Digital printing and predictive analysis. when almost three quarters of Technology Operations Advisor, BP They are now reaping the rewards companies in the sector said Upstream Technology, said that BP LNG tanker at the Karratha gas plant loading terminal, of standardisation, simpler that they had had some success is now on a journey to ‘transform Western Australia processes, more efficient in reaching their cost cutting and modernise’ its upstream Source: Woodside Energy operations and tighter cost control. targets. This year, cost pressures business. This involves ‘pursuing a
32 Petroleum Review | February 2017 Supply chain management
manufacturing ethos more than of booking slots rather than hiring that into a core reporting platform.’ we have in the past’, he noted. He them for long-term periods. The effect on Murphy’s SCM is added that it also means ‘driving already transformational with down costs, standardising the way Enhanced software is key respect to its upstream operations work is done, and eliminating But for a SCM overhaul to be truly management – forecasting, non-value adding activity’. effective enhanced software is the planning, production allocations, One area where BP is expecting key. An example of a company that procurement and maintenance. to make supply chain efficiencies is has managed to overhaul its supply An immediate benefit has been with the use of innovative process chain through a new software helping purchasing managers technologies. Today, BP uses implementation is the Arkansas- identify ways to reduce inventory, platforms like GE Predix to process headquartered Murphy Oil without cutting it back to the point data that is sent every few seconds Corporation. The company carried where there are expensive service from the 50,000 offshore sensors out a software implementation interruptions. The inventory can that are fitted on platforms – an covering ERP (purchasing and now been seen by company staff example of industrial IoT in action. supply chain), accounting and on a global basis, thereby allowing ConocoPhillips’ priority, business management, in less than them to look for more ways to meanwhile, is to move towards six months. The implementation optimise it. As a result, Murphy ‘lean manufacturing’, with the commenced in July 2015 and went now has something similar to a elimination of waste and the live in January 2016. The software manufacturing ‘just in time’ development of ‘integrated included cloud-based Accenture system for upstream. Orr says that operations’. David Boyle, UK Upstream Direct on the SAP HANA typically, if a company can save Operations Manager, platform, and SAP Ariba and SAP 5–10% of its purchasing costs from ConocoPhillips, said the company’s ‘Success Factors solutions’. The the software, this is sufficient to integrated operations project has roll-out covered its worldwide cover the costs of the software already led to big improvements in operations. Commenting on why implementation. production efficiency and Murphy elected to undertake this Over the next 10 years, the oil equipment uptime. As a result of expense at such a challenging industry’s supply chain will benefit better planning, the company can time for the industry, Mike Orr, IT from having fewer people and now make more efficient use of its Director of Strategy and Planning more technology. The more routine vessels, and through savings it has at Murphy Oil Corporation, said: transactions will be automated managed to remove one supply ‘We were in quite a bit of pain and employees will be spending a vessel from its fleet. Unplanned as an organisation. We had bigger proportion of their time shutdowns have also been reduced 64 different software systems working to reduce inventory, from about once a week to every and each country had its own optimise spending, and working four to five weeks. Recently, the ERP system. We were doing on the more complex transactions, company sent a team to visit the consolidation gymnastics at the which Orr says ‘will probably run UK F1 car manufacturer McLaren end of each month trying to get on the cloud’. ● and to Vodafone’s office in the Netherlands to get cost-cutting ideas from different industries. Training Book now For Shell, the focus is on making sure that it has adequate measures in place to enable its supply chain to provide logistics efficiencies even during a period of an Oil and gas: extended oil price downturn. Shell Upcoming courses VP Production Excellence Producing Assets, Johan Atema, said that the company is now preparing for a ‘lower for longer’ scenario to make sure it can be profitable at $20/b or $40/b oil Portfolio management of oil and gas assets prices. Two years ago, he said, the 14-17 February 2017; London company was making business This 4-day course verses delegates in portfolio plans around a $60/b to $80/b oil management from theoretical and practical perspectives price, ‘now we just don’t know’. applicable to assets from along the oil and gas supply Shell is looking to take a leaf out of chain. other companies’ supply chain successes. Among the companies it is looking to is Amazon, from which Fundamentals of oil and gas exploration Shell is hoping to learn lessons and production about maintaining continuous 21-23 Febraury 2017; London improvement and providing effective tracking information This 3-day course familiarises delegates with key materials. Shell’s upstream sector is upstream technologies, processes and facilities for also learning from the group’s finding and exploiting unconventional oil and gas downstream operations, which resources. have always been run on much tighter margins. Another oil major, Chevron, is concentrating on improving workflow and the way it works with suppliers. It has restructured the way that it leases energyinst.org/o&g-training helicopters and moved to a system
Petroleum Review | February 2017 33 EI technical
FUELS Diesel filterability issues
The Energy Institute (EI) has published a new test method to predict filterability issues in diesel – IP 618 Cold Filter Blocking Tendency (CFBT). Ian Mylrea, Chair, EI Cold FBT Task Group, reports.
correlation was shown between cold days in the UK and the number of vehicle breakdowns, with overnight minimum temperatures below 3°C causing a significant rise. The technical report put together after the workshop, CEN/ TR 16982:2016 (E) Diesel blends and fuels – Cold filterability issues, was published in September 2016. Source: Pixabay During the proceedings Cold Filter Blocking Tendency (CFBT) was introduced, where tests similar to reviously in Petroleum voluntary measure over the winter IP 387 Filter Blocking Tendency Review (January 2014), period, to provide further quality were carried out at a reduced P the Energy Institute Test assurance. In 2015 this limit was temperature. Amongst other data Methods Standardisation Sub- formally introduced into the presented, CFBT results from Committee B reported on the national annex of BS EN 590 and various fuels from UK service proposed test method Cold Soak applied during the winter. The stations containing FAME from Filter Blocking Tendency (CSFBT) year-on-year figures for 0.7% (V/V) to 3.7% (V/V) showed designated IP PM-EA/13, which breakdowns due to filter blocking good differentiation between fuels had been developed in response appear to have reduced as a result, over a range of temperatures from to filterability issues experienced although other variables, such as –1°C to +20°C. in the field. It is well known that differences in winter temperature Other fuel data demonstrated when diesel fuels, containing fatty conditions, have also played a part. correlation with the BSI Filter acid methyl esters (FAME), are However, despite this positive Blocking Task Force Freezer Rig cooled for extended periods solids outcome, the number of experiments in most cases, and may form. These are typically breakdowns is still above the norm whilst preliminary, there was saturated mono-glycerides (SMG) experienced during previous cautious optimism that a rapid and sterol glucosides (SG), which winters and summer months. small scale cold FBT test might be do not dissolve when the fuel is feasible as a standardised method. warmed. Raising awareness At the conclusion of the The standardisation of IP To raise awareness and focus workshop it was agreed that the PM-EA, which was for B100 current thinking, the CEN Distillate CEN Distillate Fuels Specification (biodiesel) and BX blends (where Fuels Specification Working Group Working Group should support the ‘X’ represents the percentage of (CEN TC19/WG 24), the group formation of the EI Cold FBT Task biodiesel in the fuel blend), has responsible for the European diesel Group in developing a new low been difficult due to variability in specification (EN 590), organised temperature filterability precision during multiple a filter blocking workshop, which performance test. The EI Task European pilot studies carried out took place in London in June Group met for the first time in by the CEN Total Contamination 2015. In the introductory remarks July 2015. Working Group (CEN TC19/WG31). it was stated that ‘a wide range Winter issues have continued and of vehicles’ was ‘being affected Proposed test method there have been an abnormal in several European countries’, A proposed test method, IP PM-ES, number of light duty diesel vehicle and that ‘there is a possible link was published in January 2016. breakdowns, specifically due to with base diesel quality, FAME The procedure uses 750 ml of fuel fuel filter blocking. Many experts composition, cold flow additives which is prepared at ambient consider this to be a complex issue, and oxidation stability effects’. The temperature. The CFBT apparatus which is not only related to the workshop discussion went on to pumps the fuel sample through fuel, but also to the design of describe experiences in the UK, a heat exchanger which cools it vehicle filtration systems. Sweden and Italy, and offered some to +3°C, before it passes through In 2014 the FBT test method technical insights into the work a filter which is also held at (IP 387) was introduced with a done so far to try and understand +3°C. The differential pressure is maximum ratio limit of 2.52, as a the issues. In particular, a clear measured between the filter and
34 Petroleum Review | February 2017 EI technical
the atmosphere and if particulates was agreed to schedule an training was provided by build up on the filter, the pressure inter-laboratory study (ILS) in 2016. Stanhope-Seta, the manufacturer increases. When the final pressure Discussion regarding the need for of the test apparatus. The revised reaches 105 kPa the test stops, or the cold soak step was finely IP PM-ES/16a was published if the pressure never reaches balanced. online, with feedback provided 105 kPa then the test is deemed to One objective was to try to from the workshop. be complete after 300 ml of fuel reflect real world conditions to the The ILS took place during July has passed through the filter. The greatest extent possible, whilst and August 2016, consisting of a result is calculated for CFBT(3). appreciating obvious practicalities number of winter grade base The temperature is adjusted to in the supply chain for a test which diesels from different UK sources, –1°C and the process repeated on a would take over 20 hours, if a cold and included imports from the US fresh portion of the same sample, soak was included. As such it was and Europe, mixed with FAME to give a result for CFBT(–1°C). As decided to include both CFBT and derived from soya, rapeseed, tallow such the two results provide a CSCFBT in the proposed ILS. A call and used cooking oil (distilled and useful insight into the filterability to industry was made, via UKPIA non-distilled). Saturated behaviour of the fuel at lower and the BSI Liquid Fuels monoglycerides were added to one temperatures. If both results are Committee, which resulted in nine sample to the maximum allowed high and similar then the fuel may companies agreeing to take part. UK winter level of 55 mg/l and contain elevated levels of The apparatus was supplied to from the ILS data the EI statistician particulates. If both results are low, participants in April and May 2016, calculated the precision for both then fuel is clean. If the –1°C result and an Energy Institute SC B-5 Cold FBT (CFBT) and Cold Soak Cold is much greater than the +3°C CFBT Task Group Workshop was FBT (CSCFBT) at –1°C and +3°C. result, then it shows some held at Essar Stanlow Refinery/SGS IP 618 Cold Filter Blocking temperature dependence of the Thornton Lab on 26 May 2016. The Tendency was published in October fuel – eg to generate particulates EI workshop was deemed a big 2016, a little over one year from the upon cooling between these success and was very well attended first meeting of the EI Cold FBT temperatures. by ILS participants, industry Task Group and can be downloaded Initially published online, the IP stakeholders, the Department for from the EI website http:// proposed method included Transport, TMS Panel Members publishing.energyinst.org/ preliminary precision gained and the convener for CEN TC 19 ip-test-methods during a pilot study using three Working Group 24. Presentations The groups’ work, however is sets of apparatus and 10 samples, were made on the background to not over and is now being directed for CFBT, and contained an the development and the key towards developing a test additional procedure on how to issues. The meeting was a final procedure for B100. In the cold soak the fuel, if required. The opportunity to comment on the meantime, industry has another initial precision was similar to test method and protocol in tool in the box to try to understand IP 387 (the ambient FBT test) and it advance of the ILS. Hands-on winter filterability issues. ●
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EI Evening Lectures 2017 Oil and gas: Upcoming course Energy for transport – a double industry transformation
The energy system for transport has Registration been fairly simple to date, but new is free Oil and gas fiscal designs and systems influences are driving change. These 4-7 April 2017; London are likely to result in a more complex future, with several trends already This 4-day course focuses on the economic, negotiation discernible. Date and operational management issues associated with the 28 March 2017 The vehicles industry is facing more comprehensive range of licence agreements encountered change than it has for many decades, in the upstream oil and gas industry. Location at a time when the energy sector is London, UK also undergoing transformation. This The many issues, going beyond just the fiscal terms, talk will explore this dynamic picture, More information that must be considered when negotiating licence drawing conclusions about the future Contact Francesca Ferrari agreements are identified and reinforced through team of energy for transport. +44 (0)20 7467 7192 exercises. [email protected]
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