“A blind horse should be slow.”
“Driving at 600 mph is certainly never the fastest way to get somewhere.”
- Mixing some metaphors from Principia Politica by Nassim Nicholas Taleb
Avoiding the news is good for one’s mental health, and sadly this fact has even engulfed energy news. What used to be a decent, business-like and relevant flow of energy happenings, developments, and price conjecture has turned into a muddled cacophony of emotion. It has been this way for a while, but we are now in a demented outward spiral, like a crappy merry-go-round oscillating unevenly, faster and faster, and you know the whole thing is going to fly apart, but the addled teenaged operator is trying to impress the girls and keeps cranking it up.
Here are the bookends of the manic news flow. Then, as an antidote, follows a bit of food for thought on where we are, and where all this madness might go. Might.
To start, it is worth defining the energy transition that is underway. Definitions are helpful, because there are actually two ‘energy transitions’ underway, which explains part of the chaos. One is a wish list, the transition that is flowing from the UN and the segment of society that is terrified about the state of the world due to climate change and pushing for immediate and severe change (influential California climate activist Peter Kalmus, commenting in an article called The Climate Crisis is Worse than You Can Imagine. Here’s what Happens if you Try., describes nightmares about being on a plane: “The emissions, you know…it feels like the plane is flying on ground-up babies to me.” Says his inexplicably still-present wife: “We find it difficult to understand each other on this topic.” To his credit, Kalmus walks the talk – he limits flying, grows some food, and has set up an outhouse that his family refuses to use, where he can be alone with his…conjecture.). The energy transition being envisioned by this segment of society is, as you might imagine, rather abrupt. They view fossil fuels as leading rapidly to “the collapse of civilization and the deaths of billions of people.” (Kalmus, same article.) This energy transition is not an engineering issue; it is a moral imperative that unequivocally must happen, and right now. It is not a graceful transition; it is a revolution requiring massive government intervention and legislated change (such as banning internal combustion engines), and a rewiring of the way we live.
The other energy transition is equally personal, equally imploring and ironically looks to rewire the way several billion people currently live also. It might best be embodied by this quote from NJ Ayuk, Executive Chairman of the African Energy Chamber: “As I have stated in the past, demonizing energy companies is not a constructive way forward, and ignoring the role that carbon-based fuels have played in driving human progress distorts public debate. We cannot expect African nations, which the Global Carbon Atlas tells us together emitted a seventh of China’s CO2 output last year, and a fourth of that of the United States–to undermine their best opportunities for economic development by simply aligning with the Western view of how to tackle carbon emissions.” (Mr. Ayuk is not alone; green titans in the Biden administration recently asked OPEC+ for more oil, and California is very (very) quietly building new natural gas power plants, for, well, blindingly obvious reasons.)
In the middle sits the hydrocarbon sector, wearing disguises and/or helmets and/or makeshift shields before venturing out in public. While few outsiders might believe it, the industry is actively searching for every possible way to reduce emissions and come to up with carbon solutions, while at the same time facing the undeniable reality that flat production requires new wells, and that the world really, really wants a steady supply of oil and natural gas (Biden’s crew included). This hydrocarbon camp is somewhat diverse; some are old school and awaiting the return of ‘the good old days’; they see no reason to do anything but bide their time awaiting the next oil/gas boom. But that number is dwarfed by those working to integrate new green technology solutions into the existing oil/gas infrastructure. Hard-core doubters won’t believe this of course, but it does take purposeful ignorance to not to even notice, say, major oil sands companies banding together to build a carbon trunk line.
Each of these camps is well populated. Each has ardent and vocal supporters. The general public has a headache.
What to do?
I can’t speak for the Kalmuses of the world; the terror they feel does not come naturally to me, not for climate and, well, not for anything.
I can’t speak for the Africans of the world; I do not know what it is like to live in a developing economy that may finally see a light at the end of the tunnel, and may finally have hope in their ability to elevate their standard of living by eliminating Energy Poverty – by whatever means are reliably available.
I can’t speak for the hydrocarbon sector either, I’m no leader, but, after three decades embedded in it, can maybe offer some insight into where we might go from here.
As a start, it is wise to recognize the level of pressure that is being put on the world’s governments to act on an energy transition. It does not matter where this pressure is coming from, who funds them, and why. What the petroleum industry needs to focus on is that it is real. Globally speaking, investment in hydrocarbons is going to be an uphill battle. Yes, China, the Middle East and Russia are exceedingly clever and looking to corner the market on hydrocarbon development (China’s Belt and Road Initiative includes massive investment in African oil/gas pipelines right down to the southern part of the continent – a very long way from Chinese HQ and new Chinese refineries; Russia is investing $230 billion in an arctic oil development program, etc.), but these investments will not keep up with global demand for hydrocarbons. To keep global production flat requires hundreds of billions every year, and capital is becoming ever more scarce.
The combination of restricted hydrocarbon capital and sustained global demand mean higher oil/gas prices are highly likely.
For North American producers, this will most likely mean a cash windfall of epic proportions, which we have seen before, but this time it really will be different. In booms gone by, the extra cash flow would have been supplemented (to put it mildly) with an influx of investment capital, which in turn would boost production and ultimately drive prices back down.
These days though, capital is being redirected elsewhere, with relatively little being put back into oil/gas reserves replacement. Even with elevated commodity prices, investors are demanding a significant portion of cash flow be directed back to shareholders. No one wants to hear the phrase ‘production growth’.
Over the next decade then, the following large trends are likely to happen: cash flows could reach staggeringly large amounts; little of that will be put back into the ground because investors want it in their pockets; higher commodity prices will ultimately dent demand, but in the meantime the oil/gas sector will find itself in a far richer but much smaller state, with relatively few oil/gas development prospects in their future (oil/gas exploration will be the stuff of legend). Any new o/g development will face an ever-steeper uphill climb as activists comb the laws for arcane things to hobble the industry with, and if they come up short, there are always good old blockades.
Any o/g windfall cash will likely flow in three directions. First, the industry needs to use the windfall to get liabilities in order, both in the US and Canada. If that isn’t industry’s first choice, regulators should make it so by enhancing such highly successful policies as Area Based Closure to make this a priority in a period of high commodity prices.
The second direction will be in new energy initiatives that utilize existing energy infrastructure – hydrogen in the gas system where possible, underground reservoirs used for carbon storage (see Entropy Inc. for example), renewable natural gas/diesel/liquids, etc. It appears that massive government money is going into the creation and support of new energy hubs and pipelines (Carbon Trunk line, the proposed CO2 system from Fort MacMurray to the Industrial Heartland, etc.). These initiatives will put Canada at the forefront of the ‘real’ energy transition, that is, the one that is grounded in the realities of merging a new system with the old (as opposed to annihilating the old, as in the thoroughly panicked vision of Mr. Kalmus).
The third direction will be a massive return to shareholders. In the past, excess cash flow went into growth initiatives. That game plan appears to have been tossed out the window. There is a palpable feeling that the industry is being squeezed to the margins of the economy, and investors are wisely looking to take as much money off the table as they can, while they can.
This leaves an interesting impending train wreck for the rest of the world. Russia and China are going to be the architects of the next generation of hydrocarbon supply and distribution channels (particularly so with China’s global Belt and Road initiative); the Middle East will run as fast as it can to supply the world with hydrocarbons, and the world’s fuel supplies will become unstable and ridiculously expensive, so long as the reliance on hydrocarbons remains (and even optimistic emissions reduction scenarios see hydrocarbons underpinning somewhere near half the world’s fuel requirements by 2050). The repercussions of hyper-expensive energy for the world’s developing economies are going to be severe (and they will be for us in the west also; we just have a whole lot more fat to cut before the pain really starts).
An epic battle is looming, one for the ages, between the forces symbolized by California’s Kalmus, and Africa’s Ayuk. In the meantime, all Canada’s industry can do is put its head down, adapt as fast as possible, and work on that disguise, should you be heading out for a weekend in Vancouver or Toronto or, heaven forbid, San Francisco.