High tech bringing fundamental changes to energy systems
If ever there was a sign that the oil industry is headed for a period of transformational change, that sign is the news that ExxonMobil is giving in to activist shareholders and will start to publish more information for investors on the risks that stricter limits on greenhouse gas emissions would place on their future earnings. The new reporting is expected to cover how stricter controls on carbon emissions would affect projects in which the company plans to invest.
The ExxonMobil news followed a similarly unusual conclusion from the new BP Statistical World Energy Outlook (2013) that acknowledged the high likelihood that oil demand in the industrial economies has peaked. BP’s 2013 outlook also opened the door to the idea that exponential growth in oil demand in China might similarly fail to materialize as the country evolved towards less oil intensive economic activities. The BP forecast cited tremendous gains in energy efficiency, changing patterns in the transportation sector, and a rise in new energy such as shale gas and renewables as curbing the world’s future thirst for oil.
The idea that the world needs to—and might actually start to—abandon the age of oil has been building momentum for some time.
In 2009, seminal science findings were published in the journal Nature that only a fraction of the world’s existing oil, gas, and coal reserves could be emitted if global warming by 2050 is not to exceed 2 degrees above pre-industrial levels. Contrary to belief that markets have not responded to the concept of unburnable carbon, the scientific findings prompted investors in 63 of the United States’ largest oil companies to shed $27 billion in market capitalization, according to a University of California, Davis study, “Science and the Stock Market: Investors’ Recognition of Unburnable Carbon.”
The need to think about an energy system that is less dependent on oil for mobility and industrialization is pressing.
Political instability across the globe from Russia and Ukraine to Venezuela to Iraq has laid bare the false promise of relying on a global oil and gas supply business as usual. Europe is facing the unpleasant choice of choosing between an unacceptable Russian incursion into an independent country and its own energy security. The United States is facing the hard cold truth that a political devolution in Caracas would open the difficult question of who, should chaos prevail, owns and operates the Venezuela-owned Citgo refining and marketing system that represents 5 percent of the US market. And the critical challenge of climate change and related severe weather events dictates that governments renew efforts at both mitigation (less carbon intensive energy) and resilience (less large-scale, centralized energy).
The oil industry has faced more Black Swans since 2012 than perhaps any other time in its history, not only from these geopolitical and severe weather events but also from disruptive technologies. And, the tech boom is going to continue to change the energy industry, for better (productivity, safety, sustainability), and for worse (cyber-attack).
And, the change is likely to be faster and more transformational than most senior oil industry executives care to admit. In fact, tech is changing the energy industry faster than its leaders can adapt.
First, there is the Texas-led unconventional oil and gas tech boom within the industry itself. The world’s largest oil companies were caught off guard when smaller, more nimble competitors such as Pioneer Natural Resources, Continental Resources, Range Resources, Southwestern Energy, Noble Energy, and Devon, to name a few, cracked the code on US shale oil and gas resources. US oil production 2013 growth from advanced drilling systems for shale has given America a historic output uptick.
Growth in renewable energy is also making incredible strides in the US and beyond. Already, the developing world is looking at new energy systems based on renewable energy (valued at $244 billion in 2012) as a solution to poverty. And, increasingly positive economics and creative finance are helping clean energy gain a foothold in the US and Europe.
Between the two, this “new energy” is expected to contribute more than half of the growth in future energy supplies in the coming two decades.
Beyond the oil industry itself, disruptive technology change from the industrial internet will dramatically cut the amount of oil it takes to run heavy machinery everywhere from marine ports to factories. 3-D printing is also expected to reduce the need for transportation fuels. And, consumer-facing software interfaces—some connected to smart phones—look poised to provide energy users more control over pricing, fuel choice and community aggregated solutions (where a municipality, rural neighborhood or business complex creates its own distributed energy system complete with small scale electricity storage to supplement, replace, or eliminate the need for centralized grid services).
Such consumer-oriented products grew partly out of the California electricity crisis that convinced large power buyers with chips to cool and servers to support that they needed to control their own destiny where energy reliability and resiliency was at stake. Similar momentum has come from India and Africa where there is a desperate need for solutions to energy poverty in rural communities.
The bottom line: More energy leaders will need to embrace breakthrough capitalism and develop more agile corporate strategies. For many companies, this would be a sharp change of direction from performance metrics that favor high-value legacy assets that are paying out today.
Instead leaders will have to think about how to position the same assets to perform under more stressful futures with the high potential of geopolitically or environmentally stranded assets. Connecting the C-suite and boards to forward looking scenario planning that encompasses a wider range of risks will be essential to success in the new energy landscape, and understanding the tools coming from this technological revolution will be a critical first step.
Amy Myers Jaffe is the executive director for Energy and Sustainability at University of California, Davis Graduate School of Management which is developing a new energy summit on the intersection of risk, technology and management in the energy business. Amy may be followed on Twitter @AmyJaffeenergy.