Month: December 2015

Peter Varadi Sees a Dim Future for the Oil Industry

The attached article by Peter Varadi presents a dim view of the ability of big oil companies to adapt to rapidly changing global conditions. It reflects his personal experiences as a solar energy pioneer and entrepreneur dealing with representatives of the oil industry, starting in the 1970s. The article was first published earlier this week in the e-journal Energy Post (www.energypost.eu.com) and is republished here as an important perspective on the future of an important part of the fossil fuel industry.

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Twilight of the Gods of Oil
by Peter F Varadi

For most of the past 40 years OPEC, the association of Big Oil exporters, and the Big International Oil Companies controlled our lives, but they have started on an inevitable decline, writes solar pioneer Peter F. Varadi. Competition from renewables and smaller players as well as tighter climate polices will make their business model obsolete. According to Varadi, their corporate culture makes it unlikely they will be able to adapt.

OPEC was initiated in 1960 by five countries and by the 1970s had 12 members who controlled the flow of oil and its price. Everybody remembers the 1973 oil crisis which ushered in a recession in the US and other countries. In the following years OPEC regularly made threats and on at least one occasion caused another crisis, in 1979. They forgot the age old saying that one should not make war with one’s customers. The customers will react somehow.

And they did – as is evident from the fact that today among the World’s top 10 oil producing countries only four are members of OPEC and the USA, which was the hardest hit by the 1973 “oil embargo”, now exceeds in oil production legendary oil producer Saudi Arabia by no less than 12.5% and the Russian Federation by 29%. Among the 20 oil producing countries with daily production over 1,000,000 bbl/day there are only 10 OPEC countries.

A case in point is Brazil, where crude oil production in 1980 was 182,000 bbl/day (barrels per day) and in 2014 catapulted to 2,950,000 bbl/day – more than is produced in the OPEC countries Kuwait, Venezuela and Nigeria.

The destructive effect of the “corporate culture” is to prohibit companies from moving into a new but related field

OPEC is at a point where it is falling apart. It consists now of a group of haves and have-nots. The have-nots want the largest, Saudi Arabia, to decrease production but they do not understand that we are not in the good old days anymore. There is now plenty of oil and the new exploration method, fracking, has turned the table around.

The conclusion is as, BP Chief Economist Spencer Dale said recently, “OPEC is simply powerless”. If this would be the script of a movie about OPEC, the next frame would have only two words “THE END”.

Corporate culture
The Big Oils, international oil companies ExxonMobil, Shell, Chevron, BP, Total and others have also gone past their zenith and started on their twilight journey. In the future they may either transform themselves (as some German utility companies are attempting to do) or become immaterial, as happened to companies such as Kodak, RCA, Xerox, Polaroid and many others – names the present generation does not even remember.

The similarity between these forgotten companies is that they all rode up to the top and then went down and became oblivious. The reason was not that people stopped making photographs or buying TV sets or making copies of their papers – the reason was that they started doing these things differently, and the companies’ “corporate culture” made it impossible for them to adapt.

Thus, for example, Kodak’s management and technical staff could not believe that digital imaging could even threaten the traditional film business. Their “corporate culture” did not let them do it and 124 years after it was founded it filed for bankruptcy in 2012.

There are many similar examples. The conclusion is that the destructive effect of the “corporate culture” is to prohibit companies from moving into a new but related field which ultimately could make their dominant business secondary or even obsolete. And that is happening now with the Big Oils.

Deeper and deeper
John D. Rockefeller’s oil empire was structured to control the oil refinery and distribution business. ExxonMobil, a descendant of Rockefeller’s Standard Oil, is still the largest refiner in the world. It is hard to pinpoint the time when oil companies started to concentrate on finding and producing more and more oil and gas. But by the 1960s they had developed expertise and money to carry out very large projects, which came to be the hallmark of the “corporate culture” of Big Oil.

The story of Shell’s “Polar Pioneer”, the oil rig used to start the exploitation of the very large oil resources in the Arctic, will be a famous milestone in the history of Big Oil

Drilling to find oil started 156 years ago in 1859 in Pennsylvania with the 69.5-foot (21.2 meter) deep “Drake well”. As demand increased the oil companies developed technology to find new oil and gas reservoirs. They had to go deeper and deeper to discover new oil formations, many of them offshore under deep sea water, and lately even in the Arctic. Today a great number of drilling rigs are being used which can operate in water deeper than one mile (1,600 meters) and can drill to a depth of 5 miles (9,000 meters) or below. In 2012 ExxonMobil completed the world’s deepest well on the Sakhalin shelf in the Russian Far East: 7.7 miles (12,376 meters) deep and 7.1 miles (11,426 meters) out under the ocean.

The cost of these deep and offshore drillings is unbelievably high. The daily rental cost of a deep water drilling rig used for example in the Gulf of Mexico is about $500,000 excluding other expenses. Because of their expertise and wealth, this type of drilling assured Big Oil a dominant position. The cost of drilling was immaterial because the upward elasticity of the price of oil seemed to be infinite.

The price of oil (per barrel) at the beginning of 2000 was $25. This lasted for 3 years when in 2003 it started to move higher. In 2005, it had doubled and 3 years later in 2008 doubled again and reached $100. From 2008 the price of oil fluctuated between $90 and $110. However, by the middle of 2014, the price started to decline sharply and by the beginning of 2015 it was $50 – half of what it was 6 months before. Since then it has been in the $35 to $50 range, which was the price of a barrel of oil 11 years ago (data: US Energy Information Administration).

Small club
The stability of the price of oil in the period of 2008 to mid 2014 prevailed in spite of increased usage in China and India and of interruptions from major suppliers such as Libya, Iran, Iraq, and Venezuela. These were counterbalanced by improved efficiency of products using oil, such as cars, switching from oil to natural gas in electric power stations and the beginning of the tightening of policies related to global warming. The high price of oil also encouraged more drilling and by now over 100 countries are producing more than 1,000 bbl/day.

But there was another reason why prices eventually came down, a new technology called “fracking” to extract oil and gas from shale, which started to be used on a large scale. Drilling for oil deeper and deeper at very challenging locations became extremely expensive in comparison. It required enormous amount of capital and therefore it was a small club which was able to do it. Fracking required little money and therefore lots of startups got in.

The question now is will Big Oil find new areas to grow?

Fracking experiments, the injection of fluid into shale beds at high pressure in order to free up petroleum resources (such as oil or natural gas) were started in the 1950s, but large scale utilization first occurred in 1968. It was then used mainly to improve the production of vertically drilled oil or gas wells. When it was realized that oil and gas inclusions in shale were in many cases horizontal and not vertical, horizontal “fracking” to create oil and gas wells was started in the 1980s but more generally used from 1991 on.

Nonetheless in 2010 still only a negligible amount of oil was produced in the US by fracking. Five years later, in the beginning of 2015, close to 50% of US production was from fracking. To appreciate how much oil is produced in the USA by “fracking” one should consider, that at the beginning of 2015 daily production was somewhat more than the production of two OPEC countries, Kuwait and Algeria, put together.

Polar Pioneer
Big Oil knew about this and could have easily branched into fracking when it was still in its infancy. But Big Oil’s “corporate culture” could not let them to believe that their well established and successful drilling technology could be affected by shale fracking. As Big Oil ignored it a number of small organizations were able to get started.

Shell, for example, ignored fracking for a long time. When they did get in, they were, as Karel Beckman writes in his recent article, “simply unable to survive in this kind of highly competitive market in which small, versatile players set the tone.” Please remember that Kodak also entered the digital camera business belatedly, but had to close it because similarly they could not compete with the many relatively small organizations which had entered that field.

It seems Mr. Tillerson was not informed that since 2000 over $500 billion was invested in solar PV alone

The story of Shell’s “Polar Pioneer”, the oil rig used to start the exploitation of the very large oil resources in the Arctic, will be a famous milestone in the history of Big Oil. Until the end of the summer of 2015, Shell’s management seemed to still believe in Big Oil’s motto: “Damn the cost of drilling and full steam ahead.” They towed the gigantic oil rig to the Chukchi Sea, offshore Alaska, and paid $620,000 per day during the summer drilling season, and $589,000 a day for the rest of the year, to lease the rig.

“Polar Pioneer” started drilling on July 30, 2015. But Shell obviously realized that under the new market circumstances the exploitation of Arctic oil will not be profitable and that this condition may last for a decade or more. On September 27 the company announced that it would pull back from oil exploration in Alaska and started to tow the Polar Pioneer back to Seattle. We can mark this date, September 27, 2015, as the day the twilight of Big Oil’s dominance started.

The question now is will Big Oil find new areas to grow?

At a loss
As Shell demonstrated the “corporate culture” of Big Oil makes it unlikely that it will be able to adapt to the world of “fracking”. Another problem is described in the recent book “The Price of Oil” by R.F. Aguilera and M.Radetzki. The world is headed for an era of oil “superabundance” in which the low price of oil will prevail and oil produced with oil rigs costing $500,000 per day can only be sold at a loss. This would mean not only loss of profit but also lower revenues.

The oil companies could reverse this trend and diversify into the field of renewable energy. But this will be difficult for them to do. I know this from my own experience. As I describe in my recent book, “Sun Above the Horizon”, around 1973 the oil companies got involved in the solar photovoltaic business. There were two reasons for this:

1. The fashionable doomsday reason: oil and gas will run out, solar energy is permanent. Oil companies should get in now (in the 1970s) to invest in the development of the continuation of their oil and gas business.
2. The other reason was that a few leaders of the oil industry correctly envisioned that PV, because of its decentralized nature, would become an independent parallel energy source to oil and gas.
The terrestrial PV industry was started in 1973 but by the end of 1983 the major PV manufacturers in the world were all owned by oil companies: AMOCO’s Solarex Corporation (USA); ARCO’s Arco Solar (USA); Exxon’s Solar Power Corporation (SPC) (USA); BP’s BP Solar International (UK).

The Paris climate agreement makes it clear that the world will not turn back on serious global warming policies

Ultimately all of them got out of the PV business. Why? The major reason is their “corporate culture”. To show the way they are thinking, this is what ExxonMobil CEO Rex Tillerson told investors on May 27, 2015, explaining why the company isn’t investing in renewable energy: “We choose not to lose money on purpose”.

It seems Mr. Tillerson was not informed that since 2000 over $500 billion was invested in solar (PV) alone, including by Warren Buffett’s MidAmerican Energy investment of $2.0 billion to buy the 579 megawatts Antelope Valley Solar Projects in California. Buffet is not known to lose money on purpose

As of losing money by investing in renewables, Mr. Tillerson was also a little bit misinformed. Solar PV manufacturer “First Solar Inc.” recorded sales in 2014 of $3,391,814,000 and made 8.5% profit which is a little more than the 8.1% ExxonMobil made in the same year.

So for Big Oil to get back now to PV is the same as getting into “fracking”.

Not many options
In the days when Big Oils calculated their odds in PV, their only risk was that they would lose their investment, which was not much more than the loss of a single dry hole. But even the minimum investment today for Big Oil is much bigger. Two big oil companies are now in the PV business but both are only minor participants.

Shell with Showa Shell Solar (Japan) was started in 2006, manufacturing the thin film CIGS solar cell/module. The company was renamed Solar Frontier in April 2010. Solar Frontier’s manufacturing capacity will reach over 1 GW in 2015, which is about 3% of today’s PV manufacturing. French Total invested 1.1% of their entire market capitalization to buy 60% of SunPower (a US PV manufacturer). Today, if Occidental Petroleum (OXY) were to buy 60% of SunPower (SPWR), Occidental would have to put up about 5.9% of its entire market capitalization. If OXY were to buy 60% of Solar City (SCTY), it would need to put up 7.2% of its market capitalization.

The Paris climate agreement makes it clear that the world will not turn back on serious global warming policies. There do not seem to be many options left for Big Oil. If they want to avoid the fate of Kodak, they could split up like German utilities Eon and RWE did, and shed their drilling business, in the same way telephone companies did with their land line business. After that in their twilight, they will have to compete in a brave new world.

Note:
Peter F. Varadi Peter F. Varadi is the co-founder in 1973 of SOLAREX Corporation, Rockville, MD (USA), which pioneered the utilization of solar cells (PV) for terrestrial applications. By 1978 it had become the largest PV Company in the world. He recently wrote a history of the early years of the solar industry, Sun Above the Horizon.
© Peter F. Varadi. All rights reserved

A Presidential Campaign Speech from 2052

(Note to my readers: please allow me this ‘indulgence’ as it allows me to discuss what I see coming in the energy field.)

My fellow Americans, I am pleased to announce today my candidacy for President of the United State. We have just turned the corner on the first half of the 21st century, a time of significant change for our country and many other countries. In 2052 it is time to consolidate and reaffirm those changes that are beneficial, and plan for the coming decades. The 21st century has been an American century, but not exclusively – other parts of the world have demonstrated global leadership both economically and politically in these past 50 years – and it is encumbent on a new set of U.S. leaders to continue the American century in peaceful and meaningful cooperation with our global partners. Before discussing my plans for the future I would like to review what I see as the history and the accomplishments of the century’s first fifty years.

The century began as an extension of the 20th century – multiple national conflicts, internal dissension in many countries, and heavy dependence on traditional fuels such as coal, oil and natural gas. Global population continued to increase – having grown from 1.8 billion to more than 6 billion in the past century – and is expected to reach as much as 10 billion sometime before the turn of the current century. That number in 2052 is just under eight billion.

Increasing electrification was an important characteristic of the 20th century and will continue to define the 21st century as well. It is allowing increasing numbers of people to enjoy the energy services that access to electricity and other forms of energy brings – lighting, heating, cooling, communication, transportation, and the ability to make things quickly and in quantity. Today, fewer than five percent of the world’s population lacks access to reliable electricity supplies, and this number should reach zero in the next two decades. Essentially all have access to wireless devices that allow widespread communication and access to the world’s store of information.

This access to energy, the closely related access to clean water, and wireless capability have significantly reduced global poverty and greatly enhanced opportunities for learning. The education revolution that has been made possible by universal access to the internet, for both women and men, and the individualized learning that the computer revolution has made possible, together with energy access, has finally allowed a slowdown in the rate of population growth so that a stabilized global population may be achievable in my lifetime.

This century has also seen other powerful changes. In 2008 our country elected its first black President, and then reelected him in 2012 as affirmation of their good judgement four years before. In 2016 the U.S., after a lengthy and often nasty presidential campaign, elected its first female president, who once and for all showed that women can serve effectively at the highest levels of our political life. Together with the military opening all its ranks to female participation in 2015, the so-called ‘glass ceiling’ was finally shattered, never to be restored. That election also saw the election of a Vice President of Hispanic ethnicity, who eventually went on to become the 47th President of the United States. Today I am trying to shatter still another political barrier by attempting to become the first Muslim American to receive the nomination for President of a major political party.

While much has changed in the past five decades, and I will discuss one of the most important changes in detail shortly, not everything has changed, unfortunately. We are still human beings, with all our many shortcomings, and religious and racial intolerance are still major sources of pain and conflict in the modern world. While the threat of Islamic jihadism that arose forcefully in the first few decades of the century has been reduced significantly through the actions of a global coalition of Muslim and non-Muslim governments, remnants are still with us and require careful attention. As our President I would commit all the resources needed, in cooperation with our allies, to keep this threat under control. A major factor in controlling this threat has been the willingness of Sunni and Shiite governments to put aside their religious differences In the name of their overriding commonality, Islam.

Among the other changes we have seen in our lifetime is the establishment of the first human colonies on the moon and on Mars. The moon colony was a joint U.S.-Chinese achievement in 2032, just twenty years ago, and the first Mars colony of four people was established just 8 years ago, in 2044. Both were extraordinary events at the time, and commanded global attention, but as is true of so many achievements in outer space the existence of the colonies is becoming part of the background. That is an OK result as we want space travel to become a routine part of the mainstream.

Other major steps forward have been in the field of medicine. With advances in DNA measurement and manipulation personalized treatment has become routine for many gene-related diseases. It is not unusual today to see people living into their second centuries and still functioning normally. Of course the social security and related safety-net systems in the U.S. have had to be adjusted for this new longevity, and as you might expect, only after long and difficult political battles.

Finally, let me talk in some detail about the most important revolution of the 21st century, one I have worked hard to support in my current position as a U.S. Senator. It is one that I am committed to support and advance if I am privileged to serve as your President. That is the energy revolution that started in the latter part of the 20th century, took flight during the early decades of the 21st, and is today reaching all parts of the globe. It is a transition point in human history.

The 1973-74 Oil Embargo, which took place almost a century ago, was a brutal wake up call for many nations, including our own. The history books tell many stories about how Americans, for the first time, began to look at energy issues in a different light. Prior to the Embargo energy costs were sufficiently low that it was not an area of public concern. Then, one day Americans awakened to the fact that much of their energy, especially for transportation, was imported from abroad, and that such supplies were subject to political uncertainties beyond our control. This was true in the countries of Western Europe as well. We responded by creating the International Energy Agency, a mechanism for sharing oil reserves among countries if another embargo threatened our energy supplies. We also started looking at energy alternatives, with particular emphasis on nuclear power. In fact the public mantra at that time by our political leaders was a doubling every decade of the number of nuclear power plants deployed in the U.S. A few others raised concerns about nuclear power and called for examination of enhanced energy efficiency and renewable energy alternatives. Until that time renewable energy had not been seriously considered except in the case of hydroelectricity. The suggestion related to enhanced energy efficiency was dismissed by economists and others who saw economic growth (GDP) tied one-to-one with energy consumption, and renewables were attacked as too expensive and incapable of meeting the demands of the U.S. economy. These arguments persisted for several decades until it was shown that GDP and energy consumption were not directly linked, climate change associated with combustion of fossil fuels became a major global issue, the costs of renewable energy systems began to decrease, and the ability of renewable energy in the form of electricity, biofuels, and heat were shown capable of supporting large economies. These new realities became the focus of policy debates in the first two decades of the century, and finally came to govern U.S. energy policy in the third decade when the majority of the private sector finally put its full support behind renewables and the battle to limit global warming. All Presidents since the Obama era have supported a move away from dependence on fossil fuels – it was 80% at the turn of the century – and Congress finally placed a steadily increasing cost on carbon emissions in 2020. This created the economic environment needed for investment in clean energy technologies and reduced use of fossil fuels. It allowed the U.S. to finally catch up with the many other countries that had seen the importance of these changes and implemented appropriate policies many years before.

These changes have led to today’s energy situation in the U.S. – 70% of electricity is generated by solar, wind, hydropower, and geothermal, natural gas from fracking peaked in 2040 and is steadily being replaced as an energy source in power plants as renewables take over, petroleum from fracking of oil shale peaked at about the same time and has been used to power aging and disappearing transportation fleets, electric vehicles dominate the automobile and light duty truck markets, all new aircraft and ships are designed to run on alternative biofuels, energy efficiency has been enshrined as the cornerstone of national energy policy, coal has been replaced as a domestic energy source except in a few industries, and nuclear power’s share of electricity generation has been steadily reduced to its current value of 5%. Total national energy demand has been stable even as the U.S. population has increased to 400 million, all new homes are routinely outfitted with solar energy rooftop systems and ground source heart pumps wherever feasible, the U.S. leads the world in wind turbine and wind energy production, we are second only to China in offshore wind energy deployment and production, and battery energy storage has become as ubiquitous as any other household appliance.

The world has turned a corner in these pat 50 years, undergoing an inevitable transition to dependence on energy from the sun and heat derived from radioactive decay in the core of the earth. These clean energy sources will last as long as people populate the earth, unlike fossil fuels which are depletable on any timescale relevant to humankind. We owe much to our fossil fuel resources, the product of millions of years of transformation of organic materials subject to high temperatures and extreme pressures deep in the earth, but the fossil fuel era is coming to an end and will eventually be only a blip on the timeline of history.

My promise to you as your President will be to continue and strengthen this transition in all ways possible so that our children, grandchildren, and their heirs, will live in a world free of global warming and the other harmful impacts of burning fossil fuels. Nuclear fission power had its day as well, but the issues associated with its use – cost, safety, long term storage of wastes, and weapons proliferation – have proved too difficult to accept now that renewable energy has been shown up to the task of meeting societal needs. Nuclear fusion, a much cleaner form of nuclear energy, remains as a long term possibility as well, but progress in taming the process that powers our sun and other stars has been slow and time will tell if controlled nuclear fusion has a future here on earth. I support continued cooperation with other countries in researching this technology that offers unlimited energy availability but so far has always been a few years away. Our investments largely must go into renewable technologies to ensure completion of the transition. This is our legacy to the future.