Chain Delivery: A Role for Big Oil in our Energy Transition?

Article by David Simmonds CEng FIChemE

David Simmonds asks how can Big Oil use its skills and capacity to kick-start the energy transition?

THE rise of renewables and transition away from fossil fuels means our future energy supply chains will become increasingly complex. I’m convinced that despite its past mistakes, Big Oil must lend its experience and help weave together those tangled webs.

After discussing  how important gas storage is for energy security, I wanted to examine how Big Oil can use its skills and capacity to kick-start the energy transition. However, having recently streamed the BBC series Big Oil versus the World, this seems a tougher sell than I first thought!

The series presents a damning indictment of the sector, with evidence presented that experts at major oil companies were fully aware of the climate-changing consequences of fossil fuel extraction from as far back as 1979, the year I joined Shell International. The discussion is further coloured by recent profit and bonus announcements made by oil and gas majors which the head of the UN has described as "immoral". 

I am not going to defend the oil and gas companies for failing to take sufficient action on fossil fuels. However, commentators who want to turn their backs on the sector need to recognise the scale and challenge of our energy transition and consider how the sector’s experience of managing complex projects and supply chains would provide a force multiplier for success if put to use, and a significant loss if shunned. Indeed those recent profit announcements highlight Big Oil’s financial capacity to influence the transition.

To understand the scale of the transition faced, it’s worth noting that at a global level, while we have seen much progress in exploiting renewables, fossil fuels have doggedly maintained a 7881% share of our total energy usage every year since 1965. Of the balance, since about 2000, wind and solar have inched their combined shares to about 5% of the total. There is a long, long way to go. But before we look forward, let’s take a quick look back and understand how we arrived at the energy landscape we see today.

The energy chain

Prior to the Industrial Age, most energy was generated using local resources. Typically this was from the use of firewood. Forest woodcutters with their pollarding skills were vital  for keeping communities warm during the depths of winter. Farmers also grew crops for their animals, particularly horses, to accomplish tasks that people could not achieve on their own.

Coal mining changed all this, and the Industrial Revolution opened the opportunity for coal to be transported around the country to where it was needed, particularly for our mills. Coal’s energy supply chain from pit to factory, through canal or by ship, underpinned the Revolution. As time marched on, energy became an international commodity, made even more readily available by the capability to ship coal long distances, and later transport large quantities of oil from the Middle East to Europe and North America.

By the 1970s, gas too started to be traded internationally, firstly using long-distance pipelines, but shortly followed by the shipment of liquefied gas. By then oil was a fully-traded commodity, with a world price. The higher risks associated with the larger investments in gas required dedicated 20 year plus sales contracts, and I was personally involved in the detailed negotiations for Malaysia LNG with its Japanese buyers in the early 1980s, with gas priced at an energy equivalent to traded oil. As projects progressed, developers had to be very cognisant of the energy supply chain, ensuring that investment throughout the chain was managed adequately from a risk perspective. This certainly coloured the sector’s slow response to the environmental challenge, for investment returns on fossil fuels stretch over periods of up to 25 years. I certainly believe this has had a major bearing on the way it responded to new facts on climate change as they emerged.

Gas pipelines have end-to-end resource-to-market commitments, and generally have shorter investment cycles; LNG was another matter! BG Group, formed following the privatisation of the old British Gas in 2000, needed to make its mark on the international scene. Low-cost LNG developments in Trinidad and the growing demand for gas in the US market opened up the opportunity to fully commoditise liquefied gas, and the Group used this principle to underpin its investments in Egyptian LNG, further expansions in Trinidad and the purchase of LNG from Equatorial Guinea. As a new integrated gas major it christened its strategy strapline "Connecting Resources to Markets", but it still had to fully manage its energy chain risks. This it did through investment in each part of the chain, from upstream production, LNG plant, LNG shipping, import terminals and, in some cases, local distribution.

As leader of their project delivery group at the time, I had responsibility to ensure each element of the "project" chain was economic in its own right, was adequately staffed, and, above all, would be delivered safely and simultaneously to ensure the supply chain worked as a single entity from day one. BG Group primarily focused on gas, but its significant investment in Karachaganak oil in Kazakhstan was similarly underpinned through its small stake in the Caspian Pipeline Consortium which is still used today to export Kazakh oil through Russia. Given the scale of the investments, risk management is the number one priority, spurring the development and deployment of rigorous value assurance processes.

LNG tanker: Liquefied gas started to be traded internationally in the 1970s

Bringing this to today’s transition

Deployment of renewables provides an opportunity for locally-based energy schemes with shorter chains, and indeed state-of-the-art self-sufficient homes can deploy self-sustaining energy technologies. However, this does not come without cost, and is not scalable to make inroads on that 80% fossil fuel share. Personally I installed a solar array and battery last November, and over recent months I have hardly taken any juice from the grid. However come the winter I will still be dependent upon the grid to meet my energy needs; someone has to provide this energy, and, more importantly, the capacity, which I only utilise a few months of the year. Longer term, I can envisage paying a significant premium for this energy on demand, be it gas or power. The cost of the transition is going to be significant, and, while we may not like it, today’s hike in energy prices likely spur greater investments in green energy.

The dynamics of tomorrow’s energy supply chains are going to be significantly different from historic patterns. On the demand side, transport is moving from oil to power, while deployment of heat pumps, used primarily in winter, will exacerbate power’s seasonal cycle. On the supply side, both gas and oil have near constant availability, while renewables are intermittent. Of course all this can be managed, but defining the energy supply chain we require is so much more challenging. I touched upon this in my previous piece which highlighted the need for energy storage and indeed electrolysis to produce the green hydrogen that will manage peak energy demand through price arbitrage.

Pulling together our future energy supply chains will involve significant investment in a range of infrastructure and energy vectors. Indeed, full deployment of electric vehicles (EVs) and heat pumps will lead to a tripling of today’s power demand, requiring additional investment in power distribution infrastructure. In the UK, the impact of power constraints is already being felt in West London where developers have warned that it may take until 2035 to install the energy infrastructure required for them to serve new homes. It’s estimated the UK will have to invest £54bn (US$62.8bn) in order to upgrade and futureproof our power networks to cope with more wind projects coming to the grid. This is further challenged by the need to design these grid capacity expansions to handle peak export for the new offshore wind farms, while average outputs are only in the order of 4050%.

"Excess" renewable energy will need to be harnessed, impacting the scope and scaling of each chain. The Ryse project in Kent plans to demonstrate the synergies between wind and hydrogen, and its business case includes the following objective: Demonstrate that coupling of hydrogen with wind developments can improve the economics of large-scale wind in the South East by providing a secure and flexible off-taker for wind developers. Our partnership with Vattenfall (the wind supplier) is based on understanding the wind-hydrogen opportunity with a view to developing larger scale systems for new wind farms.

Green energy will also become international. For example, a solar panel installed in the deserts of North Africa operates much more efficiently than one installed in a field in Berkshire. The average output over a year here in the UK for solar is about 11% (generated power/ rated capacity)* compared to approximately 20% in Australia, and if one uses economies of scale on solar development possible at these locations, the benefits will be far greater. However direct use of this power at source is not feasible, so the economic case can be made for internationally trading green hydrogen and/or ammonia produced by electrolysing water.

Future energy supply chains will become ever more complex and stretch beyond the boundaries of individual Governments, though that will not stop some influencing the market, such as we have recently seen following the recent US Senate approval of subsidies for green hydrogen.

* My own solar panel installation of 6.6 kW will deliver about 4,000 kWh over a year, equivalent to a 7% efficiency factor. I would need to cut down the trees in my garden and rotate my house by 45° to get close to that 11%!

So Big Oil’s role?

The oil and gas majors have been delivering major international fossil fuel energy chains for years. Yes, they have made mistakes and now, in particular, need to deploy programmes to better manage fugitive emissions. (The UK’s programme for gas distribution pipework replacement is a step in the right direction.) However, if appropriate policy frameworks are established by governments, they have the skills and capacity to deliver tomorrow’s energy chains, especially as these still carry significant deployment risk.

As we have seen, one of the biggest challenges for energy projects comes from simultaneously aligning all parts of the energy chain: firstly at sanction (following project development) and secondly at the point of commercial operations (following project execution). This requires excellence in technical, social, safety and managerial skills and above all soliciting cooperation and political goodwill along the chain to secure financial closure. The argument will be that this is old-school thinking and that transition technologies can be delivered differently, such as through incremental growth at a local level. However, as we have seen, the scale of the transition and the inefficiencies/timescale of incremental growth will be inhibitors to this approach, and we urgently need major demonstrator projects to kick-start the transition. Some examples of where I see Big Oil getting involved are in:

Plotvis Studio - Visualization - Render studio Rotterdam
Artist's impression: Holland Hydrogen 1 Hub at Rotterdam

It is clear that the greening of these major industrial centres will provide the critical core demand for development of these new energy initiatives, which can then grow incrementally. We should now be fast tracking these opportunities to stimulate further growth and deployment of renewables regionally and nationally. Initially, some will be dependent upon fossil fuels, but so long as companies manage their fugitive emissions, blue hydrogen schemes provide a stepping stone to a future green hydrogen economy. Under the right policy frameworks, the oil and gas majors can provide the rigorous delivery approach needed to get these developments off the ground.

Chemical engineers are at the heart of this delivery challenge, be it managing fugitive emissions or delivering hydrogen/ ammonia projects. However, as we have seen, the challenge goes beyond conventional chemical engineering scope as it extends to the direct use of renewables with the expansion of the power grid to meet demands. Some of the majors are already investing in renewables, and, as wind projects move further offshore, the scale of their delivery challenge increases and enhanced planning and synchronisation across the energy chain are required. This will include the provision of backup resources when the wind does not blow or the sun does not shine, as envisaged, for example, by the ERM floating wind farm concept.

We need the financial muscle, project delivery, commercial and other skills of Big Oil to "Connect Green Resources to Markets" if we are going to really dent that 80%! Chemical engineers have a key role to help it deliver on this.

Article by David Simmonds CEng FIChemE

Retired engineer. Former Director of Simmonds Energy and Senior Manager at BG Group and Shell

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