After the debacle that 2020 was for so many companies and professionals in the global E&P industry, there was great hope that there would be recovery this year that would gain in momentum, as the months went by. Instead, what everyone got was a muted recovery, as U.S. operators and OPEC+ members exerted uncharacteristic restraint with regard to drilling and production, respectively. And the lack of sufficient drilling globally, juxtaposed with greater demand, pushed oil prices much higher, tempered briefly by a momentary scare from yet another Covid variant. All of this was set against a backdrop of a number of countries making significant moves away from fossil fuels.
So, once again, as the year draws to a close, our core group of editorial advisors sorts out what has happened to the global E&P industry over the last 12 months while also doing their best to look into the coming year for guidance and clues on activity and trends. The subjects tackled by our advisors include the triple challenge of navigating the energy transition, bringing forth top quartile returns, and attracting and retaining the best technical talent; environmental uncertainties dominating the UKCS activity outlook; and the oil and gas industry remaining relevant and important. Additional topics include government in the U.S. being perpetually unhelpful to energy; the equipment and service sector leading the way forward in the Energy Transition; and the upstream industry being a “new, lean green machine” with a digital twist. As always, we invite you to read forward for all the details.
“LIONS AND TIGERS AND BEARS, OH MY”
DOUGLAS N. VALLEAU, President, Strategia Innovation and Technology Advisors, LLC; Senior V.P., Business Development, Piri Technologies LLC; and Chairman, World Oil Editorial Advisory Board
In the 1939 movie, Wizard of Oz, Dorothy said the quote in the headline to express apprehension and fear of the task she was about to undertake. Many in the oil and gas industry are feeling the same as Dorothy. They are faced with the triple challenge of navigating the energy transition, bringing forth top quartile returns, and attracting and retaining the best technical talent.
The Lions. The United Nations report on Climate Change calls for a ban on fossil fuels and suggests humanity is in a code-red situation with the death of the planet close at hand. This fear mongering report assumes that renewable energy sources can replace energy from fossil fuels and grow to meet the demands of increasing population. The United Nations report fails to recognize that fossil fuels are responsible for uplifting human prosperity, creating hundreds of medicines and vaccines, supplying fertilizers and pesticides to feed the world, and yes, electricity and transportation fuels.
Over 80% of the world’s population exists in a state of energy poverty today. With some using wood and dung for cooking and heating, these 6.2 billion people have no capacity to embrace renewables, and decarbonization is not a priority. As such, climate damaging, coal-fired electric plants in Southeast Asia and China are growing at an alarming rate.
Caging the Lions: The world consumes close to 600 exajoules of energy every year, and growing. Fossil energy supplies 83% of this energy demand, with renewables making up 17%. While renewables are growing, this sector can’t grow fast enough to displace fossil energy without a significant technological leap.
It may seem counterintuitive, but to assist the 80% of the world living in energy poverty and reduce global greenhouse gas, the developed nations need to increase natural gas production. Specifically, this means natural gas that can be shipped as clean liquified natural gas (LNG) to developing countries, to supplant coal-fired electric generation and provide compressed natural gas for transportation.
The Tigers. The U.S. shale boom launched in earnest in 2010. Rapid investment in competitive acreage and massive drilling programs quickly outspent free cash flow. Production grew, and companies were rewarded by shareholders and analysts. That is, until they weren’t.
When prices tanked, and despite phenomenal operational efficiency gains, companies were exposed, and it became clear that unconventional plays were over capitalized. Pressure from shareholders to create value and return free cash flow now became the new paradigm. As an industry, about $160 billion of value had been destroyed.
Taming the Tigers. Companies slashed budgets, dropped drilling rigs, and laid off staff. Focusing on core assets and ruthlessly adopting capital discipline, the industry has now achieved positive returns. Indeed, the industry has returned over $2 billion dollars in free cash flow since 2020.
But has the industry gone too far? Companies are engaging in share buybacks, increased dividends, debt reduction and acquisitions, rather than drilling new wells. Production is in decline, and some analysts are now punishing producers for lack of growth. Companies that do manage to grow production while maintaining positive free cash flow and have strong balance sheets are the ones positioned for top quartile results.
The Bears. Onboarding and retaining a talented workforce has always been cyclic with oil price. But oil demand destruction, due to the Covid pandemic and loss of staff from the great crew change, has created a weak supply of new talent. Companies that laid off senior subject matter experts are now faced with a lack of mentors to grow the next generation. University enrollment in petroleum engineering and geoscience is down, and with a focus on transitioning from fossil fuels to renewable sources, there is not a lot of encouragement for a career in petroleum.
Hibernating the Bears. During the 2020 pandemic, over 100,000 oil company jobs were lost, and potential new talent is naturally concerned about whether a career in the industry is worth it. As the energy transition to renewables proceeds, fossil fuel usage for transportation and electrical generation will go down, but petrochemical needs, heating fuels, and airplane fuels will keep demand up.
It is imperative that perception, that the oil industry is waning, be corrected. Both oil and gas companies and the service sector need to do a better job of engaging and supporting university programs that emphasize digitization, carbon-capture, sustainability, and greenhouse gas reductions. Attracting new talent also means building an agile and flexible work schedule and work location.
The pandemic taught many that remote working is efficient and reduces costs. By transforming from a traditional hydrocarbon business model to a decarbonized net-zero culture with a flexible working environment, the pipeline of new talent will, more likely, be attracted. To retain new talent still requires
opportunity for growth and development. This includes experience broadening assignments, soft-skill development, cross-training and recognition by management.
OH MY: Increasing natural gas exports, investing in production growth and maintaining free cash flow, and embracing a cultural standard attractive to the new generation, can overcome the Lions, the Tigers, and the Bears. Pay attention to what is behind the curtain—what do you want the company to look like in 20 years.
ENVIRONMENTAL UNCERTAINTIES DOMINATE ACTIVITY OUTLOOK FOR UKCS IN 2022
ALEXANDER G. KEMP, Professor of Petroleum Economics, University of Aberdeen, and Director, Aberdeen Centre for Research in Energy Economics and Finance
At late 2021, the industry on the UK Continental Shelf (UKCS) was still emerging from a very difficult period following the collapse of oil prices in 2020. Thus, exploration, field development and even decommissioning activities have been greatly curtailed. While oil and gas prices have substantially recovered in recent months, longer-term developments have still to materialise.
Current-year numbers. For 2021, it is expected that production will be around 1.37 MMboed, compared to 1.63 MMboed in 2020. A particular element in this decrease was the closure of the Forties pipeline system for some weeks, for refurbishment. Over 80 oil fields feed into this system. Associated gas production from these fields is exported to shore via other pipelines and was also adversely affected. Capital expenditure in 2021 could be around £3.7 billion. This would exceed the level achieved in 2020, but it is well below the values realised in 2019 and 2018.
Uncertainties. The current uncertainties relate to the effects of the UK government’s commitments to achieve Net Zero Emissions by 2050 and its support for the initiatives discussed at the COP26 meeting in November. In particular, there are uncertainties surrounding new field developments. In its report entitled Net Zero by 2050, the IEA stated that, for the world as a whole, no new field developments should be undertaken, if the Net Zero target were to be achieved.
Environmental groups have been very active in promoting the application of this proposition to the situation on the UKCS. The environmental consequences of new developments, in terms of their CO2 emissions, have been at the heart of the public debate. Reports have appeared, stating that operators of proposed new developments have been asked to enhance their environmental commitments and thus reduce their emissions.
Development considerations. Currently, there are around 20 oil and gas fields whose developments are at stake. These would make a worthwhile contribution to total output in the medium and longer term. Consumption of oil and gas in the UK substantially exceeds production from the UKCS. This is particularly the case with gas, where imports currently comprise over 50% of consumption. According to long-term production projections made by the Oil and Gas Authority, and consumption estimates made by the Climate Change Committee (and thus consistent with attaining the Net Zero target by 2050), reliance on imports is set to continue at high levels, as far ahead as the committed target date.
Oil and Gas UK (OGUK), the industry trade association, has pointed out that this heavy reliance on gas imports, in particular, risks increasing emissions from supplies coming from countries such as Russia and Qatar, above those emanating from domestic sources. In addition, it is argued that the security of supply risk may be greater from imports. Arguably, the UK government can influence the behaviour of domestic production to a greater extent than with imports.
It is to be hoped that the uncertainty over new field development approvals will be removed in the coming months. It is to be expected that positive decisions will depend on stringent commitments to reduce emissions in the production process. This could include promises to provide power for the production operations from renewable sources, rather than from diesel or natural gas, which have been widely employed to date. Given the location of some of the fields, this will not be straightforward in terms of costs. Examples are fields in the West of Shetland region.
Emissions issues. Another environmental issue relates to the functioning of the new UK Emissions Trading Scheme. This is a policy instrument that has the potential to incentivise reductions in emissions, in an economically sensible manner. A carbon price reflecting the value of the damage caused to the environment is conceptually sound. But operators (and oil and gas consumers) need to have clear information on the size of the carbon price, and guidance on how it will behave over the longer-term future in order to make rational decisions. Unfortunately, this is currently lacking. The COP26 event would have been an ideal occasion to clarify the position of a carbon price, not only for the UK, but for the whole world.
Some new field developments that have already been sanctioned in past years are likely to proceed in 2022. In some cases, their execution has been held up by Covid-19 and the oil price collapse in 2020. An example is Phase 2 of Buzzard field, which came onstream in early December 2021. This was originally stated to occur in 2020, but it has been postponed, due to the effects of Covid-19 and the oil price collapse. Interestingly, the operator is pursuing decarbonising possibilities for the whole field through electrification, as part of a collaborative scheme with other field operators in the Outer Moray Firth.
The field investment projections made by the OGA for 2022 show an increase over the estimates for 2021. This reflects the expectation that several new fields will come onstream next year. Development of fields not yet sanctioned would constitute a bonus.
WE’RE NOT QUITE DEAD YET!
DR. D. NATHAN MEEHAN, President, CMG Petroleum Consulting, and Senior Technology Advisor, Petro.ai
In the movie, Monty Python and the Holy Grail, there is a scene in which a man with a cart collects the dead bodies of the villagers. One elderly man is thrown onto the cart, but he protests, “I’m not dead!” Presumably, after a long period of low product prices, a global pandemic that suppressed product demand and pressures from governments, and investors and many shareholders moving away from fossil fuels, you could be forgiven for thinking that our industry was ready to be thrown onto the cart with the VHS tapes, rotary telephones, overhead projectors and fax machines.
Industry still progressing despite illogical moves. I wrote an article titled, “The end of Petroleum Engineering as we know it,” which would up being the most downloaded article of the year. In that article, I predicted fewer conventional energy jobs and radical expansion of the roles of machine learning and data analytics, along with continuing pressures on carbon emissions. Surviving producers will need to reduce the carbon intensity of their production, in order to remain competitive.
In the last few months, we have seen dramatic increases in oil and gas prices, with global gas prices outstripping North American gains. Coal prices have reached all-time highs. The casual World Oil reader would be forgiven for concluding that this would mean the world should encourage more production of safe, affordable oil and gas; approve pipelines; and encourage domestic drilling that would ease domestic supply concerns, lower consumer prices and decrease dependence on energy that may not have been produced as cleanly elsewhere. Silly readers! The lesson that many governments appear to be taking (as they approve new pipelines and expand coal imports) is that we have to further subsidize solar PV, onshore and offshore wind, and green hydrogen, and raise effective prices for all fossil fuels to discourage their use.
Don’t get me wrong. I am convinced that anthropogenic GHG emissions have made, and will continue to make, a negative material impact on the long-term climate. We should decrease methane and carbon dioxide emissions; encourage CO2 capture, use and storage; encourage alternatives to fossil fuels; and improve efficiencies. We should also work to improve quality of life for the multiple billions of people who live in energy poverty. There is no question that quantitative measures of quality of life (infant mortality, access to clean water and education, literacy, per capita incomes, etc.) are highly correlated with energy use. There are no easy solutions that balance the growing need for energy with the need to dramatically reduce carbon emissions.
Lofty goals are hard to achieve. Most forecasts of what it would take to get the world to “net zero” by 2050 essentially eliminate global coal production and reduce global oil production by 50% or more from today’s levels. These forecasts also require CCS to increase essentially 100 times from today’s levels. It is hard to imagine a world acting in concert to achieve these goals. Countries continue to act in their own best interests and there will be clear winners and losers, no matter what the energy future holds. I’m not sure what, if anything, can be done to achieve 1.5° warming goals, but I have spent enough time with actual climate scientists to know that 2.0° is worse and the impacts of something like a 3.0° warming would really be catastrophic. The worst of these impacts (whether 2° or 3°) are 40 years out and beyond for much of the world. Sooner for many others.
The nearer-term impacts of planetary warming will be felt disproportionately by lower-income individuals. This is true, both for those living in low-lying areas, who may be flooded or forced to relocate, and those in “heat islands” in inner cities devoid of trees, which even today are significantly hotter than wealthier areas and result in more heat-related deaths. Similarly, lower-income countries and even regions within countries are likely to suffer more and sooner than wealthier ones for a variety of reasons.
Steps that industry can take. It is very difficult to persuade people to make serious sacrifices to abate long-term disasters. No one built dams or seawalls before having felt the impacts of floods or storms. I am not confident that countries will act together to both decrease energy poverty and to abate climate change but there are some things I know we should do. We should make flaring infrequent, brief and efficient. We should eliminate venting and fugitive methane emissions. Regulators and governments should use both carrots and sticks to encourage the use of more efficient technologies, eliminate flaring, venting and fugitives. Monitoring can be encouraged by enabling proof of lower emissions than “default” estimates. We can encourage natural gas production with realistic carbon prices, whose revenue is returned to citizens hit hardest by rising energy costs. Hydraulic fracturing and horizontal drilling have proven vast domestic resources; in the near term we need more, not less.
Renewable energy should continue to be encouraged, including nuclear and geothermal. While the jury is still out on how large a role hydrogen will play, both green (from electrolysis powered by renewables) and blue (conversion of methane coupled with CCS) hydrogen will be essential to generate the supply needed to warrant the infrastructure. Finally, carbon capture and storage need to increase rapidly. To do so will require far greater support than 45Q.
We’re not quite dead yet. And with some luck and a willingness to adapt, we will be around for a long time to come.
THE PIED PIPERS IN GOVERNMENT (AND HOW HISTORY REPEATS ITSELF)
ROBERT E. “BOB” WARREN, President, Baclenna, Inc.
“Truth is still truth, even if no one believes it. A lie is still a lie, even if everyone believes it. Anonymous
“Fools are the only Folk on earth who can absolutely count on getting what they deserve.” Stephen King
Merriam-Webster’s definitions of pied piper:
- A charismatic person who attracts followers
- One who offers strong but delusive enticement
- A leader who makes irresponsible promises.
The oil & gas forecast for 2022 is not promising, and predictions of developing improvement in the energy space won’t be found here. From the beginning of the current U.S. administration’s policy decisions, fossil fuels have been openly treated as evil for society and the climate, with those who work in their production approaching the status of “deplorables.” There is no other way to describe the effort—it’s akin to a rugby match with referee decisions moving the ball in one direction only.
Those decisions include cancellation of the Keystone pipeline; cancellation of federal leasing opportunities onshore and offshore; ANWR closure to drilling; and the list continues. Combined with reduced support within the investing world to fund the E&P sector, the Pied Pipers of government and their sponsors have successfully produced a gloomy outlook for development of our abundant natural resources.
COVID-19 impact—loss & fear. The disruption of life from this terrible virus has been brutal. We’ve lost loved ones to the dreaded invader, and work-life schedules have been changed—in some cases permanently. But while America has been focused on managing the massive public and family implications of a catastrophic epidemic—with even more events expected to follow—we’ve conveniently lost track of the downward trend of E&P development in this land, at a time when another energy crisis may well be on the horizon. Consider the impact from recent events in energy history and current decisions poised to develop with catastrophic results.Fig. 1. During the Arab Oil Embargo, signs like this one were common in the U.S. Image: U.S. National Archives.
October, 1973: A military engagement known as the Yom Kippur War occurred when Egypt and Syria invaded Israel in October 1973. While on assignment in Germany, this writer’s U.S. Army unit was ordered to prepare for immediate deployment to Tel Aviv, fully armed to provide combat support in defense of the tiny nation. Only with massive and immediate U.S. equipment and intelligence support did Israel prevail, and our mission did not proceed. Immediately following this short-lived war, however, we rotated back to the U.S., only to experience results of the Arab Oil Embargo that crippled our economy and way of life for months: long gas lines and general shortages of fuel, Fig. 1. The lack of fuel supply had negative life consequences for months to follow, even as oil quadrupled in price from $2.90/bbl to $11.65/bbl. But soon enough, it faded from memory, two generations ago.
August 1990. Saddam Hussein invaded Kuwait, in an effort to annex the oil-rich neighbor of Iraq. Oil prices, previously stable at $21/bbl, shot up to $46/bbl, causing another prolonged jolt to the U.S. (and world) economy. To further make the point, Iraq—in retreat—then blew the wellheads on some 700 wells as they departed Kuwait, leaving more than 600 wells burning (Fig. 2), with the remainder spewing a billion barrels of oil, forming vast lakes of crude.
The burning wells were extinguished within a year, but the wasted oil created an environmental disaster requiring years of remediation. War among energy producers beyond our borders created significant negative consequences for us, even as that one faded from memory, now a generation later. Fig. 2. More than 600 oil wells were left burning, when the Iraqis retreated from Kuwait in early 1991. Image: U.S. Army Corps of Engineers.
November 2019. The United States became a net exporter of all oil products, including both refined petroleum products and crude oil. By 2021, the U.S. was the world’s largest producer.
January 2021. The changing of the guard from the previous administration to the present reflects an alarming deviation from energy independence, in the interest of green energy and alternatives. The concept of energy independence for undergirding national security is no longer considered an utmost priority by Washington D.C. policymakers, who downplay the potential for a major world/national security event. Indeed, we are expected to embrace the siren song of the Pied Pipers, who are steering our society toward a point of no return for our safety and way of life. They have adapted a laughable energy replacement theology for our path forward, even at a time when multiple crises loom just over the horizon, which could cause the oil supply and price jolts of 1973 and 1990 to pale in comparison.
Consider the daily reports of Russian mobilization toward Ukraine; a looming Chinese invasion of Taiwan; Iranian nuclear advancements that threaten the existence of Israel; and increased insurgencies in the Middle East—the potential for war and a major energy supply deficit are pending … and predictable. In spite of our complacency and trust of bureaucrats, there must be immediate steps taken to increase U.S. oil output. Since Russia and OPEC, et al, really don’t care about our imbecilic national energy decisions, just throw in a war or two, and another super freeze event here, at home, and then we’ll start to care who’s in charge of it all.
The unappreciated. So, when you’re on the road late some night, and see a lighted derrick in the distance, thank those men and women, and the tens of thousands of their crewmates working morning tour in remote oil fields, to keep the lights on and the wheels turning for all of us.
NOW IS NOT THE TIME FOR PUNITIVE ENERGY POLICY
LESLIE BEYER, CEO, Energy Workforce & Technology Council
It’s hard to find anyone who doesn’t have an opinion on energy development, and even harder to find a consistent definition of the term “Energy Transition.”
Innovation leads the way. While global sentiment against oil and gas development continues to grab headlines, those of us inside of the industry do know what defines us—and that is innovation and ingenuity. These two critical elements of our industry’s fabric are the reason why we are the solution to the world’s climate challenges, not the problem. Energy Transition, when stripped of all the negative rhetoric, is truly about the reduction of emissions, while simultaneously providing the world with the energy it needs to thrive. And the energy services and technology sector is ground zero for the innovation and ingenuity that is required in the energy industry of the future.
Energy Workforce & Technology Council members are producing cleaner energy every day by investing in research and development of an array of energy sources and technologies. These companies are leveraging their long history of creating and deploying technological solutions on a global scale, making energy cleaner, safer and most cost-effective than ever before.
Connecting government with industry. Energy demand will grow 25% over the next two decades, due primarily to population growth in emerging economies, and cutting-edge technologies must be employed to meet that demand while simultaneously decreasing greenhouse gas emissions to slow climate change. The federal government has shown a willingness to provide funding and investment for these technologies, and these opportunities should be available for all companies engaged in the effort—especially those who have traditionally been involved in oil and gas development. Every day at the Council, we work to help build the connective tissue between government and industry, focusing on the education that must be provided to policymakers when it comes to energy policy.
Ill-advised policy decisions. The Council and its members are partners on that path to a lower-carbon future and support common sense policies. However, recent federal actions and statements are continuing to influence investors. From a pause on federal lands leasing, to requests that OPEC+ increase production, and even suggesting that the industry is engaging in illegal price activity, the Biden administration appears to act against its own environmental goals, pressing for production outside the U.S.
This type of rhetoric adds insult to injury, infuriating many in our industry, who know that the oil and natural gas required for global demand is produced safer, cleaner and most efficiently in the United States, and our workforce and our economy should be the benefactors of this production.
I recently joined Bloomberg Markets and Balance of Power for two interviews over the past few weeks to discuss the consequences of negative policy decisions and underinvestment in oil and natural gas. As we enter the winter season, during a time of inflation and increased post-Covid demand, the domestic energy industry should be supported by government policies that will help increase production, securing energy supplies at home and abroad for our allies. There is no greater gift to our adversaries than to hinder our own production, ceding revenue and market share to foreign competitors.
Putting demand and price in perspective. And with this policy environment and other market factors resulting in underinvestment, we now face rising energy costs and, therefore, demands from the administration to increase production immediately. Many of us noted with disdain the letter sent by Sen. Elizabeth Warren (D-Mass.) recently to many top U.S. natural gas producers, claiming “corporate greed” and LNG exports are driving up energy costs. We were proud of EQT CEO Toby Rice’s response to that accusation, rightly setting the record straight.
“Because of the shale gas boom and companies like EQT,” said Rice, “the United States consumer has benefited from, and continues to benefit from, some of the lowest natural gas prices in the world.” He explained that her “allegations are without merit… because they foster a narrative that politicizes natural gas and associated infrastructure in a manner that runs counter to one of our key collective goals…of addressing climate change.”
He is exactly right. Energy—the underpinning of modern life—should not be a place for partisan or ideological fights. Having access to affordable and reliable energy every day is a privilege to most Americans, and the priority for energy companies operating across its 50 states.
Energy reliability. Those in Texas understand, after the winter freeze in 2021, how imperative the “reliability” portion of this formula is. An unstable flow of energy causes deaths and short-circuits both supply chains and the economy. Domestic national security depends on the American people and its businesses having access to energy every day of the year. We can simultaneously avoid another winter energy crisis at home,, and achieve our global climate goals if we incentivize U.S. natural gas production and exports.
We know oil and natural gas will continue to provide energy reliability and will always be a critical part of the future energy mix. Taking options off the table will only result in challenges currently seen in Europe, where we are seeing a return to coal, due to lack of cleaner natural gas.
We can also be optimistic about the future of oil and gas and its cleaner development because of the commercial opportunities presented in the energy transition. Our success will be built on our ability to form alliances, innovate, and advocate on behalf of wise policies that support our sector’s critical work in producing energy with fewer emissions.
Our industry has overcome enormous challenges in the past. We know how to scale projects and deliver technology that shifts geopolitical markets, reduce energy poverty and change the balance of world power.
Now the call is on the White House and Wall Street to engage realistically with the energy demands of our growing world and better understand what our sector is currently doing to mitigate the effects of climate change.
We are the solution to this challenge, not the problem. And now is not the time to hold us back.
O&G: THE NEW LEAN-GREEN MACHINE
DOUGLAS C. NESTER, Co-Founder and CEO, PetroReal ASI.
By the fourth quarter of 2021, leading soothsayers were peering into a post-Covid world and predicting that global GDP would be fully recovered by the end of the year. Domestically, U.S. E&P companies were increasing capex spending to capture oil prices that increased 39% and gas prices that had increased a remarkable 49% since the start of the year.
As a result of accelerated development activities, Permian production was forecast to reach a record 4.95 MMbopd by year-end. However, all it took was the emergence of an African Covid variant, named Omicron, to debunk such prognostications and remind us just how fragile the global economy remains as we enter 2022.
Even with this ongoing virus setback, the biggest impact to our industry in 2021 was not one associated with the pandemic. Instead, it was a groundswell of social and political forces demanding that O&G producers accelerate the incorporation of low-carbon business strategies.
Transitioning to a net zero carbon. At the start of 2021, oil and gas continued their precipitous fall from favor on Wall Street, due not only to the large financial losses in 2020, but also a growing scrutiny by investors and environmental activists concerned by our Industry’s lagging response to controlling carbon emissions. A watershed moment that rocketed our transition toward a carbon- neutral industry occurred on May 16, when both Exxon and Chevron faced unprecedented rebellions during their annual meetings from disgruntled shareholders, who demanded greater environmental responsibility. In addition, Shell was taken to court in the Netherlands by an activist group demanding reductions in CO2 emissions.
In the end, it was a clean sweep for shareholders and environment activists. At Exxon, the tiny hedge fund, Engine No. 1, unseated two board members to ensure that the company business strategy included combatting climate change. At Chevron, it was reported that shareholders voted 61% in favor of the proposal to cut so-called “Scope 3” emissions. And in the Hague, a Dutch court ordered Royal Dutch Shell to decrease greenhouse gas emissions 45% in the next 10 years. Changes within these companies and others in industry began almost immediately.
Entering 2022, our Industry will continue to make the necessary organizational and structural changes to move companies from “being part of the problem,” to companies “that are part of the solution.” To gain access to capital, satisfy shareholders and retain staff, companies of all sizes will need to maintain Environment, Social and Governance (ESG) programs. As proof of their commitment to such programs, companies will increase the practice of linking executive compensation to ESG performance.
Preparing CCS Infrastructure. Meeting the aggressive goals associated within many ESG programs requires development of a sustainable Carbon Capture, and Sequestration industry (CCS), to collect and dispose of the emissions associated with the production and refining of hydrocarbon products. While there are 33 CCS facilities operating globally, 12 of which are here in the U.S., they only have the capacity to capture less than 1% of global carbon emissions and 0.1% of fossil fuel emissions, or approximately, 37 million metric tons annually. To help solve this inadequacy, there are now more than 100 commercial projects proposed, being developed or under construction globally, and we can expect these numbers to grow during 2022.
As an example, ExxonMobil announced its $100 billion CCS Innovation Zone mega project in April, to target capturing and storing of 50 million metric tons/year of CO2 emissions by 2030, and twice that amount by 2040, from heavy industries around the Houston Ship Channel. In support of this project, ExxonMobil bid on 94 Texas offshore shelf blocks during November’s GOM Lease Sale 257 that contain the geologic structures necessary to store the targeted CO2 volumes.
Even with this surge of CCS activity, there remain unresolved challenges associated with the costs, scalability, and overall effectiveness of these projects. In addition, the economic viability of these massively capital-intensive endeavors hinges on the financial incentives provided by the governments in which these installations are to be constructed. Here, in the U.S., Congress has incentivized development of CCS projects through creation of the Internal Revenue Code Section 45Q tax credit for carbon sequestration or its use as a tertiary injectant for EOR projects. This domestic incentive provides tax credits totaling $50/ton to the company that captures and permanently stores CO2. While there are discussions in Washington to increase these credits, the political polarization existing within our government makes any increase an uncertainty during 2022.
Stronger reliance on digital oil field solutions. Government incentive programs will certainly carry an obligation and guidelines for close environmental monitoring during the collection, transportation, injection and storage of CO2 emissions. Digital oil field and smart monitoring service providers, such as ShowMyWell LLC, will be utilized to provide continuous real-time CO2 monitoring and reporting solutions that require little to no human interaction. The reliance on companies like ShowMyWell to implement the IoT technologies, smart sensors, AI analytics and mobile connectivity required to fully monitor CCS projects, as well as traditional development operations, is anticipated to grow through 2022 and beyond.
In conclusion, the demand for fossil fuels to satisfy the world’s energy needs is not going away any time soon, and as reported by the International Energy Agency, daily global demand for oil is expected to grow from the 2021 estimate of 96.5 MMbpd to 104.1 MMbpd in 2026. Also, there is little doubt that the ingenuity, technical creativity, and pioneering spirit that has defined our industry since drilling of the Titusville well in 1859 will soon establish us as a global leader in combating climate change. And to those who remain skeptical, we can, and will, develop the required oil and gas volumes to meet global demand in a manner that reduces CO2 emissions and remains economically viable to our producers.
