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Nord Stream Nr. 2: The Project’s Implications in Europe

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Russia, Germany and a consortium of Western European companies have re-activated the Gazprom-led Nord Stream Two gas pipeline project. Parallel to the existing Nord Stream One pipeline on the Baltic seabed, Nord Stream Two would double the system’s total capacity to 110 billion cubic meters (bcm) annually, all earmarked for direct delivery to Germany.

Nord Stream is billed as the world’s biggest natural gas transportation project, in terms of pipeline length and throughput capacities. Initially announced in 2011–2012 through non-binding agreements of intent, Nord Stream Two had to be shelved for the duration of Europe’s economic slump. The project agreement signed on September 4, 2015, however, is binding. Gazprom’s management anticipates economic-financial recovery in Western Europe and, consequently, gas demand recovery by 2019, the target date for completing Nord Stream Two. It also expects gas extraction to decline in Norway after having been capped in the Netherlands, thus boosting European import demand (Gazprom.com, accessed September 14).

The project’s other role is to bypass Ukraine’s gas transit system, its continuation through the Slovakian and Czech transit corridors, and potentially Poland’s. Those transit routes are beyond Gazprom’s control. The Kremlin intends to re-direct the lion’s share of its gas exports to the “old” European Union into the Gazprom-controlled Nord Stream route. This would not merely deprive Ukraine and those other countries of transit revenue. Strategically, it would result in Gazprom controlling gas transportation as well as the supply to Western European customers.

Gazprom claims that it would, in due course, deliver “new gas”—i.e., gas sourced from newly developed fields—through Nord Stream. But it has not identified those resources; its barely disguised near-term intent is to switch the flow from Ukrainian pipelines into Nord Stream. For years to come, gas volumes diverted from Ukraine will be Nord Stream’s main resource.

In the short and medium term, Nord Stream Two strengthens Russia’s hand against Ukraine and a number of Central-Eastern European countries. Gazprom will henceforth be able to bypass or cut off these countries—or extort concessions under such threats—before these countries would have made arrangements with non-Russian suppliers.

As a bypass project, Nord Stream Two is potentially more effective compared with South Stream (in its various configurations). Bypassing Ukraine, South Stream would have changed Gazprom’s export route but would have targeted basically the same markets. Nord Stream Two, however, aims to break into new, highly lucrative markets in northwestern and western Europe. Or by words of prof. Anis Bajrektarevic: “This arching pipeline network eliminates any transit barganing premium from Eastern Europeans and poses in effect a joint Russo-German pressure on the Baltic states, Poland, Ukraine, and even as far as to Azerbaijan and Georgia.”

The European Commission finally blocked South Stream on the legal level at the end of 2014; and the other southern bypass option, Turkish Stream, looks no more convincing in 2015, even to Moscow, than its closely resembling predecessor Blue Stream Two had looked a decade ago. Thus, Moscow has turned to Nord Stream again in the new circumstances and based on its forecasts of medium-term market demand (see above).

If completed as designed, Nord Stream Two could cement the Russo-German special partnership in the energy sector for the long term, with ramifications in the financial sector and foreign policy.

Germany is the exclusive designated recipient of Nord Stream gas. This evolution casts Germany in a new role, on top of Germany’s familiar role as Europe’s leading importer of Russian gas. Nord Stream Two promises the much-coveted status of an “energy hub” for Germany. It opens the prospect for Germany to become the main center for the transit and storage of Russian gas and its onward distribution in Western Europe. This would mean higher sales revenues for German energy companies, as well as a potential windfall from transit fees and taxes accruing to the German federal and state budgets. Even if Nord Stream One and Two operate (as seems likely) below their combined capacity of 110 bcm per year, the volumes carried into Germany could be staggering in magnitude. The prospects of transit and tax revenue on such a scale must be a significant consideration behind the German government’s support for Nord Stream Two.

Designating Germany as the privileged “hub” country is not an entirely novel idea in Moscow. In 2006, President Vladimir Putin had publicly offered to select Germany as the distribution center for Russian gas in Western Europe. Counting at that time on the development of Russia’s supergiant Shtokman field, Putin proposed to export Shtokman gas through the then-planned Nord Stream One pipeline to Germany, for onward distribution to other EU countries. The Shtokman project, however, turned out to be unfeasible and was abandoned in 2012.

Putin’s stillborn offer to Germany in 2006 would not have affected the Ukrainian transit of Russian gas to the European Union, given that Shtokman gas would have been “new gas,” not diverted from the Ukrainian transit system. Now, however, Russia is at war in Ukraine and is enlisting Germany into this anti-Ukrainian project. It can also be viewed as an anti-EU project, insofar as it enables Gazprom to replace a transportation route beyond its control with a route under its control.

Part Two

Within Germany, Nord Stream has spawned a system of gas transmission pipelines and storage sites, dedicated to handling Gazprom’s gas en route to German and other countries’ markets. That system’s ownership and operation pose serious challenges to the European Union’s energy market and competition norms. Those challenges will mount, if and when Nord Stream Two adds another 55 billion cubic meters (bcm) to Nord Stream One’s 55 bcm in annual capacity. From 2012 to date, Nord Stream One has operated at about half-capacity.

The dedicated infrastructure on German territory includes the OPAL and NEL transmission pipelines and the Rehden and Jemgum storage sites, all intended to operate in conjunction with Nord Stream One and Two. Gazprom and other Nord Stream stakeholders in various combinations also own and operate OPAL, NEL, Rehden and Jemgum. Alongside that dedicated system, Gazprom and Wintershall jointly operate another gas transmission network that can also be fed with gas volumes from Nord Stream One and Two.

The European Commission had, all along, viewed those plans as aiming to create vertically integrated monopolies. The Commission used its authority and legal powers to resist such arrangements (e.g., restricting Gazprom’s use of OPAL to one half of that pipeline’s capacity). For their part, the German government and regulatory agencies allowed Gazprom to expand its pipeline and storage assets in Germany through joint ventures with German companies. A flurry of such takeovers were agreed upon in 2013 and early 2014, linked with the completion of Nord Stream One and the expected agreement to build Nord Stream Two. Russia’s military intervention against Ukraine in February 2014, however, made it politically impossible for Germany to complete those transactions.

Germany’s time-out is now over. On September 4, Gazprom’s buyout of Wintershall’s gas trading and storage was finalized, and the Nord Stream Two shareholders’ agreement was signed. The agreement has created the New European Pipeline AG project company to build and operate Nord Stream Two. The companies’ press releases stopped short of identifying the chief executive of the New European Pipeline AG project company. Gazprom’s photo of the signing ceremony, however, shows an uncaptioned Matthias Warnig signing the Nord Stream Two agreement, alongside the presidents/CEOs of the stakeholder companies (Gazprom.com, accessed September 14). As managing director of Nord Stream One since that project’s inception, Warnig will apparently hold the same position in Nord Stream Two. Nord Stream Two’s shareholding largely overlaps with that of Nord Stream One and with the shareholdings of the dedicated onshore pipelines and storages in Germany.

These actions are already accompanied by pressures from the interested companies and the German government to override EU energy market and competition legislation. German Finance Minister Wolfgang Schaeuble apparently proposes transferring some of the European Commission’s anti-trust competencies to other authorities, not publicly specified as yet. Germany’s own anti-trust and regulatory agency, the Bundesnetzagentur, does not object to Gazprom’s monopolistic use of the OPAL and (in prospect) NEL pipelines (Naturalgaseurope.com, September 3).

According to the European Commission, the offshore Nord Stream One was implemented in line with EU law at that time, but “the Commission will ensure that Nord Stream Two, if implemented, fully complies with the EU’s Third Package of energy legislation.” And “any pipelines, whether northern or southern, on EU member countries’ territories must be fully compliant with EU legislation (Bloomberg, UNIAN, September 11). This official statement alludes, first, to the fact that the Third Package was not yet in force when Nord Stream One was built, but has entered into force since then. It further alludes to the European Commission’s effective use of EU law to block South Stream—that other Gazprom-led project in Europe.

The European Commission’s vice-president for the Energy Union, Maros Sefcovic, has announced “a host” of questions to be raised on Nord Stream; e.g., Does it correspond with the EU’s supply diversification strategy? What does it mean for Central and Eastern Europe? What conclusions should be drawn, if this project aims practically to shut down Ukraine’s transit route? “All projects of this magnitude would have to comply with EU legislation,” he declared (Politico.eu, September 7, 11; UNIAN, September 11; BTA, September 15).

Part Three

According to the European Union’s Energy Commissioner Miguel Arias Cañete, Ukraine is a “reliable transit country,” while Nord Stream Two does not help diversify supply sources, hence “it is not a priority” in terms of EU policies (Naturalgaseurope.com, September 3). “Not a priority” was also the European Commission’s standard diplomatic phrase when blocking South Stream. The phrase implies (inter alia) no access to EU funding, which is reserved for projects of common interest in the trans-European network-energy (TEN-E) category.

Austrian OMV’s entrance into the Nord Stream Two consortium is noteworthy, both politically and from a business perspective. OMV is the majority owner of the Central Europe Gas Hub (CEGH), at Baumgarten, near Vienna. This was the planned terminus of two major, rival pipeline projects: the EU-backed Nabucco and the Gazprom-led South Stream, both defunct. The CEGH’s remaining role is that of terminus of the Ukraine-Slovakia gas transit corridor to Europe. But the transit volumes have been falling sharply in recent years in that corridor; down to some 40 billion cubic meters (bcm) in 2014. Nord Stream Two threatens to kill that corridor altogether, by switching Russian gas flows from Ukrainian pipelines into Nord Stream.

Hence, OMV has joined Nord Stream Two to keep the CEGH alive, apparently expecting to connect Baumgarten, ultimately, with Nord Stream, via the OPAL and Gazela pipelines in Germany and the Czech Republic. OMV’s new president, Rainer Seele, has indicated at this possibility (Naturalgaseurope.com, August 12). Seele was Wintershall’s president until July 2015 and is closely aligned with Gazprom. Presumably, Seele’s value to OMV is to unlock Gazprom’s doors more widely for the Austrian company, and keep the CEGH alive by connecting it with Nord Stream (Vedomosti, September 4).

If Nord Stream Two kills the Ukrainian transit route—with Slovakia as collateral victim—Hungary could be left up in the air. Ukraine is the sole existing route for Russian (or any) natural gas into Hungary.

Re-routing gas flows from Ukraine into Nord Stream would also affect Poland and the Czech Republic adversely, albeit less dramatically than it would affect Ukraine, Slovakia or Hungary.

Czech dependence on Russian gas stands at about two thirds of the Czech consumption of some 9 billion cubic meters (bcm) annually. In recent years. The Czech Republic also provides transit service for Russian gas to Germany.

The Czech Republic’s pre-existing two trunklines are traditionally sourced with Russian gas from the Ukraine-Slovakia transit corridor. The new pipeline, Gazela, is dedicated to Russian gas to be sourced from Nord Stream, which feeds directly into the OPAL pipeline in Germany, thence to connect with Gazela in the Czech Republic. According to calculations in 2014, Russian natural gas reaching Central Europe via the Baltic sea entails far higher transportation costs—and, thus end prices—compared with the same volumes of Russian gas reaching Central Europe via Ukraine.

Poland, in the last two decades, has provided transit service for Russian gas through the Yamal-Europe pipeline, with an annual capacity of 35 bcm, which runs via Belarus and Poland into Germany. New transport capacity in Nord Stream Two would enable Moscow to either re-direct gas volumes into that offshore pipeline, bypassing Poland, or threaten to do so in order to re-negotiate supply and transit terms with Poland in Russia’s favor under duress. Re-negotiations are due ahead of 2022.

In Europe’s southeast, however, Gazprom has no bypass solution available. Gazprom will have to continue using the Ukrainian transit route in order to supply Moldova, Romania (which has almost stopped importing Russian gas in 2015), Bulgaria, Greece, and western parts of turkey. That would amount to an aggregate volume of up to 10 bcm per year, transiting Ukraine en route to the Balkans.

Whether Gazprom has the gas volumes available to deliver 55 bcm annually through Nord Stream One by 2019, and a total of 110 bcm annually through both lines after that year, seems doubtful, even by switching most of the flow from Ukraine, if Nord Stream Two ultimately materializes.

 

First published by the INGEPO Consulting’s Geostrategic Pulse magazine

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Hydrogen Could Be A Key Player In The Recovery And Resilience Plan

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Thanks to the contribution of vaccines, the Covid-19 pandemic is slowly beginning to abate and gradually lose its aggressiveness, with the consequent reduction of its impact on people’s health worldwide.

However, while the health effects of the pandemic appear to be fading, the negative economic effects of a year and a half of lockdown and forced closure of many businesses are being felt heavily at a global level and seem bound to last well beyond the end of the health emergency.

With a view to supporting and encouraging the “restart” and revival  of the economy, the European Union has launched a “Recovery and Resilience Plan”, allocating a huge amount of funds that shall be used in the coming years not only to help countries in difficulty with contingent measures, but also to stimulate economic and productive growth capable of modernising production models with specific reference to environmental balance, which is increasingly facing a crisis due to the use of non-renewable, highly polluting energy sources.

Italy will receive over 200 billion euros in European funds to develop its own projects to get out of the economic-pandemic crisis and rightly wants to use them not only to plug the leaks caused by the various ‘lockdowns’ in the national productive fabric, but also to implement a series of strategic projects capable of making not only the productive sectors, but also the public administration and the health and judicial systems more efficient.

In short, the “Recovery and Resilience Plan” that is currently coming to the fore may prove to be a powerful driving force for Italy’s development and modernisation.

The projects submitted by Italy to the EU institutions include an initial allocation of over 200 million euros – out of the 47 billion euros planned for the next decade – to promote research and development in the field of renewable energy and particularly in the hydrogen sector.

Why Hydrogen?

Hydrogen is potentially the most abundant source of “clean” energy in the universe. It is versatile, safe and reliable; when obtained from renewable energy sources, it produces no harmful emissions to the environment.

Nevertheless, it is not available in nature in its gaseous form – which is the only one that can be used as an energy source – as it is always bound to other elements, such as oxygen in water and methane as a gas.

The traditional processes used to “separate” hydrogen from oxygen in water and from methane use up large amounts of electricity, which makes the processes not only very expensive, but also highly polluting, with the paradox that, in order to produce a clean energy source, the environment is “polluted” anyway, especially if – as has been the case until recently – the electricity needed is produced with traditional non-renewable energy sources (coal, gas and oil).

The best source of hydrogen in gaseous form is the sea. Electrolysis can easily separate hydrogen from oxygen and store it in gaseous form for use as an energy source.

The electrolytic cells used to develop the process use up large amounts of energy and, fortunately for us, science is finding a way to produce it without polluting, using solar, wind and, above all, sea wave energy.

The use of marine energy creates a sort of “circular economy” for hydrogen production: from the practically inexhaustible primary source of ocean water, hydrogen can be extracted with the energy provided by wave and tidal motion.

Forty per cent of the world’s population live within 100 kilometres from the sea and this shows the potential of sea wave and tidal energy as an engine for sustainable development in economic, climate and environmental terms.

Nowadays modern, non-invasive tools are available to extract electricity from sea waves, such as the “penguin”, a device manufactured in Italy, which – placed 50 metres deep – produces electricity without harming marine flora and fauna.

Another example of Italian scientists’ intelligence and creativity is the Inertial Sea Wave Converter (ISWEC), a device housed inside a 15-metre-long hull which, occupying a marine area of just 150 square metres, is able to produce 250 megawatts of electricity a year, thus enabling to cut emissions into the atmosphere by 68 tonnes of CO2.

With these devices and the other ones that technology will develop over the next few years, it will be possible to power electrolytic cells for the production of hydrogen in gaseous form on an industrial scale, at levels that – over the next 15 years – will lead to the production of at least 100,000 tonnes of “green” hydrogen per year, thus enabling to reduce air pollution significantly, with positive effects on the economy, the environment and the climate.

In the summer of 2020, the European Union launched a project called the “Hydrogen Strategy”, with a funding of 470 billion euros, intended for research and production projects capable of equipping EU countries with electrolysis tools to produce at least one million tonnes of “green” hydrogen by the end of 2024.

The fight against CO2 emissions continues unabated: in the United States which, after Trump’s Presidency, has reaffirmed its commitment to reducing emissions; in China which, in its latest five-year plan, has forecast a 65% reduction in carbon dioxide emissions into the atmosphere by the end 2030; in Europe, which has always been at the forefront in the creation of devices for producing wave and tidal energy and exports its technologies to the United States, Australia and China.

According to the Hydrogen Council, an association of over 100 companies from around the world that share a common long-term vision for a transition to hydrogen, in the future Europe and China will compete and cooperate in the production of sea wave and tidal energy and in the related production of “green hydrogen”.

With its 14th five-year plan, China, in particular – after having been for decades, during its whirling economic development, one of the main sources of CO2 emissions into the atmosphere and of global pollution – has undertaken the commitment “to develop and promote the harmonious coexistence between man and nature, through the improvement of efficiency in the use of resources and a proper balance between protection and development”, as clearly stated by its Minister of Natural Resources Lu Hao.

It might sound like the sweet-talk and set phrases of a politician at a conference.

In the case of China and its Minister of Natural Resources, however, words have been turned into deeds.

As part of the Roadmap 2.0 for Energy Saving Technology and New Energy Vehicles, China has set a target of one million fuel cell vehicles and two million tonnes of hydrogen production per year by the end of 2035.

The China Hydrogen Energy Industry Development Report 2020 forecasts that, by the end of 2050, hydrogen energy will meet 10 per cent of energy requirements, while the number of hydrogen fuel cell vehicles will rise to 30 million and hydrogen production will be equal to 60 million tonnes.

With a view to giving substance to these prospects, China has established the “National Ocean Technology Centre” in Shenzhen and developed – with the Italian “International World Group” – the “China-Europe cooperation project for energy generation and hydrogen production from sea waves and from other renewable energy sources”.

These are concrete projects in which – thanks to Italian creativity and Chinese rationality and pragmatism – we must continue to invest and work, not least to give the third industrial revolution a cleaner face than the coal-stained one of the second industrial revolution.

These projects appear to be in line with those envisaged both at European and Italian levels by the ‘Recovery and Resilience Plan’, which should guide us out of the economic doldrums of the pandemic. They deserve to be financed and supported as they can not only contribute to the recovery and revival of the economy, but also to the reconstruction of a cleaner and more liveable world (thus showing that good can always come out of evil).

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The ‘energy crisis’ and its global implications

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A particular news caught my attention this morning regarding energy crises. Before going into the depth of the news, I would like to introduce you to the concept of energy crisis and its global implications.  As introduced by Garrett Hardin in 1968; the tragedy of commons that the resources of world are limited, if the resources are used excessively soon there will come a time when they will become scarce. These resources can only be sufficient through cooperation of people among each other; there’s no other solution. The tragedy of commons is the best way to explain the concept the energy crises.

Now, the population world is growing at an exponential rate and with the growing population there is a need to provide a better lifestyle to the upcoming generations.  In a struggle for raising that standard of living, more and more resources of developed world are being utilized. The McKinsey Global Institute forecasted that by 2020 developing countries will demand 80 percent more energy which proved to be true as is evident in recurrent fuel shortages and price hike globally. A MIT study also forecasted that worldwide energy demand could triple by 2050.

Besides petrol, there is also a rise in demand for natural gas with only few reliable reserves all over the world. The natural gas reserves are mostly unreliable because they are usually found in deep oceans and mere accessibility can cost a lot of expense. Henceforth, the supply is limited, the price has fluctuated greatly and recent technological development has reduced dependence upon natural gas by providing alternatives such as fuel efficient or electric cars. Similarly, electricity supply systems are also not very reliable because there have been power blackouts in the United States, Europe and Russia. There have also been chronic shortages of electric power in India, China, and other developing countries.

If we specifically observe the Iraqi oil crises to understand the whole energy crises shebang, then according to today’s news in TRT World, in Iraq alone, $150bn of stolen oil cash smuggled out since 2003. Iraqi oil exports are even 30-40% below prewar levels. The acting president of Iraq is furious because insane amount of corruption is being carried out in Iraq where substantial quantity of oil is being smuggled. President Barham Saleh presented a legislation to parliament, where, under law any transaction over $500,000 would be scrutinized. This step, if materialized, can be very crucial in preservation of oil reserves in Iraq after the Saddam Hussein regime.

In United States, presidents have constantly been avoiding energy problems because they are very controversial. The recent Texas electricity outrage was a one that had been warned about. Before the Arab Oil Embargo Nixon in 1970’s was reluctant about energy and said ‘as long as the air conditioners are working normally, there is no energy crisis’ but after this incident Nixon began to change his tone and said on television that “energy is number one issue”. Then came Carter, who got a number of legislations passed on the issue of energy even when his own party was against it. In the 1970’s the prevalent thought for United States was that the world would run out of energy resources very soon so they started investing more in nuclear armament as an alternative. In 1990’s the combined cycle plants that used natural gas to create electricity were really efficient and economical that even gas at a high price could be competitive, also ethno-industry was crated at that time.

Then, the threat of climate change is also one of great relevance in the context of energy crises. The nonrenewable energy resources such as oil, water and coal must be used carefully and lack of which can be hazardous. It can cause drought, famine, disease, mass migration that will eventually lead to a conflict such as explained in the tragedy of commons theory. The now developed nations exploited natural resources to build its wealth. The resources such as wood, coal, oil and gas where on one hand are very economical, on the other hand they can be the originators of carbon emissions. Climate change also led to loss of biodiversity as well as environmental hazards.

Even though the developed world i.e. north provides a significant amount of assistance to the global North i.e developing countries, they cannot be a replacement for the shortage of resources. Also, they also face extreme price hike in the energy resources even though the developing nations are the ones owning the resources such Iraq for oil. Besides expensive resources, these developed nations also give rise to domestic and political tensions in the third world countries. Organizations like Al-Qaeda have openly declared their intent to attack oil facilities to hurt the interests of US and its close allies.

All in all, the pertaining threat of energy crisis has global implications. One person’s’gain is another person’s loss but this can be made inevitable if cooperation takes places. Sharing is caring and in this context sharing can prevent from future wars and hurricanes, floods and droughts and famines. The extent of seriousness of the problem must be taken into consideration not only be academicians but by policy makers as well.

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Stay in Oil or Race to Green Energy? Considerations for Portfolio Transformation

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Oil and gas (O&G) companies face a conundrum: capture the remaining value in hydrocarbons, or decide if, when and how much to invest in new, low-carbon energy business models.

The global O&G industry has the opportunity to redeploy as much as $838 billion, or about 20% of cumulative capital expenditures over the next 10 years, to further optimize their hydrocarbon business and/or pursue new growth areas including new energy ventures.

Of low carbon business models, market sentiment is currently strongest for renewable power with growing interest in green hydrogen and carbon capture as well.

Why this matters

In the wake of COVID-19 disruptions and an accelerating energy transition, O&G companies face a conundrum: stay and capture the remaining value in hydrocarbons or embrace new energy business models. Deloitte’s new “Portfolio transformation in oil, gas and chemicals” research series provides valuable insights into portfolio transformation and offers key considerations for companies making capital allocation decisions and exploring future business models.

Finding the right recipe for portfolio transformation

While companies understand the imperative to change, they are grappling with how much to invest and most vexing, in which green technologies? After all, while the high-growth phase of the oil market may have come to an end, oil demand is still projected to remain above 87 million barrels per day by 2030, even in accelerated energy transition scenarios.

How much to redeploy? $838 billion may be a starting point

To determine how much capital to redeploy, O&G companies could start with capital that is not earning the desired return. Deloitte analyzed 286 listed global companies and revealed that in a base case scenario, these companies could have the opportunity to optimize up to 6% of future O&G production which may not generate a 20% return at an average oil price of $55 per barrel. In other words, about $838 billion, or about 20% of future capital expenditures (CAPEX) across the global industry could be redeployed to optimize these projects and/or pursue promising green ventures. The findings suggest that the opportunity to redeploy will not decrease, but rather increase if oil prices stay above pre-pandemic levels. Among the company groups, supermajors, on average, have a potential to redeploy up to 36% of their future CAPEX.

Where to invest? Solar and wind most frequently mentioned

After performing text analytics and sentiment analysis on thousands of news articles to glean a directional sense of which low-carbon and new energy solutions are attracting the most media attention, the study found renewable power (solar and wind) had the highest share (47% among all green energy models). The tide also seems to be turning for green hydrogen (8% share of mentions).

“A confluence of factors, including climate, the pandemic, supply-demand imbalances, changing trends in end-markets, and growing appetite for sustainability investments, has given oil, gas and chemicals companies the need to progress faster around portfolio transformation. Many companies are eager to act but are seeking guidance on the speed and extent to which they expand into new, potentially high-growth areas, be it in new regions, markets, products or technologies. By taking a strategic, purpose-driven approach, companies can sustainably and profitably build a future-ready portfolio.”- Amy Chronis, vice chairman and U.S. oil, gas and chemicals leader, Deloitte LLP

Debunking myths: Turning hindsight into foresight to navigate portfolio transformation

While many O&G companies have transformed their portfolios over the years, not every change has been successful. The Deloitte analysis dispels conventional wisdom about strategic shifts and offers insights and important considerations about portfolio building in the O&G industry.

Myth 1: Agility and flexibility always deliver gains

  • Reality: Of the more than 286 upstream and integrated companies analyzed, only 16% of companies that made frequent changes to their portfolios delivered top-quartile financial performance.

Myth 2: Being big and integrated guarantees success

  • Reality: Only 28% of big (revenues above $10 billion) and integrated companies figured in the top-quartile.

Myth 3: Oil has lost its luster

  • Reality: Oil still delivers significant value for many. Two-thirds of oil-heavy portfolios deliver above-average performance.

Myth 4: Every “green” shift is profitable and scalable

  • Reality: Of portfolios that have become greener, 9% delivered top quartile financial performance, underscoring the importance of a strategic, purpose-driven approach to portfolio transformation.

Myth 5: Shale’s pain makes onshore conventional plays an obvious choice

  • Reality: Between 18-45% of non-shale portfolios analyzed delivered below-average performance.

Keys to building a future-ready O&G portfolio

There are four components of a forward-looking portfolio: growth engines, cash generators, profit maximizers, and divestment of value strains. Optimizing the energy transition is not just about selecting the correct technologies in which to invest; it also involves upgrading business models to incorporate new metrics, dynamic planning and AI-based analytics to become more agile. Companies should also consider strategic alliances to maximize their strengths and gain from others.

Chemicals and specialty materials (C&SM) face similar urgency for transformation

As the chemicals industry navigates its own portfolio transformations, focus is key. Deloitte’s analysis of more than 200 chemical companies over a 20-year period showed that focused companies — those that prioritize certain end-markets and product categories and derive at least 60% of the total revenue from that category — outperformed diversified chemical companies. In fact, focused chemical companies organically grew revenues at twice the rate, generated 70% higher return on invested capital (ROIC), and delivered 60% higher shareholder returns.

The top-performing chemical companies typically change their portfolio mix more frequently than others —usually changing their portfolio once every business cycle and remaining focused on their over-arching business strategy, be it low cost, differentiated products, or exceptional service.

Keys to building a future-ready C&SM portfolio

The study recommends C&SM companies make critical portfolio choices that create value. The ongoing disruption in end markets requires leaders to make conscious decisions about their competitive advantage and play in products and service categories where they can build and maintain that advantage. Moreover, given the growing emphasis on sustainability, chemical companies should consider investing in recycling technologies and incorporating renewable and recyclable materials in their product offerings.

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