By Floros Flouros(*) and Dr. Athanasios Dagoumas
In this study, the importance of HydroCarbon (HxCY) exploration in Exclusive Economic Zones (EEZ) and most particularly its implication on the involved countries is examined. Moreover, it is well known that Cyprus has been in conflict and confrontation with Turkey during the last decades. It will be argued that the continuation of the HxCY exploration from Cyprus inside its EEZ will strengthen its position with regard to Turkey which means that it will give to the Cyprus Republic a competitive advantage versus Turkey.
The Critical Success Factors (CSF) that affect positively the Cyprus-Turkey relation in the case of HxCY exploration in Cyprus’ EEZ will be identified and then prioritized/ranked by importance/contribution to the examined relation. In addition, a list of export options for the Cypriot government is also considered and it will be investigated whether political or economic/financial factors should be taken into consideration for the choice of such export options.
Framework of analysis
The Eastern Mediterranean region has been facing challenges also related to the energy landscape. Since the economy is foreseen to grow further while at the same time the population of the region is expected to grow from 45.3 mill in 2010 to around 60 mill in 2030, energy demand should also increase significantly over the next years.
On the basis of the Exclusive Economic Law (Law no. 64(I) 2004 amended by 2014 Law), “Cyprus declared its EEZ, the outer limit of which shall not extend beyond 200 nautical miles from the baselines” from which “the breadth of territorial sea is measured in accordance with UNCLOS” .
In Table 1 short summary is presented regarding the agreements that Cyprus has concluded so far in the East Mediterranean region with its neighboring countries like Israel, Egypt, and Lebanon but not with Greece, Syria and Turkey and the Palestinian Authority.
Table 1: Agreements between Cyprus and other East Mediterranean countries
|Country||Date of delimitation agreement/EEZ||Remarks|
Delimitation Agreement entered into force
Agreement about cross-median line HxCY resources
Delimitation Agreement entered into force
Not ratified by Lebanon yet. Some difficulties still exist, due to ongoing dispute between Lebanon and Israel about their EEZ settlement
Delimitation Agreement entered into force
Even though Israel not signed UNCLOS yet
|Greece||Not yet (!)|
|The Palestinian Authority||Not yet|
In Figure 1, the Maritime Boundaries in the Eastern Mediterranean region are presented .
Figure 1: Maritime boundaries and Exploration blocks in East Med at end-2012
(Source: Darbouche at al., 2012).
Turkey considers that the Northern part of Cyprus is of geostrategic importance for at least two reasons: it affects Greek-Turkish relations and it is of global geopolitical interest due to the location .
Despite Turkey’s recent activities in Cyprus’ EEZ, that are mainly aimed at preventing Cyprus from exercising its sovereign rights in its EEZ, all licensed companies finally “proceed with their exploration programs, in line with the licenses granted by the competent authorities of the Government” .
Finally, it is important to identify those Critical Success Factors (CSFs) that affect positively the Cyprus-Turkey relation in the case of HxCY explorations that have started in Cyprus’ EEZ. As indicated in the previous Table 2.l, CSFs are those key variables that have a tremendous impact on how successfully and effectively an organization meets its mission and in the examined case how Cyprus can continue exploration activities in its EEZ leveraging such a success to its relations with Turkey.
The Research Question
Further to the previous analysis, it is now necessary to address the Research Question and then to search for the useful data and information to answer it. The Research Question is considered very crucial even though the least addressed part of the research process .
In the current case, the Research Question can be defined as below:
Identify the Critical Success Factors (CSFs) that would affect positively the Cyprus-Turkey relations in the case of Hydrocarbon Exploration in Cyprus’ Exclusive Economic Zone (EEZ).
- The identity of the research which took place is presented as following:
- Research: Qualitative.
- Type/Method: Interview (one – to – one and electronic).
- Type of Interview: Semi structured.
- Sampling: Purposeful sampling and most particular snowball effect.
- Size of sample: As mentioned above; the sampling is terminated when no new info is forthcoming.
- Selection criteria: relevant to the field, highly educated (academic degree and over), ethnicity of Cypriot, Greek, Turkish, other.
- Period: beginning of May – end of July 2015 (3 months).
The results are presented in Figure 2, in which EU and USA are considered as the most influencing actors in such cases, since they have been mentioned by almost all the interviewees. Following, Cyprus and Turkey are those countries that are supposed to affect more Cyprus in its actions related to the HxCy exploration and furthermore in finding choices on how to export any quantities from its territory in the near future.
At the same time, commercial companies like those participating in the license part, exploration activities, etc. are also considered that they play an important role in the final plan. Finally, other players mentioned during the interviews are counties like Israel, Greece, Egypt and the Northern part of Cyprus.
Figure 2: Main Stakeholders involved in the exploration and trading gas in East Med
(Source: Authors, 2015).
Stakeholders as institutions like EU and UN are believed to be important factors that can affect the progress and success of the projects and any exports in the region. Technical and geological issues, like the depth of the sea, the morphology of the surface, whether onshore or offshore facilities are all considered by the responders as critical parameters for the preparation, design and evaluation of projects in the gas fields in the Eastern Mediterranean region as per the survey took place during the period May-July 2015.
Figure 3: Critical Success Factors (CSFs)
(Source: Authors, 2015).
Regarding the possible options the Cyprus to export gas, in Table 2 are presented several answers from the responders during the survey:
Table 2: Answers from interviewees regarding better options for Cyprus to export gas
|Answer 1||Answer 2||Answer 3||Answer 4||Answer 5||Answer 6|
|Pipeline to Jordan||From netback view: Egypt could give the best ROI/netback. However, there is a risk since climate is not the best. It looks the most reasonable option but not sure if it can be finally done.||LNG is not recommended due to small qties.||The LNG looks problematic. There is a need for infrastructure.||LNG at Vasilikos: it adds power to Cyprus (having the infrastructure at your own land). There is space available at Cyprus.||The ideal would be that CY-TR-ISR to cooperate closely.|
|Pipeline to the Palestinian Administration in the West Bank.||From the risk view: the LNG looks preferable, which is not possible to be done (taking into consideration existing amount of gas).||CY-Greece pipeline: Does US support it, since it could compete and replace Russian gas?||Alternative ways for development needed and the needs for infrastructure that make sense to export the NG.||Pipeline to Cyprus due to the distance and geopolitical reasons.||LNG or pipeline is a function of qties (need to be high).|
|Pipeline to the Gaza Strip.||If qties 3 tcf or more, then LNG. Thus, taking into consideration existing amount of gas it does not look a choice (and additionally Noble does not have any experience with LNG).||Exports to Egypt: yes (+) while Exports to Turkey: neutral (-).||
Pipes and LNG are f(qty, market prices).
Export to Greece is not recommended because it would have serious technical problems (deep sea, seismic region, distance, etc) and thus a huge cost
|If you want to add value to Turkey, then you decide to pass the pipeline through it. Thus, the question is whether it can go to Greece.||Israel-Cyprus-Greece electricity interconnector is a political issue.|
|Pipeline to Turkey.||
Pipeline to Greece: no way. Huge cost, big risk.
Turkey: it could be an option (in theory) but Turkey would increase its power in the region.
|Exports to Palestine is not recommended for Israel.||Export to Egypt: yes, because of existing unutilized infrastructure and Egypt is looking for NG to support its growth plans. It is feasible. Sisi needs supporters/allies.||Depends on negotiations for the solution of the Cyprus problem|
(Source: Authors, 2015).
While energy supply is important for the economic growth of a country, there is a correlation between energy use and GNP. Since GNP is not the only factor “of level of civilization or quality of life in a country”, it is necessary “when planning for energy needs of a nation to consider alternative socioeconomic models, with emphasis on the socioeconomics and not only the economics” .
If a solution is not found in the Cyprus problem then it is impossible to see any cooperation with Turkey. Regarding export options for Cyprus, he mentioned that apart from the local market it can be also said that “the preferred monetization option is regional pipelines” and that Egypt “has been identified as the main export target for the project, together with the Cyprus domestic market” .
Cyprus mentioned that “Cyprus needs to continue trying to convenience Turkey on the advantages it stands to gain from adopting a policy based on international law and from contributing to the settlement of the Cyprus problem; a settlement that could allow the Turkish Cypriots to share the benefits of Cyprus’ natural resources and wealth .
There have been several cases in which the decision to start and build a project related to the energy (i.e. pipeline Baku-Tbilisi-Ceyhan, BTC) was taken based on political and geopolitical parameters and reasons and not economical-financial ones, since the later did not support the continuation of the project . It has been seen an inclination from the state to “use disruption of natural gas supply in order to promote foreign policy goals” which is supporting the idea of political domination when decisions are taken in energy policy of a country .
Based on the results of the qualitative research the CSFs that would affect positively the Cyprus-Turkey relation in the case of HxCY in Cyprus’ EEZ can be summarized in terms of importance as following:
- Most of the responds are related to the political/geopolitical environment as the most important success factor.
- Stakeholders as institutions like EU and UN are believed to be important factors, also.
- Geological issues like the depth of the sea, the morphology of the surface
- Technological issues as whether the facilities are onshore or offshore
- Commercial and economic issues, related to exploration costs, current and future prices in the Oil and Gas markets, incentives and taxation policy from the government, participation of the government into joint venture schemes with private companies, etc.
A short/medium term approach and a long term one had been considered as following:
Short/Medium term approach: due to the current status of Cyprus’ political relations with its neighbor’s, the liquefaction seems to be the only feasible option for gas exports for the country. Thus, there can be two subsequent options:
- Develop a joint liquefaction facility with Israel. This would help Cyprus to dispose of enough gas to synergies for its own LNG export projects. In addition, it would be EU’s interest since PCIs are already a reality and it also would assist strengthen EU’s security through diversification of sources. However, such a choice require huge investments while gas prices have been weakened radically during 2015.
- Participate in a construction scheme to build an export terminal in the Jordanian Free Economic Zone at Aqaba. This would help Jordan to get gas supplies through pipeline and thus serve also local needs.
- Continue efforts to participate into energy schemes, which to a great extent are “partnerships of an economic nature, can ease tensions, freeze or even terminate conflicts of a political nature” .
Long term approach: The regional geopolitical complexity in the Eastern Mediterranean is already affecting the progress in export gas in the area and as soon as regional conflicts are resolved then the pace of development will be increased significantly.
Cyprus needs to “continue trying to convenience Turkey on the advantages it stands to gain from adopting a policy based on international law and from contributing to the settlement of the Cyprus problem”; by this, it could possible for the Turkish Cypriots to “share the benefits of Cyprus’ natural resources and wealth” .
Based on the analysis herein, it can be said that any continuation of HxCY Exploration from Cyprus inside its EEZ can strengthen its position with regard to Turkey and this could be supported under conditions like the solidarity of the EU and support from US, the close cooperation with the neighboring counties of Israel and Egypt, the participation of international companies in available business plans in country’s territory and finally the continuation of the efforts of Cyprus towards the Cyprus problem which will eventually allow the Turkish Cypriots to benefit of Cyprus’ natural resources and wealth.
Based on the analysis presented in this study, it has been suggested that the LNG option seems to be one of the most realistic and promising options for Cyprus to cooperate with its neighbor country Israel provided that the state of Israel can relief any concerns about security and sovereignty. Then, the onshore liquefaction at Cyprus would be decided whether it would be related to the existing field of Aphrodite or others to come on stream in the coming years.
The other option for building FLNG in the Mediterranean or Red Sea could alleviate Israel’s fears and provide additional paths to new markets such as Asian avoiding the transportation through the Suez Canal.
Cyprus has decided to explore the possibility of exporting NG discovered in the Aphrodite field to Egypt through an underwater pipeline, while NG from the Aphrodite field will also be brought to mainland Cyprus for power-generation purposes. He also mentioned that the government of Cyprus “does not exclude prospects for energy cooperation with Turkey in the future provided that the Cyprus problem is first settled” which is a pre-condition .
Based on the literature and the analysis took place, the decision making for a country whether to proceed with an investment or project in the energy sector might be a combination of several parameters such as political or economic, geographical, historical, social, technological. It is also related to each country, since each one designs and follows its own energy policy and it will have differences from those of other neighbor countries.
The recent discoveries of HxCY in the territory of Israel and Cyprus, with a good probability in the future for counties like Egypt, Lebanon and Greece to follow, offer substantial opportunities to further deepen relations between them. Even though current quantities do not seriously affect global correlations, however the power of the closest markets shows the importance of energy as a synergist factor and this is important to be taken under consideration by the governments and authorities in the region.
Greece hardly can substitute Turkey in the planning of Israel and Egypt; however, it can be proved as a reliable partner whose opinion continues to have a casting value in regional affairs. Greece has shown that can achieve tangible results through practical agreements.
Actions that Greece and Cyprus take in pursuit of broader partnerships, initially to start a climate of mutual understanding, and then to design the conditions for foreign investments are deemed good. Without having any given differences in the Eastern Mediterranean region, the main challenge is to turn to normality amid intense pressure on societies and regimes.
Experienced diplomats note that Cyprus need to continue to build regional alliances with Israel and Egypt but at the same time to emphasize the development of its exploration program. During this period, time seem to be working in favor of Cyprus, while the same sources estimate that it is not easy for one company to lease drilling platform to carry out research in an EEZ internationally recognized as belonging to the Republic of Cyprus.
By invoking international law, being on military alert, strengthening strategic alliances with regional players, and harmonizing with the geostrategic interests of the US and EU (as well as the economic interests of large international companies) in the region, Greece, Cyprus and Egypt are taking cautious and systematic steps during a difficult period hoping to find more substantial backing among their allies and partners. Although the research was implemented before the discovery of the Zohr field in Egypt, this development works in favor of deepening the cooperation among Egypt, Cyprus and Greece. Some projects, such as the East-Med pipeline, increase significantly their maturity and possibility to be implemented, as disadvantages over the required gas volumes are surpassed, while they could guarantee considerable financing from the European Commission as a Project of Common Interest (PCI), towards enhancing European energy security and a functioning internal energy market.
(*) Floros Flouros has studied Chemical Engineering at the Aristotle University, Nottingham Trent University, UK and the University of Peloponnese, Greece. Floros has held several progressive managerial roles in the chemicals, minerals and polymers industry for the last 17 consecutive years. Email: floros.flouros[at]ntualumni.org.uk
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 Darbouche, H., El-Katiri, L., Fattouh, B. 2012. East Mediterranean Gas: what kind of a game-changer?. Oxford Institute for Energy Studies. NG71.
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First published by Geopolitics of Energy (GoE, March 2016) under the title: “Identification of the Critical Success Factors that affect positively the Cyprus Turkey Relations in the case of the Hydrocarbons Exploration in Cyprus’ Exclusive Economic Zone (EEZ)”. Republished by the authors permission.
Hydrogen Could Be A Key Player In The Recovery And Resilience Plan
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.
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).
The ‘energy crisis’ and its global implications
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.
Stay in Oil or Race to Green Energy? Considerations for Portfolio Transformation
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.
World Bank Supports Croatia’s Firms Hit by COVID-19 Pandemic
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