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Adapt or Die… How the Oil and Gas Industry Must Change to Become Future "Fit"


By Maggie Hanna, BSc PGeo – Energy Dialogues Speech, Global Petroleum Show 2017

Good morning everyone and a warm welcome!
I’ll begin by stating, un-reservedly, that “Oil is AWESOME!”S

How many human work hours are in a single barrel of oil? 4,053! That is 2 years of 40 hour work weeks. In one barrel! At $15/hour, a barrel of oil is worth $61,000 dollars! And we pay …what… $50 or $60 for that? Because of the oil industry, people live longer, have better health, grow more food, journey farther, build bigger, higher and faster; AND have more free time to create/invent/contribute/and play…. which all together makes for a higher standard of living.

(…the math…6100MJ/b of oil / 8.6MJ/d sedentary worker = 4053 hours)

But we have only had access to oil for a very brief time in our human evolution – only 160 years since the very first producing well … and that is not a very long time…. especially if you consider it in the context of all the energy transitions that we have undergone, starting 7,000,000 years ago, when we first mastered fire using wood, charcoal and dung.
There have been many energy transitions since then. Here are a few of the biggies.

  • We domesticated working animals 5 ½ thousand years ago
  • First use of coal 3k years ago by the Chinese
  • First use of solar power was 22 hundred years ago when Archimedes used polished bronze shields to focus sunlight to set fire to enemy sails and their wooden boats
  • 1500 years ago the Persians began using windmills for grinding grain and pumping water
  • 300 years ago Sperm Whales were killed for the clean burning whale oil in their heads and backs
  • Electricity turned from a scientific curiosity into an essential tool for modern life only 200 years ago
  • And then, one of the biggest energy watershed moments was only 97 years ago when the huge oil discoveries in Texas and the Persian Gulf made oil energy not only abundant but CHEAP.

 

We have lived in the oil era ever since. Make no mistake, the energy transition to cheap oil and gas was a disruptive one for a lot of industries. It is surprising to learn that global energy sources have actually been decarbonizing over the last 200 years. There was a kind of Peak Oil in 1985 when oil made up 50% of global energy supply. Now, oil is providing only 33%. Peak coal was in 1920’s, and Peak Wood in the 1850’s.

Today, in 2017, we are facing another disruptive energy transition. Our hydrocarbon based economy is in a transition and doesn’t even recognize that it is in one. It is difficult to handle that thought. We are not sure what to do about that. The problem is that every single person in this room was born into the oil and gas energy era, and we have spent our entire lives in that era. As a result, we have this unreasonable visceral certainty that this is how it is always been, and how it is always going to be….. That is just NOT so!

Mark Twain once said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

This is the elephant in the room folks. De-carbonization is accelerating. Ideas, Innovation, and technology will end the age of oil long before we run out of it. Our Oil and Gas Companies must evolve into true ENERGY COMPANIES to become Future Fit. Either we continue our slow decline into obsolescence, or we radically evolve to serve the new energy future. If we choose to ignore the alternative energy sources evolving now, because it is not our core business, we are doomed to die of being absolutely mal-adapted to the post-carbon economy.

This is real. Your livelihood is going to radically change, in your life time, one way or another. I am speaking, today, directly to the progressive people and firms that might be wise enough to acknowledge this reality, and play both sides of the energy fence, at the same time, because it is a competitive long term advantage for your stakeholders.

There is a lovely teaching story about the wise fool, Mullah Nasruddin, which illustrates our current conundrum.

At closing time one night, an older gentleman comes out of the tavern and sees his friend, Mulla Nasruddin, on his hands and knees in the road under a street lamp, sifting through the dirt with his fingers. He says, “Mullah are you looking for something? Maybe I can help.” Mulla Nasruddin says, “Yes, thank you, I lost my key.” His friend replies, “Okay, I’ll help. Where did you lose it?” Mulla answers, “Over there in that field”. His friend says, “Why the heck are you looking over here on the road then?” And Mulla replies, “The light is so much better here.”

Is that any different than us? It is easy to look where the bright light shines, but it will not solve the problem we have got.

Trying to predict what will make up a profitable energy project in 10 years, or 30, or 60, or 100 years is becoming increasingly difficult. But we have to do it anyway…. in order to address this tension that is building between our energy heritage and our energy future. The most creative place in the world, exists in the tension of the opposites ….opposites which are BOTH 100% opposite AND also 100% true. It is not a comfortable place, but it is exactly where we are sitting right now, and exactly where we need to be. Let’s not waste this discomfort. It is time to get radically creative.

Oil Trades at the Margin. Only a 1% over-supply or under-demand causes the oil price to be cut in half. 2% cuts the oil price to a third. Saudi is no longer using its swing production to provide that critical market balance needed to keep the price up. What do YOU think will happen to the future oil price, as an ever-greater mix of renewable energy systems reduce fossil fuel demand?
Most of us know that 70% of all oil produced on the planet is used for transport fuel. As the people whose livelihoods depend on providing that transport fuel, we might look out our windows, with some relief, and say, “Oh gee, there are 1.2 Billion internal combustion engine vehicles on the world’s roads today.” And then we might say, “There are only 1 million electric vehicles, and 1.3 million hybrids … which, when added together, constitutes only 0.2% of the world fleet … so obviously there is nothing to worry about. The oil industry is alive and well, and will be for a really long time.” But…we would be wrong.

In fact, it is not the current percentage of the vehicle fleet that has already been electrified that matters. What matters is the increasing RATE of change of vehicle electrification and technology advancement.

Tesla 3’s, will be rolling off the production line next month, (July 2017) with a base price of $35k US. There is a backlog of 375k pre-orders. In addition to Tesla, there are 22 other auto makers offering 41 different fully electric cars that are on the market…today!

How soon should we start being concerned? Metaphorically….well…. the day before Yesterday! Why? Because when electric cars surpass internal combustion cars through some combination of better performance, affordable purchase price, much lower fuel cost, and negligible maintenance costs, longer lifespan; then the change-over to electric vehicles will be faster than you can shake a stick at. The average life span of a vehicle today is about 15 years, which means it takes 15 years for the entire world vehicle fleet to age out, and less than 15 years to swap it over to electric.

An often heard prediction is that the oil price in 2025 will be around $26/bbl. We are also looking at a 50% probability that half the world fleet will be electric by 2035….that’s 18 years away. Is your company ready for the consequences of that?

What is the evidence for these predictions? It is mostly about how fast radically new mobility battery designs are evolving. Here is some data:

  • The average cost of a Lithium ion battery has dropped every year since 2010. 35% in 2014 alone.
    We have all heard about Tesla’s Nevada Giga-factory for lithium ion batteries. Well, it was just announced that Daimler broke ground on the largest battery factory in Europe, just south of Berlin. It will be up and running by the middle of next year. Global battery manufacturing capacity will double within the next 4 years. Might the lithium supply become tighter and more expensive? Probably. After all, most of the known lithium deposits in the world are in China and they are closing ranks around it and treating it like a strategic resource.
    Well, here is your first BIG IDEA…. There are significant amounts of very valuable and harvestable Lithium in Central Alberta in the Devonian formation waters. Anything over 50ppm is economic. And up to 140ppm has been measured so far. Is your company taking advantage of that resource?
    Also, there is an awesome new mobility battery near commercialization, the Vanadium Lithium Phosphate battery. The claims vary, but assertions are that this battery will take an electric car 4-11 times farther on charge than the current lithium ion technology. Assuming just the low end of that estimate, only 4 times the distance, an electric car will have a range that is 2.5 times the range of a tank of gas in a similar sized car purchased for comparable money! AND they are predicting somewhere between a 90 second and a 6 minute charging cycle! AND you can fuel your car with solar panels on your own garage roof! Think about that for a minute. Affordable, faster, as convenient, less maintenance, better performance, quieter, longer life. What would your next car be?
    Where is all that battery Vanadium going to come from?
    BIG IDEA… Athabasca bitumen contains 220ppm Vanadium, petcoke 1000ppm, and coke boiler ash contains 3.5-5 PERCENT Vanadium. There are Vanadium ore bodies sitting around in the ash ponds at Athabasca, doing nothing….. So far.
  • And beyond lithium ion, there are other awesome battery designs under development even though a little farther into the future. Granted, and they still have challenges to solve, but this list gives you an idea of the breadth of ingenuity that is coming towards us just the same.
    • Lithium Air Battery …1/5th as heavy and 1/5th the price
    • Lithium Solid State Battery ….30% more power density and eliminates the need for hazardous electrolyte
    • Graphene Batteries that offer a range of 800 km (or 500 miles) on a charge
    • One of my favourites …the Aluminum Air Battery with 40 times the capacity of Lithium ion and it is recharged by topping it up with water
    • Gold Nanowire Batteries are showing no recharge degradation AT ALL, after 200,000 discharge cycles compared to Lithium Ion which starts to degrade after only a few hundred to a few thousand discharge cycles.

 

BIG IDEA! These new battery systems are replacing our liquid fossil fuel products. Invest in what is replacing you. If we are not bold enough to change our business models by expanding into the non-carbon energy market….Others will do it for us… …and we will NOT SHARE in those profits.

Another electric car game changer is the hydrogen based PEM fuel cell cars built by Toyota, Honda, Hyundai, and GM. These cars can run the fuel cell on hydrogen from any source. It could be methane reforming OR carbon free as hydrogen derived from onsite electrolysis of water. China has preferentially committed to the hydrogen highway over the electrical one. And you can drink the water that comes out of the exhaust…it is that pure.

You can see where this is going.

Question: By a show of hands, how many of you have ever driven a 100% electric car? Show of hands. I highly recommend you do it. There is a difference between knowing something, which is a head thing; and knowing that you know that you know, which is an experience-thing. Take a Tesla S for a free test drive and have that experience. Be sure to turn on the autopilot. It is scary… but safer than you are.

The next “Big Hairy Question” is… How the heck are we going to charge all those electric cars? The grid will have to seriously change to handle the increased load and become greener at the same time.

BIG IDEA…Oil companies could build and own the new wires. And then invest in the East/West Energy Corridor in Canada. Check out Dr. David Layzell’s work at the U of C on that topic.

Actually, the whole Alberta grid is already becoming carbon free. Coal is going away by 2030. And the grid has already embraced net metering for residential solar installations.

So, another of our markets, ie. fueling the grid, is poised to disappear in the medium future. What are the signs?

  • Solar installations are becoming so much cheaper and more efficient. It is ¼ the price compared to 10 years ago and has greater efficiency.
    BIG IDEA…. What if were re-purpose our old well sites leases into Solar Farms. While you are at it, harvest the geothermal energy from existing wellbores, especially on hot spots near towns.
  • Wind installation is accelerating – however the current large blade turbines are becoming obsolete. It is too expensive to service them, and they have sound problems.
    BIG IDEA…. Get into that game of replacing the Big turbines with the new smaller, cheaper, more robust and more efficient turbines currently under development. It will mean steady long term cash flow.
  • GEN IV nuclear reactor options are here. They provide abundant safe clean electrical power baseload to the existing grid. My current favourite design is the FLIBE Thorium Molten salt reactor. Look it up on Youtube and TED talks.
    BIG IDEA …. The first oil company to do a deal with FLIBE ENERGY will have a considerable market advantage for the foreseeable Future.
    ANOTHER BIG IDEA…. The first oil company to buy up the moth-balled coal plant sites in Alberta, and elsewhere, will have a superb cash cow asset into the future. Why? Because all the main grid transmission wires connect there. The Alberta grid is worth $263 Billion dollars today. Capitalize on that infrastructure. If an oil company owned those coal plant sites, and built Gen IV nuclear reactors on them, it could sell clean baseload power into the Future for the next 60 years.
  • And then we have Super-efficient Grid level batteries that are becoming cost effective – there are several designs today that can put 1MW in a Sea can. That is all important grid level storage for renewable peaking. (V Flow, Zn-Br battery).
    BIG IDEA…. The first oil company to buy into Imergy Power Systems will be able to capitalize on their superior Vanadium Flow battery for grid level storage. AND Imergy is currently insolvent so you should be able to get a deal on it.
  • Next …Look into Biofuel and electrical generation from organic wastes of all kinds AND through genetically modified algae, bacteria. A company called Solazyme in the US has been running Naval ships exclusively on oil from genetically modified algae.
  • Smart buildings are needing less fuels for heating /cooling .Vancouver has mandated zero emissions from new builds starting 2020, with all building retrofits done by 2040. Invest in what’s replacing you!

 

Oil and gas demand is going away, however, in the near term, hydrocarbon is still a very necessary and key energy bridge to the post carbon energy future…. all bridges have an end. It is not a matter IF, it is a matter of WHEN.

The exact timing is hard to pin down because there are so many moving chess pieces. Things like: changing policies and regulations, changing consumer preferences, faster/slower economic growth, faster/slower technological progress, different relative fuel prices, and technological breakthroughs. But the bottom line is we are advancing through the LOW-carbon future into a NO-carbon future. Our industry problem is the significant amount of lead time required to change our business models, train our staff, and evaluate the best bets to take, foster the relationships, and make our bets. We have to act now to make sure we are relevant, contributing, and therefore prosperous in those futures.

How are we actually going to get there from here?

It is going to require a drastic change in oil patch corporate culture. As Peter Drucker, known as the founder of modern management principles said, “Culture eats strategy for breakfast.” He is not wrong.

So here is my …

THE TOP TEN LIST OF CHANGES REQUIRED TO INNOVATE CORPORATE CULTURE IN OIL AND GAS COMPANIES

1. In near term, establish 2 separate, distinct, and parallel corporate cultures, which co-exist within each major oil company. The first culture is no surprise. We absolutely protect the existing culture of operational excellence, safety, efficiency, and continuous improvement, which maintains production stability and is our “bread and butter”.

2. Our leaders have to get with the program. Either we retrain and repurpose our existing leadership, or if they prove intransigent, we let them go and hire new ones to fill the job description of “Inspired, Visionary, and Courageous Leader”. Because that is what it is going to take to mandate the second, separate, high-end innovation culture. The intention for this team is to actively engage Innovation that is the “Highest Risk”, and therefore the “Very Highest Reward”. They take on nothing less than “Game Changers and Revolutionary Innovation. We set them loose into 3 specific areas of endeavor:

  • Develop radically new exploitation technologies to substantially cut our Hydrocarbon Production Costs …which will buy us some time to adapt, and simultaneously they….
  • Evaluate and expand our Business Models into non-carbon technology …which guarantees our future; and at the same time they …
  • Increase our stable of cost effective Environmental Performance Technologies …so we can be sure to clean up our messes and afford it.

 

3. This is not generally known… but High-End Innovation requires a different skill set and a different mindset than Continuous Improvement. So we high-grade any independent thinkers we have left after this last round of layoffs, and parachute them into the new innovation team. Realistically though, we might not have many of them left because they do think differently, and are usually a little bit quirky and a bit of an acquired taste… kind of like olives…which makes them easy lay-off targets. Hire them back if you can because they are already up the learning curve as they know your people and understand your processes.

I would call the new group something playful and edgy. So I thought of a name that reflects that quality of ferreting out new ideas and landed on the “Ferrets’ Nest”. Let’s consider that an interim name we are just trying on for size. That means there is going to be a “Senior VP of the Ferrets’ Nest”.  ….which …. somehow ….pleases me. And then hire an innovation coach for that SVP, he/she is going to need one. The Ferrets’ Nest also must be housed offsite, close by, but definitely away from the main culture.

4. Commit a minimum of 5% of Gross Revenues into R&D, instead of the current 0.5% industry average. 1% goes to incremental improvement, which doubles their budget, and 4% to the Ferrets’ Nest. Be willing to risk production in order to field test the best ideas they come up with. In fact, a third of the Ferrets’ Nest should be field staff.

5. Incentivize the Ferrets’ Nest differently. Instead of bonus-ing them on success and maintaining production like the rest of us, we bonus them individually on their failures, and as a team on their successes. Why? Because, as a high end innovator, if you are not failing, you are not doing much. As a collaborative innovation team, if you are not succeeding somewhere, you are not doing the right things.

6. Take the Long Term view. Hold the intention of being a commercially viable energy company in 100 years’ time, or even a hundred generations’ time. As we take that longer term view, we’ll make different choices TODAY. With that long term view, next Tuesday, we might even decide to buy a GEN IV nuclear reactor company in full knowledge that it will not produce meaningful revenue for the next 8 years, but will be a cash cow for the 60 years after that.

7. Recognize that the smartest people in the world probably do not work for you. We must get over ourselves, and our fear of the media savy Green Peace and her sisters, to put ALL our process data, sample analyses, pain points and wishes online. We want to engage the world’s best and brightest thinkers in solving our problems. Let’s make it easy for them to help us by readily providing free samples of anything they want… fast. That means creating a proper sample train on our sites.

8. Be willing to take technological risks in the same way that we already know how to take geological risks. A New Pool Wildcat well has a 1 in 10 chance of success. We understand that drilling that high risk well can bring rich rewards. Be willing to engage in and support A LOT of risky new technologies at much earlier stages so we can partner with these inventors, and therefore steer their tech development towards our own needs, thereby providing the tech inventor with all important early cash flow.

9. Encourage the Ferrets’ Nest to be revolutionary that means focusing innovative thought on Tomorrow’s Customers, while letting the rest of the company remain evolutionary by focusing on today’s customers.

The Irish Nobel Laureate and playwright, George Bernard Shaw said, “Some people see things as they are and ask why. While others dream things that never were and ask why not.”

Task Ferrets’ Nest team with developing what I call “wild hair” energy solutions that don’t exist yet….for example:

  • Commercial fusion reactors. Kudos to Cenovus who has invested with General Fusion. Visionary.
  • Figure out bitumen to carbon fibre and other unburnable uses. Check out AOSTRA 2.0.
  • Plasma cracking
  • Asphaltenes to fuel
  • Use Solid Oxide Fuel Cells, run in reverse, to change CO2 into feedstock for petrochemicals, plastics and polymers
  • Transmutation of carbon into hydrogen for fuel. Transmutation is here. Check out the ECAT out of Italy.
  • Analyze for nano-gold in the McMurray formation and the underlying Devonian
  • Harvest and concentrate NORMS, and rare earths from bitumen
  • AND if you REALLY want to be in service, develop carbon negative tech that removes CO2 from the atmosphere and oceans, and concentrates it for feedstock. Dr. David Keith has some good ideas there.

 

10. Focus on new energy SYSTEMS not just new energy SOURCES. We understand energy, big complex systems design, how to execute long term energy projects like upgraders, and how to integrate incremental changes into existing processes. It is our forté. And now is time to expand that skill set and apply it to integrating multiple complicated energy sources into a complex and robust energy delivery system, as we move from the SILVER BULLET of hydrocarbon to the SILVER BUCKSHOT of the post-carbon energy system.

Timing is critical. And it is NOW.

In Summary….

There is no question that Oil has been Awesome! And it is still THE BRIDGE to enable our companies to sell meaningful levels of Post-Carbon Energy into the Future, which will assure OUR companies OF a Future….. if we can just get our heads around it. We have such a huge effect on this world. How can we continue to serve it? It is not just about us. INVEST IN WHAT IS REPLACING YOU.

We really do have the power, the resources, the bright and skillful people, the opportunity, and right timing needed to make this change from Oil Companies to Energy Companies. We just need visionary and courageous leadership to commit to it. People are counting on us to make the bold moves.

I know there have been a lot of uncomfortable new ideas in here today. But consider this, once you see something important, you can’t pretend you didn’t see it. You have to move forward and find out what it wants from you.

What are you going to do about it? Now that you know. How are you going to bring it up with the people in your group? On your floor? With your leadership? What is the next good question you are going to live into? Now that you know.

Anyone who wishes a copy of this speech can have it. Just email mjhanna@telusplanet.net or LinkedIn message to MAGGIE HANNA, Innovation /Technology Scout and Coach. https://www.linkedin.com/in/maggie-hanna-2b9b3316/?ppe=1 . Thank you all for your kind attention.



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