• brendon.james

Europe is leading the Green fiscal policy initiative, the Oil and Gas Majors are pivoting

Why do we need to pay attention in Trinidad and Tobago?



This is a long article but bear with me.

The story of Energy is now the story of dealing with change. It is now the story of challenging old belief systems and paradigms. Thirteen years ago, before getting involved in energy and economics, I spent two years of my career working with a leadership and culture change program at an energy company. This has benefitted me in the long run because economics and culture are the lens through which I view the world. During that time, it was clear that we had to adapt to what was at its root cause; a change in Environmental Policy globally that required new investment and new ways of working to compete with the global marketplace. Oil and Gas products and services were being held to a higher standard, and new technology was not enough to compete. We needed a new way of thinking.


Books have always been my solution to most problems I encounter. If I have a challenge ahead of me I am always 100% positive that someone faced this before and most likely wrote about it. So, I began reading a lot. There were two authors whose work greatly impacted my thinking and eventual approach. The first was Peter Schwartz who wrote many books, but my favourite was “The Art of the Long View” written in 1991. He is a world-renowned futurist and thinker. He also worked with the Shell Oil Company Unified Planning Group who made the Scenario Planning model mainstream. I spent months studying his work and how Shell has used Scenario Planning to influence their business decisions. To put it simply - they researched and studied patterns in society, politics, business and science to understand where economies were heading and to understand their position within it. It was Strategic Risk Management before there was a term for it.

The second author that greatly influenced my thinking was a Management Theorist Dr. Clayton Christenson, who I have written about before from Harvard Business School who recently died (may he rest in peace). Dr Christenson and his collaborators coined the term Disruptive Innovation. In 1997 he wrote “The Innovators Dilemma”; the basic tenant of his theory is that industries who are in a business that have a dominant position, large market share are sometimes unaware when they are being disrupted or don’t understand the power of new entrants into the market. When they do realise that their business model is under threat, they double down on what they know to do well: which are their existing business practices. It is like the Latin quote “Quod me nutrit, me destruit” which translates to “What nourishes me, destroys me”. Simply put, the existing business model that built a successful business is now destroying the business and market share.

After reading these books and studying the culture surveys, strategy documents, and divisional performance data, I was a man on a mission. I felt like I could have contributed to a multi-pronged approach to change the organisation. Embracing change and looking at it not as something to fight but an opportunity to grow, lead, adapt, and find new purpose. I thank God for leaders in the organisation at the time who encouraged me to bring new ideas. They supported me with kind words and actions told me not to give up because they saw the risks that the business was facing - but no one responded. I did training sessions and PowerPoint presentations on strategic options with scenario-based plans but it was never acted upon. There is a third author in this story that helped me understand why the organisation did not respond to what was clearly a threat to their business. Dr. Peter Senge’s work from MIT and his book “The Fifth Discipline” written in the 1990’s (this is mandatory reading for any working professional out there). In his work, he spoke about mental models. The way we see the world shaped by our education, beliefs, experiences and how we were raised. These mental models are one of the most difficult things to change. Even in the face of overwhelming evidence, we refuse to see the truth that the thing that is nourishing me is also destroying me.

This now brings me to the subject of this article. The European Union has just passed a budget of two trillion dollars as its COVID-19 relief package. This fiscal policy package is focused on green investment, “The entire EU pipeline of green projects could represent as much as 1 trillion euros in investment and replace at least the 12 million jobs lost during the pandemic” Chesney (2020). European countries are not the only ones doing this. A recent IEA Clean Energy Transitions Summit led by Dr. Fatih Birol was attended by over 40 Ministers of Energy globally (this represented in real terms, 80% of global energy production and consumption) who all committed to Green Fiscal policies to pull their countries out of the global recession and create jobs. Some even used the opportunity to announce billion-dollar clean energy projects that has achieved final investment decisions. It is expected that globally, at minimum, 12 (twelve) trillion dollars will be spent in the next ten years. The question that we need to reflect on in Trinidad and Tobago is not “if” we are transitioning to clean energy but how quickly will this happen. My thoughts are it will be faster than we think. Is our Trinidad and Tobago business model for energy and a country being disrupted? My position is that we are, and we need to change soon. Very soon. We may only have a three to five-year window. This is a controversial statement that can and will be challenged but I want to ask you to suspend your beliefs and look at the data, policy positions and investment cycles. I will give three observations that inform my position. There is evidence out there that I am also wrong, but there is a mountain of evidence that supports my position.

1. Climate-based fiscal policy is great politics:

I have already made the point about Europe – they are leading the way here. What I will identify for you to research on your own is that in both Germany and France you can buy an electric car for the same price as a cell phone contract right now. In France, depending on the model, it is free with government subsidies. I expect this model will be adopted by the rest of the 27 countries in Europe. There are many points that can be raised here but I will focus on three major economic blocks. The United States, Europe, and China. The US has dropped out of the Paris Agreement, but this does not mean they are not on track to achieve their emission goals. With coal-fired power generation being displaced at a rapid pace, they are cleaning up their energy systems. Trump’s policies have not been effective in achieving coal revitalisation. In fact, there was a major judgement under the Trump administration that battery storage can play a role in providing power to Energy markets and be paid for it. This is going to lead to country - and eventually global - adoption of utility-scale battery systems to store excess Solar and Wind energy generated, and it will significantly reduce the project financing and costs. This makes battery systems competitive with Natural Gas power generation. The elephant in the room is China. Without them on board this change may not happen. Chinese economics is a very complex topic but the fundamental point is that China is a manufacturing economy. They will manufacture anything the world wants to buy. In the next ten years all the major economies will want green energy technology to deploy. So, they will go where the money is.

NOTE: Take a look at Joe Biden’s policy position on Climate Change. He has committed two trillion dollars to be spent in four years. If he wins the US presidential election this is going to ramp up the transition aggressively. He will not need Congress to pass any legislation to do this. It can be done by Executive Order using federal procurement policy.


2. The Oil and Gas majors are pivoting and diversifying aggressively: The recent announcement by BP is a clear indication of what they believe the future of energy to be. I believe that the COVID-19 pandemic was not the reason for these adjustments, it just accelerated it. They have rebranded as an Energy company and have committed to being net-zero greenhouse gas business by 2050. They have created a new strategy and structure to achieve this. They have also committed to cutting their global Oil and Gas production by 40% between now and 2030. Approximately 30% of our National Budget comes from taxes and royalties of gas sold by BP. This has implications for our Natural Gas value chain. I will argue that BP’s announcement has been a clear confirmation of what we always knew. Centrica in 2019 has fully exited the Oil and Gas business all together. In 2016 Centrica sold its Oil and Gas interest in Trinidad to Shell (Trinidad Guardian 2016). In a University of Columbia Energy Exchange interview the then-CEO stated that they have recognised that they must transition to an Energy business and not an Oil and Gas business to survive. There are industry professionals and major Oil and Gas companies that do not believe in this transition and has committed to Oil and Gas as it is now as a business model. I will challenge you to look at their share prices and their dividend pay-out to shareholders and think about how long they can maintain that position with the dismal financial returns they are getting.


3. Renewable Energy prices are so low it is making Green Hydrogen economically viable:


The technology behind Green Hydrogen needs cheap electrical energy for hydrolysis to be economic. This is happening globally and is getting a push with COVID-19 fiscal policy. There have been several final investment decisions made on gigawatts of hydrogen generation facilities in China, Europe, Saudi Arabia and the US (to name a few) that will begin construction in 2021. Hydrogen can be used for ammonia, methanol, steel and cement production. It can be used, with some adjustments, with existing infrastructure in the place of natural gas in the downstream petrochemical and manufacturing industry that requires a lot of heat to be generated. Hydrogen and Natural Gas storage systems and pipelines are being viewed as a “battery” system for Renewable Energy systems (power to gas concept). Using excess RE power to make Hydrogen that can be used in petrochemicals, manufacturing, and power generation. BP has an entire division dedicated in their new structure who will be looking at this.

Conclusion


Let’s be cynical for a minute and say that the investment decisions being made globally is lip service and that the money being allocated will not be as much as is being promoted. Context is important on how investment impacts both cost and speed. In 2008 then-US President Barack Obama’s stimulus called the TARP Program was worth 800 billion dollars. Out of this, $150 billion was spent on Green Energy technology. In terms of return on investment this brought power prices of solar energy from $0.75 kWh to $0.04 kWh (in 2018) in ten years. Cheaper than Coal and Natural Gas in most markets. This investment also built companies like Tesla, the largest car company in the world, by market cap. Now imagine what trillions of dollars will do in terms of cost of disruptive technology and speed of deployment.


If you assume that I am right in my thinking or even if I am partially correct here, there are a few questions that must be answered.


1. What is the future of Point Lisas with what is happening with the Natural Gas market/ prices, the restructure of the Oil and Gas majors and the rise of Green and Blue Hydrogen technology?


2. It is no secret our Natural Gas production has been falling for the past decade. Can we continue to generate power in our current model of Power Generation, Transmission and Distribution that wastes a significant amount of Natural Gas? Can we ignore the fact that Solar and Wind technology combined with battery technology is cheaper on a levelized cost basis than Natural gas power generation?


3. The political and policy climate is changing. Europe and the US is close to passing Carbon pricing. This means all energy technology that generates Green house gases will have an additional tax making them expensive. Will we be able to afford to pay these additional prices?


I can’t answer these questions but I am concerned about them and hopeful that our policy-makers are looking at this and they will make the right decisions for Trinidad and Tobago’s energy future.




Author

Brendon James,

BA Geography, MBA Occupational Health and Safety, MSc Process Safety Management, MBA Sustainable Energy Management

LinkedIn: https://www.linkedin.com/in/brendon-james-94332a18/

"I am a lover of Economics, Energy, Stoic Philosophy, Crix and Milo in that order."

REFERENCES

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