Shell Unveils Their Strategy For Net-Zero Carbon Emissions While Pipelines Freeze in Texas
The oil and gas news issue for February 2021
This is the Oil and Gas Special Issue from The Polymerist. If you are new here and somewhat confused as to why I am writing about oil and gas it is because most of our polymers, plastics, and chemicals come from refined oil. Currently, the oil industry is going through some big changes with the rise of electric vehicles, installation of renewable energy, and consumer demand for alternates to fossil fuel energy sources. Some of the chemical industry is looking to transition away from oil.
A thesis I have for 2021 and beyond is that oil companies will seek to become chemical companies.
A lot has gone on in the Oil and Gas sector in the last month. When I started this special monthly issue on the topic I had no idea that there would be so much going on in 2021 already. There are a multitude of stories that have been happening, but there are two that I want to focus on.
The first story is that Shell has released their vision for making the company more sustainable from a revenue generation standpoint.
The second story is what has been happening/happened in Texas. I’m not interested in the political aspects of the story, but rather in the actual phenomenon of natural gas pipelines freezing and how our supply chain grid could be this fragile.
Also, welcome to the resulting supply chain shock. I am currently dealing with it. Some suppliers are out of stock on certain raw materials or they are about to run out and this is making life difficult.
The Royal Dutch Shell Strategy For The Future
Shell’s Vision for their transition to a net-zero carbon emissions company is Titled “Powering Progress.” You can watch the whole video below if you want, but its over an hour long.
Shell’s slides are here as well if you want to look through all 78 of them. My goal here is to read and listen to all of this for you and then give you the highlights. If you have seen any good reviews elsewhere online please post them to the comments. Stanley Reed for the New York Times also has a good take on the situation.
Defining The Problem (as Shell sees it)
I do not recommend watching the whole YouTube video. Imagine a few hundred 30 second TV commercials overlaid with corporate speak. Here is what I took away from the presentation and the video:
Energy efficiency needs to improve while energy demand is going to increase.
Need to shift industrial energy consumption towards electricity, hydrogen, and bioenergy
Transportation needs to transition from oil and gas to electricity, biofuels maybe hydrogen
Buildings need to switch to renewable electricity
Power Generation needs to primarily shift towards wind, solar, and some nuclear. Natural gas will help us transition from coal and compensate for intermittency of renewables (Shell plans to make money here).
Shell Unveiled their 4 Step Plan To Be The Solution
Step 1: Provide Shareholder Value (yawn, obvious). Grow dividends, increase share price, and take some risks on transitions to alternate energy sources while still making money from their upstream oil business.
Step 2: Net Zero Emissions by 2050 in all sectors including those that are difficult like aviation, shipping, road freight, and industrials
Step 3: Powering Lives by providing electricity to 100 million consumers in emerging markets that do not have electricity right now in an inclusive way
Step 4: Respecting Nature by reducing waste and making a positive contribution to biodiversity. Reuse water. Recycle plastics. In April they will talk about Steps 3 and 4 in more depth, but this 1 hour video is really about steps 1 + 2
Van Beurden’s vision is serving all of their customers with net-zero energy solutions by 2050 through renewable power, biofuels, and hydrogen. Biofuels would be in partnership with aviation companies. Renewable power would be for residential and business electricity consumption. Hydrogen would be for heavy industry and transport. They will still probably sell fossil fuels, but those sales would be offset by carbon capture and storing it via nature or materials. If you are wondering about how you might store emissions via carbon emissions I’ve written about it previously in my issue on carbon capture.
Van Beurden wants to use Shell’s energy and chemical assets to enable their transition towards this sustainable future. Van Beurden fully believes that their upstream oilfield operations will fund shareholder’s return on capital and accelerates this shift towards their renewable future. He then outlines his plan in three major pillars:
Pillar 1: Pay the Bills through upstream business and provide shareholders with their dividends
Pillar 2: Transition will rely on natural gas and the chemicals business
Pillar 3: Growth through new modes of energy generation (solar, wind, nuclear?)
Shell also believes that we experienced “Peak Oil” in 2019 and expects a 1-2% decline in oil production every year. So the upstream business will continue to produce, but they do not really give any indications of when that business will no longer be able to sustain the company. My guess is they have about 10 years.
The figure above shows the the routes in which Shell believes they can reduce emissions. Going from left to right I think is the order of what Shell believes they will realistically be able to execute with board approval. Another interesting tidbit is that they will eventually start to transition gas stations to EV charge points and intend to gain significant revenue from their existing network of assets.
Shell has laid out a vision for how they think they can achieve their ambitious goal of net-zero emissions by 2050. This is the biggest presentation and most detailed of any of the big oil companies that I have seen. Their slide deck is worth looking over if you are really interested. Shell also intendeds to chemically recycle a lot of plastic in the near future too, which can then be used for new chemicals and plastics or for fuels depending on the market demand.
One thing that I thought was interesting from the video was that Van Beurden recognizes that their plan is ambitious and he does not have all the details on how to achieve their goals. This moment of honesty is good because I think any oil executive who tells you otherwise is probably lying. Has the world ever seen such a dominate market sector go through such fundamental changes in their business and survive?
The major integrated US oil companies I think are behind Shell here. I think Neste and Total might be slightly ahead of Shell with similar transition pillars such as growing their chemicals business and doing chemical recycling of plastics to make naphtha. Maybe Shell buys some big GE wind turbines in the next few years? If they do buy some wind turbines it would be nice to be selling GE the epoxy resins needed for the blades. I think Shell should buy Hexion’s epoxy business (larger version of the Shell epoxy business) for about $0.8-1 billion. They could even reintegrate their Pernis, NL site.
Energy Crisis in Texas
Just two weeks ago we saw an extended cold snap in Texas and other parts of the Midwest that wreaked havoc on everything. Significant power outages were reported in Texas, Kentucky, West Virginia, and Oklahoma. The cold snap also caused a surge in demand for energy that in turn caused a spike in demand for natural gas. With huge demand and limited supply the natural gas suppliers attempted to turn on capacity.
Rachel Adams-Heard reporting for World Oil had a story on owners of natural gas wells trying to bring more capacity online during the cold:
Physical natural gas prices were soaring in Oklahoma amid a cold blast that was gripping much of the U.S. and only stood to get worse. Bird, owner of a small gas producer in Tulsa, called one trader who confirmed the heating fuel was going for a staggering $350 per million British thermal units. Then he called another who said it had risen to $395.
That’s all Bird needed to know. He and his production technician grabbed some winter clothes at the dollar store and drove the stretch of highway to Osage County some 20 miles north. They met up with a buddy who owns a propane torch and began melting ice off idled gas wells to get them back online.
The spike in demand and highs meant that those who could supply natural gas were set to make a fortune while some areas in Texas also meant that you could be paying a fortune for that natural gas. The world uses natural gas to primarily do one thing— burning gas to generate heat. Natural gas powerplants have been a key component of transitioning away from coal generated power due to the environmental costs of coal.
The most economical way to transport natural gas within the continental United States is via pipelines. If you have natural gas as a utility look closely at your bill next time and you will probably see that a large portion of the bill is due to transport costs.
The big issue in transporting natural gas via pipeline is that when pipelines are not weatherized there is an event called “freeze-off.” The issue is more pronounced with “wet-gas,” which as you may have guessed holds some water. As natural gas with the water moves through a cold pipeline the water can freeze and gradually as more “wet-gas” moves through the pipeline you can get blockages. This issue is well known enough that BTU Analytics can predict the increased probability of freeze-off occurring with a 1 F degree drop in temperature. Welker has a good introduction to freeze-off and blockage issues (they sell weatherization technology for pipelines):
There are several points to remember when discussing freezing and they are discussed in the GAS ENGINEERS HANDBOOK, Section 4, Chapter 8, ”Gas Hydrates and Gas Dehydration.” Two major ones to keep in mind are:
High BTU Gas is more likely to produce hydrates and freezing problems.
Joule-Thomson rule of temperature effect as a result of pressure reduction. Temperature will decrease approximately 7 degrees Fahrenheit for every 100 psi pressure reduction.
In a practical case you can have gas flowing in the pipeline at 60 degrees Fahrenheit and 700 psi and have no evidence of freezing. If you pass through a regulator station and cut the pressure to 225 psi, the flowing temperature at the point of regulation will drop 33 degrees Fahrenheit to approximately 27 degrees Fahrenheit. If the gas stream is saturated with water vapor and condensate, you will quickly experience the freezing concerns we are discussing. The gas stream is the same, but conditions have changed and your problems have commenced to affect your operations.
So while temperature matters pressure in the pipeline also matters. I suspect that low temperatures also complicated pressure building. If we just think about the ideal gas law for a minute any decrease in temperature will lead to a decrease in volume of the gas and thus a decrease in pressure. This is why you might need to top off your tire pressure in New England during the winter.
Today things are back to normal somewhat, but buildings and infrastructure not built to handle this type of extended cold weather will need repair. I hope those affected will have their costs covered by insurance. These weather problems are known to happen. The pipeline freezing issue is literally text-book. In the failure modes and effects analysis exercise (FMEA) that the utilities undertook when constructing the system they must have not factored in cold-snaps that would last longer than a few days.
Cold snaps in Texas are not unusual as reported by Space City Weather on February 13th. If anyone wants to do some FOIA requests on the energy grid and pipelines I would suggest that they look into the FMEA exercises that should be documented by the utilities that maintain the natural gas pipelines, powerplants, and electricity grid.
Governor Greg Abbot is supposedly trying to figure out ways to help alleviate the high energy bills his constituents according to Shannon Najmabadi for the Texas Tribune:
Lawmakers and Abbott have pledged to protect consumers from the big bills, and excoriated the Electric Reliability Council of Texas for the outages last week. The reliability council, which operates the power grid that covers most of the state, is overseen by a Public Utility Commission.
Abbott’s office did not respond to a question about what options were on the table.
Najmabadi does some excellent reporting on the details of how some consumers are paying these high market rates of energy while others are refusing to pay. Najmabadi also reported that Texas has a multitude of energy plan options on their marketplace. Some consumers have experienced that once their fixed rate contracts were up got bumped to market fluctuating plans without their knowledge and were hit with unexpected high bills.
Based on Najmabadi’s story it I suspect that many residents will switch away from the market rate plans and the companies that offered them might not exist for too much longer, especially if people refuse to pay these extraordinarily high energy bills. Free markets can cut both ways on both sides.
Talk to you next week,
Tony
The views here are my own and do not represent those of my employer nor should they be considered investment advice.
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