WECA X: 5 Key Takeaways

Access to capital for hydrocarbons projects was a mainstay throughout the World Energy Capital Assembly discussions 2020. With the consensus being that ‘oil is here to stay’, the natural question becomes who will be investing in E&P and how do producers access the capital? Jan Laubjerg, Head of Natural Resources at HSBC believes that in the next decade or two, before we reach peak-oil, the heaviest burden will be on the mid or high-cost producers, traditionally the smaller E&Ps, as they will struggle to find significant capital. On the flip-side, there is likely to be significant investor appetite for the low-cost producers both in the short term (10 years), and even after peak oil the low-cost producers will have access to capital for up to 50 years. Furthermore, cycle length will continue to be critical for access to capital. Both Mark Cutis and Jan Laubjerg believe that capital for long-cycle projects will be “hard to come by” and that, in the context of a world recovering from the impacts of the pandemic, short-cycle projects will be desirable for investors.

Kerogen Capital was represented at WECA by both Ivor Orchard (Chairman & Co-Founder) and Tushar Kumar (Partner), who both spoke on Day 1 Finance Panels. Kerogen believes that peak demand for Oil and Gas will arrive in the late 2030s and as such still consider hydrocarbons a core part of their investment strategy, as well as consolidating an ever-diversifying portfolio to reflect the direction of travel of global energy demand. Ivor Orchard, as well as many of the Energy Companies represented at WECA X, were keen to distinguish between Oil & Gas, with Ivor specifically highlighting the role of gas in the ‘Green Economy’. In the mid-term, the consensus among the Energy Council Network is that Gas and specifically LNG will be the “resilient hydrocarbons” of the Energy Transition and as such, investor sentiment will reflect that.

On Day 1 of the World Energy Capital Assembly, all 4 Thought-Leadership Panels mentioned ESG within their discussions. It was the unavoidable phrase throughout the entire conference, pointing to the continued growth of its importance as a policy at the heart of the industry and on the lips of its decision makers.

Our poll taken at the start of Day 2 of the conference revealed that 87% of the Energy Council network in attendance said that ensuring ESG was at the heart of their business and investment strategies was “very important”. Day 2 of the conference consolidated the intrinsic link between the Energy Transition and the ESG policies of companies. The trajectory of the Energy Transition, as mentioned, will be determined by the decisions made by the industry’s traditional investors. These decisions are continuing to be influenced, and in some cases dictated by, the ESG requirements of each investment. Anecdotal evidence of this was provided by a high-profile Private Equity fund manager from the Energy Council network, who remarked in December that all new assigned capital in the sector will now need to be invested directly in projects that directly drive down CO2 emissions via their “Pure Energy Transition Fund”. As WECA-X proved, the roadmap of the Transition remains unclear, but clear trends are emerging and the days of significant investment in long-cycle hydrocarbons investments could well be behind us.

Notwithstanding, there is still a case for E&P investments in the right projects and WECA-X identified two primary reasons for this. The first being that a not-insignificant portion of our network still does not see ESG as fundamental to their businesses, 13% to be precise described ESG as a “box-ticking exercise”. In addition, a recent Financial Times report identified that over one-third of investors’ low-carbon funds are still investing in oil and gas assets. This perhaps points glaringly at the second point that was raised at 2020’s assembly, so long as shorter-cycle projects remain profitable and low-cost, and there is a conscious effort to reduce emissions from E&P companies, investors will still have a business case for traditional energy fund capital to be assigned to the sector.

The Energy Council throughout 2020 was able to take the pulse of our network through webinars, online discussions and Virtual Conferences. A recurring theme among the Oil and Gas companies within the network was and remains to be the need to: cut costs, increase energy efficiency, and pivot to remote and digital work. Digital transformation has been something the Oil and Gas industry has historically been slow to embrace and without doubt the social implications of the Coronavirus Pandemic have highlighted this weakness. Some of the industry’s digital champions made the ever-strengthening case of digitalisation during the “Digital Transformation” and “Industry Transformation” panels at WECA-X.

Stuart Gregg (Industry Innovation Director, AXORA) in his opening remarks as moderator remarked that “Disruption is a constant” and later highlighted how Digital Technologies can allow O&G companies to find a new route to market for new products. Patrick Von Pattay (VP Digital Portfolio & Transformation, Wintershall Dea) was keen to add to this by emphasising how the industry must embrace digitalisation as a means to enhance sustainability as well as providing resilience through optimising process efficiencies. Efficiencies that will in-turn reduce costs and allow companies to produce and provide hydrocarbon-generated energy to the regions with a growing middle class that are “energy hungry”.

Very interesting points were later raised when the topic of digital technologies as a key driver of the Energy Transition was initiated. Lee Hodder (VP Upstream Digital Transformation, Shell) talked of how technological advances will not only enhance efficiency, but that they will be required to make Upstream Oil and Gas cleaner to comply with growing ESG concerns, he pointed to investments in CCUS as an example of this. In addition, Sergio Fernandez (Chief Technology Officer, YPF) argued that digital technologies can simultaneously maintain and disrupt: by optimising existing assets and also disrupting the market by finding the alternative to the status quo. The prevailing conclusion not only from these panels, but also from leading analysts and the IEA is that there is no net-zero and no Energy Transition without digital technology.

Gil Holzman (Chief Executive Officer, Eco Atlantic Oil & Gas) when asked if there was going to be a future of exploration responded confidently “There is a present, a great past and definitely a future of exploration”, as he pointed towards the basins in West Africa where there is already over $2bn is expected in exploration from TOTAL and Shell (among others) in 2021. There may be a discussion to be had about the long-term future of exploration, but upon analysis of the statistics of oil exploration in response to the last crisis (2016) vs this crisis (2020) the short-term future seems clear. Despite numerous delays and slashed budgets for drilling campaigns and new exploration, oil and gas discoveries exceeded 10 billion boe in 2020 vs the 7.7 billion boe discovered globally in 2016.

The “Future of Exploration” panel were unanimous in the fact that in the short-midterm exploration is going to not only continue but grow. This was mirrored by the interactive poll conducted on Day 3 of WECA-X where 55% of the Energy Council network when asked “What is the Future of Exploration” said “Exploration in new basins and in frontier locations will continue” compared with just 10% who said “There isn’t one”.

Despite the ambitious net-zero targets of many, Amalia Olivera-Riley (Head of Exploration, Tullow Oil) pointed out that the regions with hot spots to explore are the same regions craving energy independence, have a growing population and a growing middle class. Whichever model you choose to determine what the Energy Mix will look like in 2050, there is still to be a significant portion of the world dependent on oil and as such, exploration will thrive. Furthermore, Amalia Olivera-Riley and Brian Glover (VP Offshore, Staatsolie) agreed on the sentiment mentioned earlier by the finance panel, that cycle lengths will need to get shorter for mid to long term prosperity. Notwithstanding, successful oil exploration will be able to drive prosperity in regions such as South-East Asia, Africa and South America.