Episode 1: Shifting power: what’s next for global energy?

Catherine: [00:00:21] Welcome to The Signal, a new podcast presented to you by Third Bridge, the world’s leading independent research provider, exploring how some of the globe’s most investable industries are facing upheaval. My name is Catherine Ford, and I’m a journalist with a 20-year track record of reporting on a wide range of financial topics such as capital market developments and M&A. In this episode of The Signal, we’re going to explore what’s next for the global energy market and its key players. Joining me today are Peter McNally, Third Bridge’s Global Sector Lead – Industrials, Materials & Energy, and Neil Atkinson, a renowned independent oil expert. Hi, Peter and Neil, thank you so much for joining me today. Can I briefly ask you to introduce yourselves? Peter, maybe you first.

Peter: [00:00:45] Sure. I’m Peter McNally. As noted, I’m the Global Team Lead for Industrials, Materials and Energy here at Third Bridge, overseeing all our efforts in those sectors. Prior to this, I spent about 20 years on the buy side at a couple of hedge funds and mutual funds and pension funds where I manage money and analyse companies in the energy, raw materials and related sectors.

Catherine: [00:01:10] Great. Thank you so much. Neil – how about you?

Neil: [00:01:12] Well, thank you for inviting me. First of all, it’s great to be here. My name is Neil Atkinson. I’ve been working for most of the past 40 years in and around the short- and medium-term oil market analysis field. I worked for very nearly 20 years for petroleum to Venezuela, and I’ve had roles since then in think tanks and consulting firms and media groups. And until this time last year, I spent five years as Head of the Oil Industry and Markets Division at the International Energy Agency here in Paris. Since I left the agency, I’ve been working independently, doing commentary and analysis on the oil market and wider energy issues.

Catherine: [00:01:53] Fantastic. Thanks, guys. I think you’re both obviously experts in your field, which is exactly what I’m after as we have a conversation around the energy space. Let’s get straight into it. It’s fair to say that even before the war in the Ukraine, the energy space has been going through some unprecedented challenges. And today I think we are at a critical fork in the road when it comes to sort of where the space is going. Let’s start with looking at how on earth did we get here? What has happened? Tell us a little bit about that, first of all, Peter.

Peter: [00:02:22] Well, there were several reasons that we ended up in this situation. But as I sit here in the United States, I’ll talk a bit about shale, which came on the scene first as natural gas about 15 years ago and then over the last decade hit oil markets. And while volumes grew a lot, profits did not. And the industry consumed an awful lot of capital and the investors in the sector did not generate any returns. And as a result, we’ve seen a dramatic slowing in investment. And one of the outcomes has been a slow response in oil production, even as prices have climbed higher since the pandemic began. So we entered this, you know, 2022 with really low inventories and oil and US supply was just one of the factors that led to that situation.

Catherine: [00:03:18] Neil, can you put what Peter said in a little bit of a global context, what are the kind of things that we’re seeing in Europe indeed or even in Asia?

Neil: [00:03:26] Well, it’s a big, big, big question to kick off with. As Peter said, in the last ten years or so, there’s been a lot of input and a lot of output as far as investors are concerned. But let’s just put that in a slightly wider context, and this will lead on to some of the discussion we’ve got today. We have a situation where the global population of people is increasing pretty steadily by the middle of the century, 2050, there’s going to be another one and a half billion, possibly 2 billion people on the planet. There’s an awful lot of demand for energy. It’s growing inexorably, year after year after year, leaving aside the impacts of Covid just for a moment. And so with all this demand for energy out there, that raises the question of how that demand is going to be supplied. And that has two facets. Number one, the continued role of fossil fuels in providing that demand, but of course, the rising urgency of the need to decarbonize the energy complex, so therefore the rising role of renewable energy and the wider issue of electrification. So, the last ten years has seen an enormous amount of change in all aspects of that picture that I painted. Where we are today in 2022 is in a period which is probably quite unique. Firstly, because we are just coming out of the global pandemic, which has upended normal patterns of demand and trade for a significant period of time. But we aren’t out of the woods of that just yet. And then the other issue we’re facing in 2022, which may also have implications far into the future, is the Russian invasion of Ukraine, which is the biggest security crisis we’ve seen here in Europe and to some extent globally since the Second World War. So, we’re in a very, very interesting place as we talk in now in May of 2022.

Catherine: [00:05:18] Thank you very much, Neil. You’ve raised a couple of the sort of challenges that the industry is facing, and we’ll get on to that in a few minutes time. But first, I’d like to have a look at some of the key players. Peter, you mentioned Shell there in your beginning in your beginning commentary. Who are some of the other key players that we’re seeing dominating that industry at the moment? And what are your feelings with regards to are these going to be the dominant players when it comes to the future, the next 10, 15, 20 years? Are those players still going to be the ones that are driving the conversation, driving the demand and driving, indeed, the interest from investors?

Peter: [00:05:45] Well, what we’ve seen here in the United States is actually a consolidation of oil supply. Shale wasn’t invented by the Exxon’s or the Chevron’s or the BP’s and the Shell’s of the world. But, you know, some of those companies, particularly ExxonMobil and Chevron, have now emerged as much larger players. And I would include ConocoPhillips in that group. So, what has happened, though, with these companies is they’re actually spending less and it’s a lot less and they’re making choices to do other things. So if we take Shell, Chevron and ExxonMobil. The last time oil prices were here, you know a little over $100 a barrel, was in 2013. Those three companies spent $111 billion on new investments that year. This year it’s going to be $52 billion. And some of that money is actually going to renewables. I mean, even this morning, like Chevron is announcing an expansion in their carbon capture and storage business, this isn’t producing more oil and gas that the world needs needs today. So there has been this, I would call it almost historic underinvestment relative to what we’ve seen in prior years. And the world has become, you know, here in the US, has become more dependent on these larger companies, including some of the independents like Pioneer Natural Resources and EOG and companies like that.

Catherine: [00:07:08] Thank you very much for putting that a little bit into context. Neil, where do you think sort of the key players are and where do you think the key players from the future are going to come from? We’ve spoken an awful lot about oil. We’ve spoken about gas. What about some of the alternative energies that we’re seeing coming through at the moment?

Neil: [00:07:25] Well, just a couple of points on the oil picture first. Peter made some great, great points there. It’s interesting that in the US shale patch right now, Peter’s right that there’s been a growing role of the major companies. You mentioned ExxonMobil and Chevron. But what we’ve been seeing just now and if I was reading about this just before I came onto this podcast, is that there’s now a rush of renewed activity and vigour in the US shale patch for the smaller independent companies. There’s stress in the supply chain for equipment and personnel in the US shale patch. So, there is actually among the smaller players now a lot of renewed interest. And indeed that’s a good thing because as we may discuss a little later, we’ve got challenges as far as global supply is concerned into the future, arising from the lack of investment in upstream oil and gas that we’ve seen over the last six or seven years, which is a big subject. Tt’s something that’s coming on to bite us now. As we move into the future, which is to respond to the challenge that you just made, there’s no doubt in my mind that demand for oil and gas is going to remain pretty strong well into the foreseeable future. And even when it peaks, perhaps at some point in the early 2030s, there will still be a long tail of oil and gas demand into the future.

Neil: [00:09:41] So the big players will remain the big players. The players who will always probably be the last man standing, are the national oil companies. For example, Saudi Aramco is the biggest of them all. But then let’s transfer over to the other sectors. Peter alluded in his remarks to investments in alternative energy, low carbon energy being made by some of the traditional oil and gas majors. They have an eye on the future and that future is coming faster and faster towards them. They’re responding to a lot of investor pressure that is being placed upon them to continue, of course, to invest in the necessary fossil fuel resources we need now. But to do that in a cleaner, greener, more responsible way and at the same time pivot towards cleaner energies. So, you will see companies like Shell, and to some extent we’re already seeing it, BP and Chevron, they will evolve over time and they will do it partly because it’s the right thing to do. Secondly, they have the skills, they’ve got the engineering skill sets within their workforce and also they’ve got the money. And that is crucially important in terms of investing in the transition that we all wish to see.

Catherine: [00:10:00] You make a really interesting point there about how it’s the traditional players that are moving into that new sort of type of energy alternatives, and that they’re responding to investor pressure. How much do you really believe this is something where, yes, they are the best placed people to execute on that innovation that we’re seeing in that field? And how much is it an exercise in greenwashing?

Neil: [00:10:19] Well, they’ve got the skills. I mean, the BP, Chevron and across the fossil fuel companies, they have got a century or whatever of expertise in making technical innovations that enable you to do things better, to do things more efficiently, to do things in a greener way. So, they are going to be the source of a lot of the transition that we see over the next few decades. Now, as far as greenwashing is concerned, I see where that challenge is coming from. And to some extent I understand it, but actually, ultimately I reject it. These companies are smart. They can see the future. They can see that the future is going to be very different in 30, 40, 50 years from what it is today. And they want to get up in the morning, do something related to energy. That’s what they do. And they will embrace the future rather than seeking to push back against it. So, I’m not comfortable with the term greenwashing.

Peter: [00:11:22] Well, I’d add in there, Neil. Neil, these are not charities. They’re in this to make money. And to your point that they’re going to invest for the long term, the energy transition is not going to happen without investment. And the good news about oil and gas prices being high, at least in the short term, is that these companies have more money to invest. I mean, two years ago, we were talking about the historic cut in the dividend at Shell, the first time they’d got a dividend since World War Two. Now they’re investing more money every day and a lot more of it is going to the green transition.

Catherine: [00:11:58] That’s a really excellent point there. Neil – did you want to respond?

Neil: [00:12:00] Peter’s hit the nail on the head. I mean, today here in Europe, we’ve seen the results announced for BP and Shell. I think Shell came out a little later than BP this morning. And as Peter has alluded, they’re making a lot of money. And that’s hardly surprising given the strength of oil prices in recent months. But, you know, as he says, they’re not charities. They are there to make a return for shareholders. And if they’re doing their job and the long-term planning people are doing their job, they’re looking to the future. They’re looking to rising populations in developing countries, rising energy needs. Energy has to come from somewhere. A lot of it will still come from fossil fuels. A lot more increasingly will come from low carbon. And they’re in the position to do it. They’re not charities, but you don’t have to be a charity to do the right thing as far as the energy transition is concerned. You use the technology, you use the resources which are available to you.

Catherine: [00:12:52] Let’s move the conversation forward and go back to sort of the situation that we find ourselves in now. We established already that obviously the energy space is going through massive upheaval at the moment, definitely a crisis on our hands with the war in Ukraine. How does what we find ourselves the current crisis compared to what the energy space has gone through in previous years, Peter?

Peter: [00:13:13] Well, it has become more of a boom and bust type of business. We’ve suffered through two oil crashes in the last seven or eight years. But, you know, the current situation is kind of rolling us back to the 1970s where we had two oil crises, you know, price spikes and disruptions in supply. And that spurred more investment, which was ultimately followed by a crash as well. There’ll be longer term shifts that we see in demand. We started driving smaller cars. You know, in the eighties there was a lot more focus on fuel efficiency. So, as we come through this crisis, there’s going to be a lot of changes that we’re not even sure about what they’re going to look like just yet.

Catherine: [00:13:57] Hmm. Neil, what about you?

Neil: [00:13:58] Trying to predict things, especially the future, is difficult. But let’s start from a couple of those points Peter made. As I said in my introduction, I’ve been in and around this place for 40 years now. And just after the Iranian revolution, which led to an enormous spike in oil prices, we had events later on, such as the Iraqi invasion of Kuwait. Where we are today, though, differs to some extent from what we’ve seen before, particularly in the oil space when it comes to big upheavals. There is very, very little spare production capacity out there in the world today to meet the challenge of a major upheaval, like, for example, the excommunication of Russia from large parts of the global industry. Whereas, for example, when Iraq invaded Kuwait in 1990, there was loads of spare capacity available for other countries to step in, and Venezuela did that when I was working for the state company back in those days after the Iranian Revolution. So we’ve been able to deal with these crises in the past and these upheavals in the past. Not easily, of course, that’s not the appropriate way to describe it, because we did see huge price spikes and then later on we saw price crashes.

Neil: [00:15:13] But we have been able to manage disruptions to production in the past. This time it’s more difficult because the challenge posed by the Russian invasion of Ukraine looks almost to be existential. And this is not the temporary bombing of an oil facility which might be out for three months or six months. This is, as I said, the excommunication of a major producer from a big part of the global oil market. So we’ve now got the the US government going around with its begging bowl, asking Saudi Arabia, possibly Iran and Venezuela through different means and now, finally and belatedly, its own oil producers to step up to the plate. And it’s having to do this because there isn’t spare supply there. And that arises from this lack of investment that we’ve seen over many years now, getting on for a decade, which, as I said earlier, is something that is coming back to bite us and bite us hard. 

Catherine: [00:16:12] So we’ve talked about the geopolitical situation and the impact that that’s having on the industry. As I was thinking in preparation for this podcast about the other challenges that the industry is facing, obviously climate change came up quite early on in the conversation and obviously the global pandemic as well. Talk to me about how you see things progressing as we go forward, where solutions might come from. 

Peter: [00:16:32] Well, look, the current crisis is causing people to look for any alternative that they could possibly get. We’ve seen coal consumption go up. And if anything, the last few months in China with lockdowns has actually probably eased the crisis. Demand is not as strong as one would have expected had China been completely free and open. So in a certain sense, we may be getting a little bit lucky. But, you know, the investments in climate friendly solutions are going to have to continue. And I think that if there’s one thing we’re learning through this crisis is dependence on any one source of energy is not a good idea. We can roll this back. Maybe the case of Denmark is an interesting example. Somebody asked me, oh, a few weeks ago about what was the last time an EU country grew oil production in any significant way. And I had to go look it up. And it was Denmark at the turn of the century. But about seven or eight years ago, the Danish national oil company renounced hydrocarbons. They got out of oil and gas. Orsted is now the company that emerged from that. And they’re committed to generating power from wind and it’s low carbon and it works. And we know it’s been deployed in lots of places. Well it was, I guess, about 15, 16 months ago that Orsted warned investors that, hey, the wind blew really hard in 2020 and it’s not going to repeat and what that ultimately led to was more natural gas demand. 

Catherine: [00:18:01] Neil, would you agree to that?

Neil: [00:18:02] Peter’s hit on another extremely good point is that it’s not just Denmark, which has lots of wind. In my home country in the United Kingdom, there’s a lot of offshore wind being developed in recent years and at its peak when the wind really does blow, in the right conditions, wind alone can be contributing, I think well over 20% of the generation mix in the UK and in fact I think the absolute peak is significantly higher than that. But the problem is, is when the reverse is the case. And in the autumn of 2021, there were times when the wind was contributing almost nothing.

Neil: [00:18:36] There wasn’t any wind. And if there’s no wind, you’ve got no wind power. And of course, you have to keep the heating on, the lights on and all the rest of it, by some means or other. So then of course in the case of the UK, gas steps up and takes on the burden. But the point there is, is that, while everybody’s going on and saying, oh, well, renewables is great, we should install more capacity because the costs are coming down. That is true up to a point. But they sometimes fail to include in their cost estimates the cost of maintaining spare back-up capacity in the case of the UK and many other places, mainly from gas. And someone has to pay for that. And that is not cheap. And it’s going to be needed for a very long time. Because unless I’ve missed something, I haven’t seen anybody attempt to forecast global wind speeds over the next 10 to 15 years. So we need to be wary of the fact that although, yes, there are trends towards alternatives and wind is obviously the one we’re talking about, there is the constant need to have back-up. And that back-up will almost certainly be gas. And in many other places also it will be coal. We can’t get away from this.

Catherine: [00:19:52] Let’s spend some time now talking about sort of what’s next for the global energy market. We’ve spoken a little bit about wind. We’ve spoken a little bit about hydro. What types of energy do you think will dominate and what’s the most sort of exciting innovation that you’ve seen when it comes to alternative forms of energy? Peter, from your perspective, talk to us.

Peter: [00:20:10] Well, I’d be cautious on that word: dominate. I think diversity is important for these things. One thing that we have paid attention to is actually where companies and countries actually spend their dollars. And one of the emerging areas that we’re seeing is this idea of carbon capture and sequestration. And we’re seeing several projects kick off this year. And it looks like there’s more to come. And while it may upset some of the stricter environmentalists, it is hard to get around the fact that we consume hydrocarbons. But if we can capture the CO2 that is emitted from different industrial processes and store it, it is a viable alternative. Now, costs still need to come down to make this an actual profitable endeavour. But governments are supporting this, and large companies really are committing to invest in this space.

Catherine: [00:21:07] What about something like solar, Neil? How much potential do you see for that market expanding and more of our energy coming from that source?

Neil: [00:21:11] I’d like to come back on to CCS. I acknowledge that there is a lot more progress being made, that the pace of investment and innovation has certainly picked up in the carbon capture and storage space. But I’m still to some extent sceptical about the scalability within the time frame that policymakers wish for. We’ll just have to wait and see. I mean, Peter’s right, we are not going to get rid of or find ourselves not using hydrocarbons. Therefore, CCS is going to be part of the solution. But I’m a little sceptical about the pace of that innovation.

Catherine: [00:21:51] Where does your your scepticism come from? I mean, is it the pace of innovation? Do you think that it’s not having the necessary support? Do you think there’s not enough investment in that space?

Neil: [00:21:58] I think it’s the economics, unless governments are going to stump up significant support for the sector, which they’re, of course, at liberty to do, my understanding, and Peter may have a different view here, is that the commercial scalability of CCS and its rollout across the world is just not yet there.

Catherine: [00:22:19] Peter, how do you respond?

Peter: [00:22:20] Oh, it’s definitely not economic today. The investments are coming. But we said the same thing about solar 15 years ago, that it couldn’t stand on its own without subsidies. But here it is today. It has made incredible inroads. And the economics stand on its own, even without subsidies for power generation. So Neil’s points are all well taken. And I agree, it gets our attention a bit when we see more companies in diverse places making these investments with real dollars. We would expect some progress. The timing on that progress is definitely hard to predict.

Neil: [00:23:00] Just finally on CCS, is where are those investments going to be made? Because energy demand, the growth in energy demand over the next 30 years or so, 30 or 40 years, is heavily skewed towards developing countries: India, South East Asia, various other parts, other parts of Africa, for example. That’s where there’s going to be a big, big growth in demand. And certainly in the next decade to two decades, a lot of that growth is going to be supplied by fossil fuels. There’s just no other way around it. And I can see, therefore, it would make sense that the investments in technology such as CCS should be directed towards where the source of the demand growth is going to come from. Where is the stuff being belched into the sky? And that’s increasingly in developing countries. The problem with supporting decarbonisation measures in developing countries is that the developed countries, as agreed at COP26, and indeed I think at previous COPs, I’ve lost count of COPs now and I can’t remember what they all agreed. But there is a provision, certainly at COP26 and possibly before for developed countries to transfer about $100 billion a year to the developing countries, however, that is defined, to support decarbonisation measures. Now apparently of that 100 billion that is committed each year on paper, the amount of actual dollars that are being transferred is not much more than zero, which is probably being a little unkind, but it’s certainly nowhere close to $100 million a year. And to me, if you’re not getting that kind of transfer from the maturer economies, whose energy demand is actually not growing and whose emissions are actually falling because of deindustrialisation, then you’ve got a big, big problem. You’ve got a big problem because it’s the developing countries where the action is. That’s where the investment needs to go.

Catherine: [00:25:03] Peter, I’d like to come back to you on the topic of subsidies. We spoke about solar and we spoke about how government subsidies have played a crucial role in pushing the industry into where it is now. So if we take this slightly broader context now and we think about the transition from conventional energy sources to alternative sources of energy, how much do you feel the governments need to play a role in pushing that transition via things like subsidies? And how much is that something we’re actually we’re going to let the markets do their own thing and we’re going to work on the assumption that traditional energy suppliers will move into that space and also the other companies will emerge newly into that space?

Peter: [00:25:38] Well, governments always play a role in this industry. I mean, there is a lot of regulation and standards that need to be met. Now, can that be supplemented with subsidies to create investment incentives? Sure, we can debate about what degree it is that happens. But I think that it is always going to be part of the solution. And then the question is how long do those subsidies need to stay in place to have an industry stand on its own? California is a fascinating place. Always. Their history in fuel standards and subsidies is always interesting. But I think this case of renewable diesel is something worth watching in the future. I mean, there’s this Finnish company, Neste, right, who’s become a really, really large company by investing in this business. And they make real money by converting things like palm oil or used cooking oil into fuels that are used. And in the United States, it’s actually gone so far that our crude oil refining capacity, the ability to manufacture fuels, is going down because refiners are converting to make renewable diesel as opposed to making diesel and gasoline from crude oil. It’s creating some short-term problems in the diesel market. But they’re pursuing this partly because of subsidies for renewable fuels, but partly because of economics. So those are some of the things we’d watch.

Catherine: [00:27:07] It’s a really nice innovation that you highlighted there. Neil, any innovations that you’ve come across that you think like, Wow, who would have thought? And that’s really exciting.

Neil: [00:27:15] Well, I’m not really a technology guy. I’m a sort of supply-demand-price kind of guy. So the technology innovations are a little bit over my head but what is undoubtedly the case…and again, if you’ve been around long enough in this space and you take yourself back to the world as it was 40 years ago when I first looked at an oil supply demand balance, and you tried to remember how you felt back in the early 1980s, you would not have forecast in a million years the world in which we live now in terms of the technology innovations that are available to us, specifically on energy, things like 3D seismic drilling in oil, we’ve got things like the expansion of solar because of the improved  absorption capacity of the panels. We’ve got wind farms with capacities which were considered inconceivable just 20 years or so ago. So, I’m not able to give you an answer because I’m not a sort of sci fi writer as to what the big innovation is going to be in the next decade or so. Other than that, I think one lesson that I have learned professionally over many, many years now is never underestimate the ingenuity of the people who are looking at these problems. There’s a lot of really bright, smart young people trying to come up with solutions to these challenges. And they will. What it will look like in ten years, I don’t know. But they will.

Catherine: [00:28:42] Now when it comes to alternative types of energy, markets such as the US, in Europe have been really critical at this particular point with something where the pressure I think from the public is quite great that we need to move away from our dependence from oil. Obviously in Europe at the moment, it’s a very timely geopolitical issue. What does it look like in other parts of the world? If we look towards Africa, if we look towards Asia, if we look towards Australasia, how much of a focus is it there? What are some of the things that are happening there? Can you put that sort of in a context with what we’re seeing in some of the markets that we’ve discussed so far? Peter, maybe you go first.

Peter: [00:29:16] Well, I would point back to Neil’s earlier comments that in the developed world, energy demand isn’t growing and emissions are actually falling as we deindustrialise or transfer industrial activities to the developing world. But in those countries, right, vehicle ownership and industrialisation are quite low. But they’re coming up. And this is the dilemma as people get their first cars and it’s just not conceivable, let’s say, in the near term, that they can be all electric. The infrastructure is not there to have something like that occur. So this is the tension. And what makes the case for those transfers that Neil was talking about earlier. So growth in energy really comes from the developed world and it’s going to come in all forms.

Catherine: [00:30:05] Okay, Neil, do you agree with that?

Neil: [00:30:06] Oh, absolutely. Peter hit the nail on the head there, there’s a lot of people who, in developing countries, who are moving from two wheeled transport to four wheeled transport for the first time. They rode around on bicycles and now they ride around on little motorbikes. Now they’re getting their first car for a family. So, the demand is rising for four wheeled transport, which for a long time to come is going to be gasoline powered or gasoline and diesel, because electrification, of the vehicle fleet, is not yet possible on an economic scale for the mass market, let alone the charging station issue and all the rest of it. So as far as Africa is concerned and as far as India and other parts of Asia is concerned, because the you know, the vehicle ownership rates, I think India still has about only about 100 and maybe a little less 100 cars per 1000 of the driving age range, 17 to 75. The US, which is the daddy of them all, depending exactly how you define it, it’s somewhere between 850 and 1000. So I’m not suggesting that India or developing countries will or indeed should try to replicate rates of car ownership, as you have in the US. But the point is that India and a lot of other developing countries have very, very low rates of vehicle ownership. They have very, very low rates of overall energy consumption per capita than we have here in the West and their populations are rising, incomes are starting to increase. Urbanisation is growing. Those people demand more stuff. Consumer goods and consumer goods require plastics. There’s an awful lot of demand still to come from developing countries, and that is going to come certainly for the next decade or so, mainly from traditional fossil fuels.

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Catherine: [00:32:20] We spoke about investment. What should investors be looking out for? What are sort of both companies that they should be showing an interest in, specific subsectors when it comes to energy that they should be keeping a close eye on. But also what are sort of developments that they should be aware of, whether it comes to production quotas, whether it comes to areas of increased geopolitical tension like we see in Ukraine at the moment? Are there other things that they just need to be aware of? Peter, maybe from you first.

Peter: [00:32:33] Well, I’ll start and I think Neil will have some follow up on this one. But a fascinating area in terms of oil and gas supply that is emerging is South America. I mean, seven or eight years ago, Guyana was a zero in terms of oil production. And ExxonMobil and Hess have discovered billions of barrels of oil, and it is growing incredibly rapidly. Brazil has well known discoveries, and after some struggles over a decade with a big corruption scandal and some inflationary problems, production is growing again. We’re even starting to see some capital flow back into Argentina in other industries. So I know Neil has a long history in Venezuela, which was always the biggest and dominant player in oil production in South America. There have been well documented problems there. But it is an area that’s got our attention for sure.

Catherine: [00:33:28] Neil, what about you?

Neil: [00:33:29] Just specifically on Latin America as Peter’s raised it. You mentioned Guyana, which nobody had heard about until a few years ago. Nobody cared. I think the only thing anybody knew about Guyana was it actually had a communist government and it played cricket and that was about it. Now it has lots of oil. I think ExxonMobil are one of the big players there, and there is the possibility of a big leap forward in production from Guyana, a significant big leap forward into the millions of barrels a day from Guyana in the next few years. Brazil we’ve known about obviously for a very long time, it’s become a producer of what, three and a half million barrels a day or something like that, and there’s enormous potential for future development. Argentina is interesting because it’s one of the only countries outside of the United States that is making a serious effort to develop shale resources, and we may well see some future developments there. As far as Venezuela is concerned, and we can tie this in to the current day overall supply problem, but just to say in passing that I left the state oil company in Venezuela in 1998 when oil production was three and a half million barrels per day. Now it’s about 0.5 million barrels a day. I’m not saying my leaving and the production collapse are necessarily related, but the point is Venezuela has degraded over the last 20 odd years because of mismanagement, corruption, waste and incompetence. And there is still, for the longer-term interests of maintaining a balance in the oil market, there is still enormous potential in Venezuela for oil production, on the assumption investment goes in, to return to the kind of levels it was at traditionally.

Neil: [00:35:14] So Latin America is really, really interesting as far as the oil market is concerned and indeed to some extent in LNG also and of course, Colombia remains a pretty significant player in coal markets. So Latin America is a place that we should all be watching in the next few years. And also we need to be looking, I think, because there’s less attention paid to Africa than perhaps it deserves, to the possibility of further developments in Africa. And when I say Africa, I mean the physical landmass. So that includes North Africa, Libya, Algeria, Libya, Egypt to some extent as well. Again, rising populations in Africa, big, big populations. I think the population of Nigeria by the middle of this century is going to be something in the region of 350 to 400 million people, and it’s just under 200 million I think it is now. Enormous population growth, enormous demand for energy, and the requirements for investment in the resources that the continent does have is going to be important. But just finally on Africa, not just the traditional fossil fuels you should be looking at here, but rare earth minerals, stuff that we’re going to need for the transition to, for example, electric vehicles, a lot of resources: cobalt, copper, zinc and other other resources that we can add into this mix are found in abundance in Africa and indeed elsewhere. So there’s going to be a lot of interest in Africa, a lot of investment, both in the traditional fossil fuels and in the other elements that we’re going to be needing as we as we transition.

Peter: [00:36:58] I would also add in there on Africa, for our European friends there, in the eastern Mediterranean, there have been some interesting developments. Like Israel has transformed its energy mix to cleaner natural gas. They got themselves off coal, you know, thanks to some industrious Texans at a company called Noble Energy, which got acquired by Chevron a couple of years ago. And there had been subsequent discoveries and developments in Egypt, and there’s quite a large resource sitting in Cyprus. There’s some geopolitical issues that would need to be worked out there. But it is a resource that has shown some promise and really made a difference in terms of changing emissions and energy needs for some large countries. 

Neil: [00:37:42] Just closing out on the regional thing here because we can’t ignore them is the Middle East. Peter just touched on the eastern Mediterranean and mentioned Israel. One of the most extraordinary developments geopolitically in the last few years is the normalisation of diplomatic relations between Israel and, for example, the UAE and other countries in the region. That is incredibly important, not just for political stability, but for future investment and trade around the region. But the point about it is, is that also about the Middle East, is because of the huge share of global crude reserves of oil in particular, but also to some extent gas that countries such as Saudi Arabia, the UAE, Kuwait, Qatar, Iran, Iraq and so on and so forth, because of their enormous resources and because of the fact that even after oil demand peaks, whenever it does, there will still be a lot of demand for oil and gas in the future. Those countries and the national companies who are the dominant players in those countries will be very, very important for a long, long time to come. 

Catherine: [00:38:50] So, Neil, picking up on the topic of Asia and the developments that we’re seeing there, can you put China into a global context for us? If we look at the energy consumption, where is the energy coming from that is being consumed in China, what is it being expended on, how does that compare to what we’re seeing in other energy markets?

Neil: [00:39:07] Well, earlier in the discussion, we focused on India, which is the fastest growing of the major developing countries right now. But China has been hugely important since essentially the early eighties and particularly since the turn of the century, in terms of expanding its energy demand and its overall economy quite significantly. China is now the second biggest oil market in the world behind the United States, 50 million barrels a day in China versus 20 million in the United States. We’re seeing growth in incomes. We’re seeing rising car ownership. We’re seeing rising consumer demand for products in China. Products means plastics. And that is a story that will continue because the sort of grand bargain in China, which is unspoken, but you have the political dominance of the Chinese Communist Party with the lack of political freedoms that there are. However, you’ve got considerable economic freedom, businesses to grow, to invest and to supply goods, and indeed to export as well and to generate wealth. But, you know, where does that all come from? Well, China is actually a very, very big producer of coal. It’s a very big producer also of oil and to some extent, gas. So China does supply some of its own needs for many years now. It’s also had to import considerable volumes of oil from the Middle Eastern countries.

Neil: [00:40:34] It imports oil also from West Africa and from other parts of the world. So it’s been an important and growing part of oil trade and it’s increasingly reliant on imported resources going beyond just oil and gas markets. China is a huge importer of other natural resources, minerals. We’re familiar with the phenomenon of copper and zinc and nickel production in countries where China has taken a stake in the development of those resources in those countries, particularly in Africa, but to some extent also in Latin America. And so China is positioning itself to meet its rising demand by bringing in resources from around the world. And it’s using its political influence. It’s using its financial firepower by often striking relationships with local government or national governments in other developing countries to develop resources in those countries in exchange for providing schooling or transportation or other social benefits and taking those natural resources back to China. So China has a voracious appetite, and that appetite is going to continue to grow once we get out of the pandemic and we understand what the post-pandemic world is like from which we then develop. But undoubtedly, China is going to continue to grow.

Catherine: [00:42:02] Thank you very much to both of you. So let’s wrap up the conversation with me asking you to gaze into your crystal ball and paint a picture of where the energy supply might come from in the next 5 to 10 years. Are there any particular companies that really stand out to you in that particular context? Are there any regions that you think will be driving this going forward? Peter, maybe you go first for me.

Peter: [00:42:23] Well, I’m sitting here in the Eastern Time zone of the United States, so I’ll talk a bit about Pennsylvania and the US Gulf Coast. There’s an enormous natural gas resource which people certainly have known about, but the US went from an importer of natural gas to now the major exporter, and we’re supplying gas, liquefied natural gas to Europe in the current crisis. But there is an enormous amount of investment that’s going into the Gulf Coast and those natural gas molecules are likely to be exported either in the form of liquefied natural gas, petrochemicals, which has been a massive story over the last decade, and even things like fertilizer. So it is a low cost resource with an ability to export. And that is something that we’re going to continue to watch.

Catherine: [00:43:13] Thank you very much. Neil, from your perspective, crystal gazing, please.

Neil: [00:43:17] Oh, boy, oh, boy. Well, here we are in May 2022. I’m an Englishman living in France, a country of $8.50 a gallon and 500 different cheeses to choose from. So, you know, I think that on a five year time frame, which is the challenge that you put out there, I think that whatever I might have thought before the pandemic and the recovery from the pandemic and the Russian invasion of Ukraine has been thrown out of the window because, as far as Europe is concerned, one of the biggest political challenges for all governments in Europe right now is the cost of energy for consumers. What they’re paying out of their pocket. There is a cost of living crisis here in Europe and that is going to dominate the discourse over the next few years. 

Catherine: [00:44:07] Thank you so much, Neil. That’s a really, really nice point and really thought-provoking point to wrap things up. Unfortunately, that is all that we have time for today. Thank you so much to Peter and Neil, for sharing your experiences and insights. And thank you to all of you for listening to this episode of The Signal presented to you by Third Bridge, the world’s leading independent research provider. Join us for the next episode when we will be discussing upheaval this time in the technology industry. Please rate, review and follow our podcast. And indeed, if you like it, tell a friend about it. Find us on Spotify, Apple Podcasts and Google or anywhere else that you find your podcasts, plus Thirdbridge.com/signal. That’s all from me, Catherine Ford. Thank you so much for listening and goodbye.