The connected world of energy | Special episode from Wood Mackenzie

0:02Hello and welcome to The Energy Gang, a discussion show from Wood Mackenzie about the fast-changing world of energy. I'm Ed Crooks and welcome to a special episode where we're going to be talking about understanding the connected world of energy. The reason for this is that we at Wood Mackenzie have just published a new book which is called Connected and it's written by our chief executive Jason Liu and our chief analyst Simon Flowers. You can actually download it from our website woodmack.com so please do do that. Go ahead and check it out. What it's about is about the key challenges facing the energy industry today and what we see as some of the solutions.

0:36And to talk about that, it's a great pleasure to welcome Jason Liu, who, as I say, is our chief executive here at Wood Mackenzie. Hello, Jason. Welcome to the show. Hey, Ed. It's great to be here. It's a pleasure. Yeah, thanks very much for joining us. And it's also a pleasure to welcome to the show for the first time another new guest, Sunaina Odjalan. Sunaina was until recently the senior director for corporate strategy and climate change at HESS, the oil and gas company. And you've recently started a new job, haven't you, at the investment company Bernstein. Hello, Solana. Welcome to the show.

1:03Thanks, Ed. Thanks for having me. Hey, Jason. It's really good to be here. Yes, I'm excited to say that I'm going to be an equity analyst for Bernstein in the energy and energy transition sector. Fantastic. Yeah, well, great that you're able to join us and great to take part of this conversation. I think that's a fantastic perspective to share this discussion we're going to be having about the future of the energy industry. One of the things we always like to do when we get people on the show for the first time is talk to them a bit about their careers, how they first got interested in energy, and how they got to the roles they now hold.

1:34Maybe, Jason, to start with you on this, as I say, what attracted you to energy, and what was the pathway that took you to being chief exec at Wood McKenzie? Oh, great, Ed. You know, I just would probably start off and say that I think energy's been a bit of the family business. My father was a civil engineer and actually a wind expert, and so in my youth, we would actually spend vacations touring wind farms. You know, I think we you know, as younger kids would have preferred being on the beach or amusement parks, but we'd be touring wind farms. So I guess that's where it all started. I will say over the last 30 years, I've had an opportunity and a pleasure to run some of the larger software and data companies in the world.

2:12And, you know, I did have one stint where I ran one of the largest energy software companies in the world, Allegro. And now I've been at Wood McKenzie now for about 15 months as CEO. And the only thing I would add is, I think at Wood McKenzie, we have this fantastic 100-plus year history, but I'm the first outsider from Wood McKenzie, but also the first one with a tech, you know, AI background. And I think that's part of the outsider's perspective that I think I can help bring to the energy world is that kind of how does energy meet tech and AI? Yeah, absolutely. That is very interesting. And as you say, very much traditionally at Wood McKenzie, we've appointed CEOs from inside the company.

2:49you I think the first one in the whole history of the business to come from outside as you say really interesting to bring that tech perspective and that's definitely something we're going to be talking about on this show before we get to that though Sunaina and tell us about your career so you spent a long time at Hest didn't you but what's your your journey been you know I was reflecting on this Ed I actually entered energy by accident it was early 2000s and I found myself with not one, but two electrical engineering degrees at a time when tech was crashing. Slumberger was hiring. It was not a company that was on my radar, but oh well.

3:27And in hindsight, it was fantastic because it provided such a great foundation for understanding how complex and how large the energy system can be. I got into strategy through business school at Rice and did six years in strategy consulting in Boston before joining Hess. And at Hess, I've done various roles in onshore and offshore before joining corporate strategy and doing our climate change strategy as well. So I've moved around a lot, joined energy by accident, but stayed by choice. And then getting into energy equity research in particular, as you've been saying, that's kind of a new thing for you.

4:06So this is a new field for you to explore. You know, it's more of like a shifting perspective for me. At Hess, I had the chance to shape energy and climate from the inside. And now it feels like a natural next step because at Bernstein, I'll be analyzing the sector, a sector that I love, from the outside through more of the market lens and more of the companies. You know, energy transition, and I'm sure we'll talk about this as well, is at such a critical point. And I'm excited to bring my background in engineering strategy, as well as climate and sustainability to help investors and companies really cut through some of the noise that's been there in identifying the opportunities as well as the risks that lie.

4:48Right. Absolutely. So let's start off then by talking about the shape of the energy landscape. Maybe, Jason, get your thoughts on this then. So, as you know, you've been about 15 months leaving Wood Mackenzie. When you think about the energy industry as it stands today, and the challenges that it faces, what do you think are the biggest issues? Obviously, I wish my partner, Simon Flowers, and my co-author of the book had an opportunity to also chime in. But I think the way we laid out the context of this question in the book was a substantial kind of deep dive into why has the energy landscape changed so dramatically, particularly in the last five to 10 years.

5:27There's an incredible amount of additional complexity now, whether it be now the rise of energy demand, energy transition or climate issues, coupled with now regulatory involvement and other pretty substantial changes around national security and others. And that has created a lot of additional complexity. And what also is kind kind of added to the mix is an enhanced amount of volatility. And so in the last year plus, myself and Simon have gone out and met with several hundred of our largest energy customers. And we met with the CEOs of these large energy providers. And we definitely started recognizing some patterns and almost like a zeitgeist that was happening in the industry, which was there was just a lack of predictability going on in the industry.

6:11And we heard that from multiple CEOs that felt like they could no longer predict the future. And we're not just talking about 5, 10, 15, 20-year outlooks. We're talking about predicting over a six-month, a nine-month period of time. And we ultimately came to the conclusion that the historical ways in which strategic planning and operational planning had to be fundamentally rethought. In fact, they arguably had been broke because of this volatility and complexity. And so the book is all really lays out the reasons why we ended up in a situation where the old paradigms don't work. And then our proposed solutions on what the new paradigm should be for planning and decision making, both strategic and operational.

6:56Yeah, I think that's really interesting. And I do think, you know, people sort of seem to always say, oh, everything's very uncertain and things are more uncertain than they've ever been and so on. But I do think there are real grounds for thinking that the uncertainty today is higher than it's ever been. as you say, a lot of different kind of interrelationships, interconnections that didn't exist before that exist now. The whole issue of climate, as you say, which is something that people didn't really think about in the energy business 30 or 40 years ago, is now very present still, despite everything.

7:25And then through into that AI and what's happening, you know, this kind of brand new world-changing technology, which is kind of evolving at such a fast pace. As I say, I think, you know, it's not just an empty thing to say, to say uncertainty is greater than ever, I do think there's something really in that. Absolutely. You know, I think, Ed, just to add, you know, I think on a couple of the vectors that you mentioned, you know, first of all, with AI demand, I've been in countless customer meetings just recently. And one of the obvious questions is, what is AI demand going to be? You know, is it going to be the hockey stick increase, or is it going to be more tempered?

8:00And, you know, with Wim McKenzie, we're obviously doing everything we can to generate that type of output, whether it be our sensor data. But also, you know, when you look at things like congestion queues and interconnection queues. There's a lot of ways that you can try to estimate that information. And I think those are some of the techniques that we would say helps bring a little bit more clarity to some really important questions because the impact is substantial when you're talking about that type of increase in load on our grid. Yeah, as you say, any then insight you can bring into that uncertainty is then kind of particularly valuable.

8:33Now, what do you think then when you think about key challenges in energy right now, what are the big ones that stand out for you? Yeah, you know, looking at it from the strategy perspective, so inside a corporate perspective, one of the things we used to deal with is, it's exactly what you said, Jason, where basically the energy sector is so different because you're dealing with these four forces, essentially, geopolitics, policy, tech, and then the regular consumer supply and demand, right? And all of these four forces are interacting constantly. And so you could have a breakthrough in tech, but if policy shifts, then the economics might not work, right?

9:13Or if consumer demand shifts, kind of like how we're seeing in EVs right now, you have to start again from, you know, forecasting oil demand for the long term, right? So that's one of the inherent challenges that companies are working on. And so really one of the solutions is to think about how do we think through exit ramps so that we can pivot quickly when we find the information changing. I think an inherent other, more so for oil and gas companies, challenge is that it's a depletion business. So every barrel that we have produced was our best barrel, right? And we have to replace that barrel somehow.

9:53So fields decline naturally about 5 % or 7 % a year. And if we're not constantly reinvesting, your production and your cash flow shrinks. And so do you go find more resources? Do you buy the resources? How do you actually allocate that capital? And then two other challenges that I'll highlight in the energy space is the time horizons, not for every part of the energy space, but largely for infrastructure as well as offshore fields or pipelines, things that you were talking about, Jason. The time horizons are long. So you're making a decision thinking about a certain future, and that future might not exist when you're coming to FID, right?

10:35And then finally, in the commodity space, we're essentially price takers. we're not price setters. And that's the last part of that challenge. So it's an interesting dilemma. To maybe add what you're saying, just some real life customer stories. One is, we actually did some analysis recently on some of the European majors and some of their, obviously, recent, over the last three to four years, decisions to obviously move into the power renewable space away from some of their core competency in oil and gas. And unfortunately, there was obviously some less optimized decisions that were made. And we actually calculated the exact impact.

11:11And it was roughly about$80 billion in lost value with kind of suboptimal decisions made in that, you know, in some of the investments they made. But also, I just was out meeting with one of the largest developers in the US and the CEO. And, you know, one of the biggest issues that they're dealing with is obviously with the changes in the big, beautiful bill, you know, what does that mean to them real time from an investment and planning perspective? and even to a point now where they're considering options as gas, you know, both trying to understand the price of gas because it has an impact on power, but also, you know, gas power plants obviously have a big potential impact on AI generation.

11:52And so they need to understand that piece as well to make better decisions. So the world has obviously gotten a lot more complex and the volatility is much more substantial than, you know, 5, 10, you know, 20 years ago. Yeah, that's really interesting. And I want to pick up on something you mentioned, Salina, earlier. You talked about the energy transition. You just mentioned the energy transition. I wanted to kind of just interrogate, I think, as they would say in academia, that use of words. Because, as you say, Jason, if you look at some of the decision making that was taken by European oil and gas companies over the past kind of five to 10 years, there's clear value destruction there, as you say, that figure,$80 billion.

12:30dollars. And I think part of the reason for that was that kind of conceptual framework about whether there's a transition happening or not, in the sense that there was kind of an inevitable transition and a progress away from fossil fuels towards low carbon energy, particularly towards renewables. So you could say, oh, well, the words we use, whatever we call it, don't particularly matter. But on the other hand, as I say, I do think it kind of creates a mental framework that then actually helps guide a lot of decisions. So, Jason, how do you feel about that language? And do you like to talk about the energy transition?

13:02Is that something you think is a useful kind of mental framework for what's going on? I think what the way we tend to look at, and this has been pretty consistent with WoodMac, you know, for the last, you know, five to 10 years, is I do think WoodMac has consistently said that we need every ounce of energy we can get. You know, there's going to be constant need. There's an insatiable appetite of new things that need new energy. You've got still 7 billion people that are below, you know, kind of modern usage of energy. You know, roughly 2 billion people that are still using firewood right now as their main source of energy.

13:32And then an additional 3 to 5 billion above that that are still not able to use full optimal amount of energy or electricity to power their daily lives. And so this demand is obviously coming online in the coming decades and will really serve to drive further increases in energy demand. And so, you know, we've increasingly started thinking about the word energy evolution, that it's not a light switch. It's more of a dial, if you will, and that there will be continued usage of oil and gas products for many, many decades to come. But also, we need to see more renewable type generation going on as well.

14:11Yeah, no, I agree with that. I think over the last five years, maybe five to 10 years, the thinking has evolved, right? And so energy evolution, energy addition, whatever you want to call it, energy growth is tied to GDP growth. And so if you break that out into how some of the myths have been busted over the last five years, it's kind of like what you said, I think people have aligned on the fact that it's not a switch, and you can't just switch off hydrocarbons, right? But if you take every commodity, so oil demand has slowed down or is slowing down. Roughly one to two million barrels a day growth over the last decade, it's probably looking at like 0.5 million barrels a day going forward, right?

14:53So it's growing but slowing. Gas demand, obviously, with everything you've mentioned on AI, but also onshoring of manufacturing, electrification, and more just cooling needs with climate change. That's gas demand. There's a ton of gas bowls out there as well. And then on the new energy side, I think it's interesting to think about what are some of the near-term technologies that are going to work? And then what are some of the technologies that are on the horizon that are probably more like a 2035-ish sector? So for instance, solar and wind are obviously growing. Battery storage is great and is needed if we want to use more solar and wind.

15:34And we can talk about all of these as well. I think some of the capital that went into the clean technology side of things was probably chasing hype, was probably learning as well. So green hydrogen, for instance, not sure where that's going to go. But then nuclear is definitely going to be needed, right? And that will be more of a 2035. So I think there's more of an understanding of the fact that energy is really complex. We're going to need all sources. Some are more near term and economic right now with and without subsidies. And some are more of the long term, mid 2035-ish. I think in many ways, you know, I think we tend to think of the world as energy addition or energy evolution.

16:18And one of the reasons is kind of the bouncing of those four really key, you know, pillars. I think, unfortunately, there was kind of an oversteering on one of the pillars, which was climate. Climate is super important. But when you look at energy demand, it's not only AI, it's also the 7 billion folks in this world that are living, you know, in levels of poverty and trying to, you know, bring them up to a higher quality of life. But even when you look at regulatory, I think we all understand now that national security has become a big, big component of that regulatory piece. And so now I think what's really complicated the matter is trying to balance those four areas.

16:53And the other thing I would just add about what's made energy transition a little bit more, I think less of a relevant term is the integration of all the energy components. They're all integrated. It's not, you know, it's not siloed. And I think the energy transition view was everything's kind of siloed. And now I think everyone sees that the impact and the interdependence of each of the energy generation capabilities or oil and gas is all interrelated. And so we've got to think about it in a much more kind of holistic, integrated view rather than in separate piece parts. And I'll just add to that.

17:25I think there's regional differences as well, right, Jason? So, for instance, I think, you know, the over-indexing of climate probably was more of a European side of things. China is definitely focused on energy security, right? And so it's looking at a lot of the critical minerals work, a lot of the magnets that they're building or manufacturing capacity that they're building is more from an energy security perspective. the U.S. has a really interesting opportunity being resource-rich and also having companies that are responsible producers and so wanting to do the right thing on the climate angle as well.

18:03So I'll just add that there are regional differences there. Yeah, no, that's very true. That's a really important point. As you say, those differences are very significant and persistent. Just going back to something you were just saying, Jason, very much resonated with a lot of the conversations I've been having. You said you were talking to people in the US about, for instance, integrating solar and gas. And that seems to be a real kind of buzz thing now. Just I've lost count literally of the number of people that I've been having exactly that conversation with in the US just over the past couple of weeks in terms of, apparently, the new buzz phrase.

18:40I think it's the integrated energy plan, but this is a thing that a lot of people now interested in, as you say, these kind of developers who, up until very recently, probably, you know, up until kind of nine months or so ago, would have been very strictly kind of solar and wind and storage focused, are now saying that they need to offer natural gas as well as part of the package, given, you know, what the market wants, given what the policy environment is now. You know, this is something which absolutely makes sense, as I say, in terms of kind of where the market is moving, not always easy to deliver, particularly not if you're not super experienced in that field and you're kind of learning about it for the first time.

19:18And yeah, that's just one very interesting little kind of micro example, as you say, of not so much sort of, you know, transition and kind of leaving one thing behind and moving to something else, but actually kind of trying to integrate the different technologies together. Yeah, absolutely. I think to your point, I've been in now several meetings recently in the power renewable space, and now everyone's trying to ramp up on being gas experts. So it's just really interesting to see in these conversations. Yeah, very true. So, Naina, I wanted to go back then to you on this and just to think about, you know, what that means in terms of decision making.

19:53And maybe just to tell us a little bit about your experience at Hess then. So this is an oil and gas exploration and production company, had an interesting record, if people know the history, but founded by Leon Hess way back, was originally in the fuel distribution business, diversified, then became a very, very successful upstream player. and in particular had this incredible success in Ghana and these massive fields, which are very important now to future oil supply. But there was always very strictly an oil and gas company. When you thought about the energy transition and where it was going, how did that affect your decision making?

20:37Did you ever, for instance, think about investing in renewables? Was there something or did you think about what it meant for the decisions you had to make in terms of the types of oil and gas assets you invested in, what did it mean to you? You know, Ed, when we started, it was about 2019, right? And there were a bunch of net zero commitments coming out. There was a wave of net zero commitments coming out. And Greg Hill, who was our president and John Hess, came to my team and basically said, you know, figure out net zero. What does this mean? So we took our time to understand this space because is we're really good at our netting, which is oil and gas, more oil than gas.

21:15And we're really focused on our portfolio and understanding the role of the assets in the portfolio, etc. And so when we started looking at net zero, a couple of things came to play, right? And we distributed sort of the solutions in three big pillars. How can we decarbonize our own operations? Are there technologies or additions in the adjacencies of our current assets that make sense for us to invest in? So new technologies like maybe CCS or even hydrogen, if that made sense. And then we knew that at some point there was going to also be a financial instruments angle to it. So offsetting what we can to decarbonize ourselves.

22:00And so when we started looking at each of those pillars, our decarbonization angle was the one that we could very systematically go after because it's just basically building out a marginal abatement cost curve with all of your solutions and then going after it from an operational perspective. On the CCS side, as well as some of the newer technology side, like renewables as well, we looked at a bunch of different things and we realized very quickly, and this is one of the learnings that we had, is to make a switch, and this probably goes to what you were saying, Jason, about the European majors as well, to make a switch of a business model, you need an investment thesis that makes sense, right?

22:42And we looked at our knitting and we said, can we actually move into some of these spaces? Are we, you know, what gives us the unique advantage to move into some of these spaces? What gives, you know, how are we actually going to create value down the line? How are we going to bring costs down the line? And then what portion of our portfolio can we actually invest in that space? And we very quickly realized that the most sensible solutions in order to decarbonize were solutions that were in adjacencies to our current assets because we were really good in the Bakken. And so we started exploring what potential carbon capture in the Bakken would mean.

23:23We've got Asia, which is high CO2 assets. And we looked at, you know, what does carbon capture mean? Again, carbon capture is similar in terms of skill generation, right, between oil and gas and CCS. CCS. And so, again, it's the adjacencies of the assets that we were looking at. Right. Really interesting. And actually another great example of kind of interconnectedness between sectors that you're in upstream oil and gas, but you realize you need to know about carbon capture as well. And that's something else you're going to be wanting to explore. So I wanted to talk a bit about data, Jason, because I know this is a big theme of yours, and you talk about bad data leads to bad decisions.

24:01Can you talk a little bit about what you mean by that and what are some of the big issues in terms of energy data as you see them? Yeah, I mean, certainly we can, you know, spend an hour on this, but I don't want to, you know, put your listeners to sleep. But I think what I would say is that when you look at the topic of data, we're in a point in time now that we have access to an unbelievable amount of data. And we kind of see kind of three kind of traditional mistakes made with data. But the first is just the lack of using the amount of data. So when you looked at historical ways in which decisions were made, humans just tend to think very linearly.

24:34It's cause and effect, right? And so the amount of data they collect is a very small amount of data and oftentimes misses correlations or interdependencies between data sources because the human eye just doesn't see that, you know. And so when you start looking at these machine-based programs, they just crunch massive amounts of data and they start recognizing patterns or interdependencies that humans, you know, don't see. And so when you look at the amount of data that's out there, you know, Wood McKinsey is arguably the largest proprietary aggregator of data in the market right now. We have the most proprietary data of anyone out there.