The Energy Transition Needs to Transition

CERAWeek 2023 takeaways

Super-Spiked is now available on Substack (here) and on the Veriten website (here), where you will also receive their flagship COBT video interviews.

Over 30 years in and around the energy sector and this was my first ever CERAWeek. Key takeaways:

• "Energy transition" and The Energy Transition (TM) are way over-used, mis-understood, rorschach test phrases. Energy transition as a concept is itself in need of transition.

• There were pains to inject pragmatism, the notion of the "energy trilema" (affordability and security along with low carbon), as well as talk of there being multiple transitions going on currently (differences in approach for developing versus developed world).

• There is a need to push past stilted, ideological talking points, which some speakers did better than others.

• You can't walk 5 feet without saying hello to at least 3 people you know or used to know. Thank goodness for mandatory name badges!

• As far as US conferences go, CERAWeek is still the epicenter of the energy world. Congratulations to Dan Yergin, Jamey Rosenfield, and the entire S&P Global team for putting on an incredible event.

• A great first week to un-retirement; I am exhausted and missing nap time.

Five questions coming out of CERAWeek 2023:

1. Will the concept of "energy transition" transition to one that does not drive a super vol macro backdrop of price spikes followed by price busts, economic damage, and no real change in the world's GHG trajectory?

2. Can the developing world divorce itself from western world institutions?

3. When will traditional energy companies recognize the need to free themselves from dependence on European capital and insurance providers?

4. Where is there opportunity to take risk without group think?

5. What were my most notable CERAWeek 2023 moments?

(1) Will the concept of "energy transition" transition to one that does not drive a super vol macro backdrop of price spikes followed by price busts, economic damage, and no real change in the world's GHG trajectory?

The word "transition" implies we are moving from one state to another.

• For environmentalists, this usually means away from fossil fuels and to renewables.

• For policy makers (I'll stick with American terms here), this has usually meant adhering to either progressive "urgent climate crisis" religiosity or right-wing "hey, the climate is always changing, what problem?" negligence. As I have stated many times, I deeply despise partisan politics. Energy is the last area that should be part of the culture war.

• For traditional energy companies, this has usually meant a mixture of corporate speak and mostly tentative actions or, worse, non-sensical, whole-sale "integrated energy company" transitions to try to thread the needle of the multitude of pressures coming from shareholders, policy makers, and other pressure groups. As Dave Mustaine eloquently stated: "If there's a new way, I'll be the first in line...but it better work this time."

• For new energy companies, this has meant learning to love pro-business subsidies that split the ideological baby and will definitively enrich subsidiary beneficiaries even as societal outcomes are not always clear. I do appreciate that we need to start somewhere if we are going to diversify our energy sources. In the western world, we are still mostly missing conservative (small "c") solutions to our energy and environmental challenges and are therefore stuck with big government mandates and subsidies as our sole policy tool.

In my view, the reality of the next 10 year outlook for energy is:

1. Global coal consumption reached an all-time high in 2022 and I believe will continue to rise over the next decade.

2. Oil consumption is also on-track to grow for at least another decade and possibly further into the 2030s (slowing population growth a major risk factor).

3. Natural gas is on-track to grow well beyond the next decade.

4. CAPEX for the first three items is well below what is needed to avoid price spikes. But most investors and essentially all environmentalists hate capital spending in these areas, and that is not yet on-track to change.

5. We lack a nuclear power "Marshall Plan" anywhere in the world that can provide zero carbon baseload power. This is perhaps the area where government rule making and public-private partnerships are most urgently needed. This is also the area that is undoubtedly of critical importance if the world wants reliable power generation at scale with as small of a carbon footprint as possible.

6. The answer to the intermittency issue with renewables power, which some effectively tout as "The Answer," is not yet evident, though that can always change.

7. Which new energy technology will be "the next Tesla"? I don't know, but the amount of capital pursuing new opportunities is massive; the issue is the time to scale and ability to displace legacy infrastructure, which I would measure in multiple decadal type time frames...much longer than the techno optimists in the environmental, policy, and investor spaces believe.

The "energy transition" needs to transition in its objectives and policy prescriptions.

(2) Can the developing world divorce itself from western world institutions?

It seems increasingly clear that global elite, western world "climate solutions" and "energy transition pathways" are incompatible with lifting the remaining 1-3 billion people out of energy poverty.

To wit:

• The World Bank does not finance new coal projects in the developing world. Yet Germany, which as of the publication date of this post is not dependent on the World Bank, is able to develop new coal projects. WTH?!? This is but one example.

• The Glasgow Financial Alliance for Net Zero (GFANZ) has set so-called "financed emissions" as the core metric for the mostly western financial institutions that have signed up for it. Yes, they have lots of boilerplate about an orderly transition and the needs of the least fortunate. But there is no mistaking the chilling effect GFANZ directives are already having on the world's leading capital providers and insurance companies, none of which appears to be in the interests of humanity generally speaking or the developing world specifically.

• The International Energy Agency's (IEA) "Net Zero by 2050" report that highlights just one of what could be a near infinite number of future scenarios is being widely interpreted as “The Pathway” to net zero and limiting warming to 1.5 degrees. The weaponization of this report by climate ideologues is similarly predictable and, in my opinion, likely to lead to energy shortages in both the developed and developing world.

The questions I pose are:

• What are the steps the developing world can take to free itself from the restrictive, self defeating, moralizing edicts from the likes of the World Bank, GFANZ, and IEA?

• How does the developing world support domestic economies through a mixture of traditional and new energy technologies and infrastructure?

• Can development be self-financed (i.e., entirely from non-OECD sourcing) without the help of western institutions?

• What is the role American companies and non-GFANZ financial institutions can play in supporting energy growth in the developing world?

(3) When will traditional energy companies recognize the need to free themselves from dependence on European capital and insurance providers?

When will traditional energy companies in Europe first and foremost and possibly the United States and Canada see the handwriting that is clearly on the wall that they too may need to go it alone, much like the developing world? Perhaps not in the next year or two, but over the long run. US coal may well be the predictor sector. This is a point I have disputed in pushback from several thoughtful Super-Spiked subscribers; I am increasingly wondering if their concerns should be taken more seriously than I realized.

For coal companies that survived the onslaught of inexpensive natural gas coupled with strict environmental regulations, the strategy is one of: (1) no external debt; (2) self insurance (or limited external insurance); and (3) self financing through free cash flow. Ironically, these are core Super-Spiked financial principles I have espoused for traditional energy, with the assumption full access to capital and insurance markets would be unfettered as profits recovered. These may now be principles for long-term survival.

Fortunately, the oil and gas industry is far larger and healthier today than the US coal industry ever was in recent memory. There is plenty of time to:

• Diversify capital markets sources toward "rest of world" and away from Europe for sure and potentially US institutions (on the latter, I sincerely hope this will never be the case, but you can't assume sanity prevails).

• Diversify insurance sourcing away from Europe and possibly toward an industry self-insurance plan.

• But planning needs to start now when positioning is still relatively strong. This is like a slow drip leak, a minor inconvenience until barriers are breached and a flood ensues.

(4) Where is there opportunity to take risk without group think?

New technologies

Consensus view: New technologies are exciting (true statement) and thanks to the Inflation Reductio Act (IRA), risk taking and capital formation is going full steam ahead.

Opportunity:

• What is over-hyped and should be avoided?

• What out of consensus ideas have a chance?

• What in-consensus idea makes sense but perhaps with a new twist?

Areas of interest:

• I am often asked what areas do you like? Hydrogen? Battery storage? Wind/solar? Geothermal? Nuclear? Other?

• I understand the question and there probably are some broad categories that I would put in the don't-touch-wth-a-10 foot-pole list. My memories from the last super cycle of cellulosic ethanol, corn-based biofuels, and algae fuel additives come to mind.

• In the current cycle, I would encourage a focus on specific projects not broad categories.

• Using hydrogen as example, the colors are dumb. Really dumb. The so-called Hydrogen Economy (TM) I will simply say is at best many, many, many decades away. But individual projects that focus on energy output versus cost to produce versus net carbon intensity can have financial logic.

• Favorite new opportunity I heard at CERAWeek? New merchant solar that is unhedged and looking to play power price volatility...love it!

Traditional energy

Consensus view: Oil and gas was a low return business over the last decade (true statement) and will be going away at some point in the future.

Opportunity:

• If you don't believe it is going away any time soon, there is little doubt the business is currently completely lacking in capital formation.

• Private companies (not necessarily private equity) and national oil companies look to be best positioned to take advantage of backward looking pessimism by western world investors.

• Which traditional energy companies are willing to buck "hunker down" investor mandates and (favorably) change the conversation?

Areas of interest:

• Why is nearly everyone so hesitant to take risk, which is especially true for most publicly-traded companies?

• Let me be clear: Taking risk is NOT analogous to cranking up CAPEX to return to growth mode. This is NOT in any way, shape, or form a plea for a return to drill-baby-drill. Quite the contrary.

• Which group of companies are most likely to be free of artificial constraints on risk taking?

• Privately-owned companies, which I would note may well be different from private equity-backed entities, currently appear to have the best chance to take advantage of the dearth of capital formation in traditional oil and gas.

(5) What were my most notable CERAWeek 2023 moments?

Editorial note: For the time being, I am going to refrain from highlighting Veriten specific events as I don't want readers to perceive Super-Spiked as transitioning to being a Veriten commercial. The two Veriten events I attended during CERAWeek were indeed awesome. However, I am not going to discuss them further as the intention is for Super-Spiked to forever remain free of charge and commercial free. So in this space I also won't mention the opportunity that exists for leading companies of all sizes, regions, and energy technologies to partner with Veriten; I'll leave that to Maynard, Jeff, and the rest of the team to highlight. Instead, Super-Spiked will strive to maintain its founding mission: truth in energy.

Source: CERAWeek by S&P Global.

My top five most notable, non-Veriten, CERAWeek 2023 moments that I can publicly discuss:

#1: At a Center on Global Energy Policy (CGEP)-hosted dinner Sunday night, a senior executive at an American E&P company was highlighting industry progress made on methane containment. A senior policy maker retorted (paraphrasing), "you keep saying 'industry'...it is really just your company that has indeed taken substantive action...industry broadly speaking remains in max-resistance model on methane." I believe the senior policy maker made some excellent points in his retort. It was a great exchange at a great dinner.

#2: Tengku Muhammad Taufik, Petronas CEO (paraphrasing): "Energy transition only through an Anglo-Saxon lens will not work. We need to be pragmatic about what makes sense for the rest of the world." Well said Petronas CEO. And your company also had a terrific Agora House booth. I need to get back to Kuala Lumpur. Haven't been there since a memorable Royal Dutch/Shell analyst visit to the region in 1998.

#3: Meeting with people involved in the non-publicly traded oil & gas space. Freedom lives here. Does the future of oil and gas live here as well? If you are currently a private oil & gas company, you have a potentially major competitive advantage at this moment versus publicly-traded peers.

#4: H.E. Dr. Sultan Ahmed Al Jaber (CEO, ADNOC) delivered a highly anticipated keynote speech. I appreciated his remarks about Abu Dhabi National Oil Company (ADNOC), which seems well positioned to benefit from under-investment from western world companies to grow supply with a decreasing net carbon footprint. If choosing between low cost, low carbon barrels, there may not be a producer better positioned than ADNOC and the United Arab Emirates. As I understand it, Dr. Sultan has played an important role in positioning the UAE and ADNOC to thrive well into the future.

The surprising part of Dr. Sultan's speech was when he seemed to channel his inner John Kerry with what is now the boilerplate global elite talking points about the Urgent Climate Crisis (TM) and we all need to come together and believe what The Science (TM) is unequivocally stating which you are not allowed to question in any way, shape, or form or you will be deemed to be a Climate Denier (TM) and if there is any abnormal weather anywhere in the world we will make sure to highlight it using modern social media platforms which didn't exist in historical periods and we need to stop wasting time and really get things done for Our Children (TM) and especially The Grandchildren (TM)…you already know the rest as it is the standard talking points of those that treat climate as a religion.

I think the question is why Dr. Sultan felt compelled to frame this portion of his remarks using the language of the western climate-is-all-that-matters elite. The plan he has helped create for ADNOC and the UAE is an outstanding model that others, like the United States and Canada, should follow: more domestic resource development, with decreasing carbon intensity. I will guess there was a purpose to why he chose this language, which I may not fully appreciate. I am hopeful that COP28 under his leadership will prove to be a turning point where we can move away from the climate-is-the-starting-point-of-all-that-matters perspective. While Dr. Sultan's CERAWeek speech is perhaps a warning sign that nothing may change in how we discuss energy & climate, COP 28 is still over seven months away. We can evaluate whether it does favorably evolve the conversation, or not, when it’s over. Looking at Dr. Sultan’s resume (hint: first college), I will respectfully offer two words of encouragement: Fight on!

#5: Agora House Tour that included Aramco, Chevron, ExxonMobil, Occidental Petroleum, and Petronas (Amazon Web Services was also there). It was impressive to see some of the substantive efforts being made by traditional energy to produce low-cost energy with a low-carbon mindset. More of this please. The lady from Petronas did a great job with her presentation and the Petronas booth was dazzling. The Chevron AR demonstration was super cool. Saudi's new carbon-tracking software was impressive and I can't wait until it is publicly published. Kudos to Oxy for its 3-D printed DAC (direct air capture) model. At ExxonMobil, I missed the House remarks, but was happy to reconnect with an employee I knew from long ago.

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⚡️On a Personal Note: Dan Yergin

I joined Petrie Parkman & Co. in 1992 at the age of 23. One of the first big meetings I attended was a presentation Dan Yergin made in Denver to highlight the new PBS mini-series about The Prize, for which Dr. Yergin received a Pulitzer Prize. It remains the definitive history of the energy industry. Every energy analyst, portfolio manager, academic, policy maker, environmentalist, and person on Earth should read this book to properly understand the importance of energy in our lives, economies, and geopolitics.

I would like to thank Tom Petrie for going out of his way to introduce me to Dr. Yergin that evening. I remember it like it was yesterday. 99% sure we were at the Denver Petroleum Club. If you had told me on that evening that 25+ years later I would have served with Dan Yergin on two advisory boards I would have said you’re crazy.

What I find remarkable about Dr. Yergin is that not only is he still the leading energy sector statesman, historian, analyst, board member, and author, he does not pull punches in his actual views. Many of the CERAWeek speakers resorted to some mixture of corporate speak, activist/ideologue speak, etc. I am pretty amazed that while he is polite and statesman-like in his messaging, his actual views remain hard hitting.

Dan Yergin is both an inspiration of what is possible and what we should all strive for as energy analysts: truth in energy.

Source: Wikipedia.

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⛳️ The Un-retirement Blog: Episode 1

I get enough good feedback on the "On A Personal Note" section, I am going to supplement it on occasion with a new "Un-retirement Blog."

Un-retirement advice of the week: If you are currently retired and planning to un-retire, I would definitely recommend doing it right before CERAWeek or similar major industry event. Start with a bang!

Week 1 positives:

• The entire Veriten team is awesome, hard working, nice, and highly capable. Thank you for inviting me to join.

• It is really fun engaging with company executives in a new capacity that leverages 31 years of experience plus new skillsets gained since Goldman retirement via my board, private equity, and public policy exposures.

• There is a hugely enjoyable freedom that comes with not trying to build a career and not working for a major investment bank.

• Earning money to have fun is an incredible blessing. As long time readers know, I am pro-capitalism, anti-socialism. We are not doing charity work at Veriten. But there is a mission of Truth in Energy that transcends our profit motive.

Week 1 challenges:

• Stamina is not what it used to be. Still working my way back into professional game shape. Wise choices were made: didn't drink much alcohol, avoided red meat, minimized desserts, stuck to just 2 cups of coffee per day, and made sure I stayed hydrated. Unfortunately, I was only able to take 1 nap (on day 1) and had zero proper workouts while in Houston though the sprawling Hilton Americas ensures you get your steps in.

• I am currently missing a great golf weekend at Kiawah though that is as much due to a Saturday board offsite at my local club. Professional bettors are starting to take the under on my achieving a minimum 60 rounds this year…I’m going to say the over/under has dropped to 50 as of the March 9 close. Peak (low) handicap may be a thing.

• It's always hard to be away from our golden doodle...as well as my wife and our baby (last child still at home).

Spring Break is next week so expect my first video with my new Veriten producer for next Saturday.

Golden doodle relaxing on deck chair while Dad is working hard at CERAWeek 2023

Source: Super-Spiked.

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⚖️ Disclaimer

I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.