Ramez Naam: The Energy Industry Must Take the Speed of Disruption Seriously

How should energy look like in future societies?

This was the main topic at this year’s Offshore Northern Seas (ONS), where the world’s oil and gas executives and sustainability leaders converged to discuss energy, security, technology and environmental issues.

We had many interesting conversations during our time at ONS 2018, and it’s reassuring to see that the oil & gas world is certainly waking up to the disruption that’s quickly descending upon the industry. Among the people we met included prominent speaker, futurist and award-winning author Ramez Naam, who took the stage on the first day of ONS 2018.

Having spent 13 years at Microsoft, where he led teams developing early versions of Outlook, Internet Explorer, and Bing, Ramez now dedicates his time to clean energy. Besides co-chairing the energy and environment program at Singularity University, Ramez also actively invests in innovative energy startups and speaks across the globe. His work has been featured in The New York Times, The Wall Street Journal, and numerous other leading media.

Engage // Innovate and Strategy Tools co-founder Christian Rangen caught up with Ramez during the conference for a quick chat about disruption in the energy industry today.

Listen to the podcast and read the interview below:

This interview has been edited and condensed for length.

Christian Rangen: You gave an opening talk a lot of people followed on Day 1. If you’re going to summarize, what was the essence of your talk?

Remez Naam: The essence of my talk was that technology disrupts existing industries. It disrupts dominant players, just as Kodak was disrupted by the digital camera even though they were the ones who invented it. In the energy sector we’re seeing massive disruption. First, solar and wind plunging in cost, batteries plunging in cost. And then a really almost existential threat for the oil industry is this combination of electrification and autonomy of transport and the switch to fleets, to buying rides rather than vehicles. That disruption that could easily be 10 or 20 million barrels a day of demand wiped out this decade. While that is not the end of the oil industry, it is a massive, massive change. It’s a contracting demand for oil that could start within five years and that’s a big deal.

 

Christian Rangen: So we’ve had we’ve had several executives from the oil gas industry including Equinor come visit Singularity, have some heated debates and then leave again. How do you see the industry mindset move closer to exploring some of these new areas?

Remez Naam: I think you have to hear it at this conference. Equinor and Total both had a really big presence. They are probably the two most progressive and forward-looking of the oil and gas majors when it comes to clean energy. And yet even so, I think they may be underestimating the pace of change. It’s not to say that they should give up all oil and gas investments because we’re going to have demand for oil 10 and 20 years from now, at least for things like aviation and so forth. But I think they could re-balance their portfolios to invest even more than a fraction of their investments into clean energy. That really is the growth factor.

Christian Rangen: One of the speakers this afternoon coming from the capital side said when he looked at the energy transition, the capital allocation process was going to be a core skills for energy companies. What do you see in other types of energy companies in terms of investing in this shift?

Remez Naam: I think that the investment for the shift is really from seeing a guaranteed return or at least a high likelihood of of a good return. And investors have become more and more comfortable with the financial modeling around whether renewables make sense.

You see a lot of money continue to flow into solar and wind, and now into batteries and you’ll continue to see money flow into this sort of electric autonomous transport future. General Motors bought this company Cruise, which makes autonomous vehicles on the Chevy Volt electric car platform that GM owns. They paid a billion dollars for a one-year old start up. About a month ago, Softbank put another two and a quarter billion dollars into Cruise, with a valuation at over 30 billion U.S. dollars. We’re starting to see the automotive companies, and I would say the Gulf states being really interested in the future of transportation and putting money into that.

 

Christian Rangen: That’s a good point – the role of of investors. One of the trends we’re watching is who’s going to lead the shift? Existing corporates or new startups and scaleups that are coming in? What do you think?

 

Remez Naam:  It’s some mix. The companies really implementing on the power side on solar and wind are neither a startup nor traditional in that space. There are some traditional ones; for example G.E., Siemens, those have both done a good job in the wind category.

In batteries, Panasonic is a leader.  Solar has seen a whole lot of new companies but they are no longer startups! They have scaled up to be multi-billion dollar companies.

In that transport future – which is really what disrupts the oil industry – it’s all companies we would’ve called startups a few years ago.

It’s Google – Google is in the lead for autonomous vehicles. They have autonomous vehicles in Arizona now with no safety driver being tested out as a form of collective transportation, said to be commercially available by end of the year. And Google’s not a transport company. I wouldn’t call it a startup either but that’s that’s their roots.

It’s GM with Cruise, so it was a startup that was founded and GM was wise enough to make that acquisition. A billion dollars is a very big acquisition, but I think GM saw they were behind and had to do something. GM and Cruz are now saying that by 2019 they’ll have an autonomous taxi service – all electric – running. So that’s a big deal.

And there’s Tesla that says they’re going to release full autonomy to vehicles from 2017 and later in the next few weeks. We’ll see. Maybe it’ll underwhelm slightly but I don’t think it’s going to be that far off.

It’s important to understand that the intention of the acquisition of Cruise really came from someplace outside of the automotive sector. I think the oil and gas companies need to be looking for that, looking for the startups, the new players that are the acquisition targets or the partnership opportunities for them.

 

Christian Rangen: So you you’ve mentioned GM, Cruise mobility technology software, Tesla, Google, Waymo, Softbank. I mean these represent fundamentally different capabilities than traditional energy companies. Now if we just play around a little bit and fast forward 10 to 20 years, which for a technology company might be a long time, but for an energy company at least a legacy energy company, it is very short time. What are some of the scenarios that could play out if these trends keep accelerating?

Remez Naam: If you look at oil demand – ninety some million barrels a day today – if you add up passenger vehicles, cars, buses and then light commercial and medium trucks that never go on more than 150 miles a day. All of that could be electrified quite rapidly. That’s 30 – 35 million barrels a day. That’s one third of oil demand.

And how fast could that go? That could go in ten years, most of it. 70 percent of it could go in ten years. You know maybe 10 percent will go in 20 years. But that’s a loss of 20 – 25 million barrels a day of demand. That means peak oil demand in those scenarios happens almost in the next 10 years and quite possibly in five years.

 

Christian Rangen: There’s a term that’s been growing “stranded assets” and increasingly also “stranded infrastructure”. Large parts of Asia including China have significant investments and value chains on coal; coal plants and coal factories. Equally, you have large investments in offshore and onshore installations for drilling. A lot of the decisions that are being made today might have 50 to 60 year time horizons. How should senior management think about resource allocation differently in light of these events?

Remez Naam: Last year China canceled more than 150 coal power plants that haven’t been planned to be built. 40 of them had already started construction. You call that a stranded asset or wasted capital. In the U.S., we’ve shut down about a quarter of the coal fleet in the last eight years and the rest, I mean Trump is not slowing it down at all. It’s just going to be shut down because they’re no longer economical. The cheapest solar in India is probably cheaper than the operational cost of a quarter of India’s coal fleet even though India’s coal fleet is quite new. So those become stranded assets and they are not paid off even.

The analogous thing for the oil and gas industry to do, oil especially, is to think about whether the drilling platform whether is still NPV positive in a scenario where oil demand peaks in 2025 and is down to 75 million barrels a day by 2035. In that scenario does this rig make sense? Yes or no.

We heard Patrick Pouyanné of Total say that his whole focus is on lowest break even, the lowest cost of production. Which makes sense if you’re going to make a new investment. But walk down the production cost curve of the cheapest and most expensive oil, with the Saudis being the cheapest and the Canadian tar sands being the most expensive, we’re going to walk a quarter or third way down that curve. And so even the stuff that you think is pretty cheap might be on the wrong side of that line.

Christian Rangen: You mentioned Softbank – world’s biggest VC fund close to 100 billion under management now raising their latest fund. What role do you think someone with the muscles like Softbank can play in this shift?

Remez Naam: I worry a little bit because there’s almost too much money floating around the world. There’s a lot of capital out there which is is primarily good but what it means is that when you really have a cost attractive and economic basis to switch to new technologies, we’re not limited by capital on how quickly we can scale them. The world can deploy a solar at a pace that’s not really constrained by capital if solar is cheaper than the operating cost of a coal plant in a place. You can imagine that it would get deployed quite fast. But a company like Softbank can go even further than the capital markets that are debt financing, in that they can make more visionary bets.

And so that’s what I think you see happening – visionary bets being made in the future of energy, the future transportation that have not the economics of a project, not the economics of funding, really attractive gigawatt scale solar field, but that the scalability of software, the scalability of technology to build this new thing that you can then replicate everywhere in the world within a few years. The venture money drives the proving out, building, technology and the business model, and then the debt-financing drives the replication of the implementation deployment.

Christian Rangen: If you are a senior strategist, young executive or board member within the energy space today and you’re stuck with some of these habits and legacies and investments but you’re seeing these new things, what would be your advice? What should strategists at any level do to really get to grips and make the right decisions in this landscape?

Remez Naam: The first thing is to take disruptive trends seriously.

The International Energy Agency (IEA) has been providing medium- to long-term energy projections since 1993, and yet every single year in the history of their existence, they’ve undershot their forecast. The 2017 report underestimates what’s going to happen in 2017 by one third. That’s how bad it is. And so you just can’t depend on that. You have to look at the reality and start, not even the actual deployment but start first with the cost reduction trend. That’s the key. And you should take it seriously.

People will tell you “oh, it’s impossible. Solar will never drop below x price. Wind will never drop below x price, batteries will never get below x.”

Maybe. But do the math. Take a moment. It’s not hard to plot out the numbers. See what the trend actually suggests and then ask yourself if batteries, electric vehicles, solar and wind gets to this cost, what business could I build with my current business model? What is the business I would build if technology really does continue on its exponential trend the way that it has been for the last few decades?

If you don’t do that, you’re being irresponsible because you’re ignoring the reality of the exponential improvement of performance of technology.

 

Christian Rangen: Closing question. You’ve been having many conversations here at ONS. How do you see the audience that you’ve been meeting understanding and grasping these things?

Remez Naam: Well I’d say I was apprehensive. Pierre Bang of Total, who was on the board of ONS invited me to join. I told him “you don’t want me, what I’m going to say is going to be very frightening for your audience,”

He told me “that’s exactly why I want you.”

So I was trepidatious before I came. But I’ve not seen any negative reactions. I’ve seen people being excited, people in the oil and gas majors, people and service providers have been walking up to me all three days and saying it was a terrific talk and it opened their eyes and that the industry needs shaking up. Some selection bias there, people who hated my talk are not coming up and saying hello. But it was really refreshing and heartening to see that people did take the numbers I showed seriously and were eager to think about being part of the next stage of the industry’s evolution.

 

Christian Rangen: Wonderful. Well we’re speaking on behalf of at least parts of the audience very thrilled to have you. You did bring very different perspective and I think the work that you’re doing is incredibly important. So thank you for coming and thank you for talking.

Remez Naam: Thanks so much Chris. This is fun.

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Download our free report The Shifting Energy Arena, which explores in depth the shifts that are now upon us in the energy arena, and how we should tackle them.

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