US poet Robert Frost spoke of two roads diverging in The Road Not Taken and he lamented not being able to take both. The oil and gas industry is also at something of a crossroad. With the green energy revolution and particularly hydrogen gathering momentum at the same time that oil prices are enjoying a resurgence, many traditional oil and gas firms are conflicted in terms of priorities. The storage and sale of hydrogen is best undertaken by oil and gas firms and whilst many are attempting to dip their toe in the water, others are once again fixated on the burgeoning oil and gas price.
However, for the industry, the choice may not be the binary one described by Frost. Indeed, some oil and gas companies are already carving a path of transition, attempting to continue picking the low hanging oil and gas fruit whilst at the same time laying the foundations for the arrival of the renewable energy revolution.
In the hydrogen space some are looking to transition their empty oil and gas reservoirs into hydrogen storage facilities, others are moving rapidly down the technology path in the manufacture of man-made hydrogen and some are looking to make use of their God given oil and gas divining skills to sniff out natural hydrogen deposits.
Offering a salient lesson however, BP suffered the slings and arrows of investor backlash when it very publicly eschewed its conventional oil and gas business model for clean energy in the first quarter of 2020. As a result, the supermajor became a whipping boy for investors and its market cap was slashed by more than half. The company’s shares were sold down on London’s FTSE 100 from about £5 in January 2020 to below £2 in October the same year - its lowest price since 1995.
Since then, exploration and production companies have nuanced their growth strategies with more realistic and sustainable transitions to clean energy. This is especially true for the smaller to mid-cap companies that do not have the luxury of a BP-sized balance sheet to support endless investment into non-revenue generating projects.
The evolution, offering perhaps a window to the future, has brought about a more balanced investment approach to renewables by Australian energy companies. Rather than a headlong rush into any clean energy opportunity, many established companies are instead working on the greater and less understood goal of transition.
One of the issues many investors raise when looking at the recent flight of capital into clean energy projects is the question of when will any actual returns be booked from these new investments? Payback is often intangible, unclear and some way off in the future. Hard-nosed market watchers are rightly asking which initiatives have real commercial prospects and which projects fall into the unwanted category of simple greenwashing.
There has been a gradual swelling however in the number of ASX companies announcing significant renewables projects in the last 12 months and many others have been contemplating it.
Complicating the push into renewables is the fact that companies with existing production assets have seen their oil and gas income increase this year. The oil price strengthened from US$50 per barrel in January to an October high of US$86. The spot price is currently trading just north of US$70 after easing in November on COVID 19 concerns.
Whilst the strategy of the bigger players is all too often on show in very public forums, it is instructive to cast an eye across some of the smaller-capped players to see where they are heading - who’s blazing a trail, who’s bucking the trend and who might be playing it with a very straight bat.
Buru Energy is one company stepping up the pace at its conventional oil and gas exploration and production operations in the Canning Basin in WA, whilst concurrently growing a number of clean energy subsidiaries. Whilst generating revenue from its Ungani oilfield, the company is also about to flow test its recent conventional Rafael discovery, notwithstanding Covid-driven border supply chain restrictions.
Buru however also has what it calls a number of “energy transition assets” covering natural hydrogen exploration and production, carbon capture and underground storage, battery minerals exploration and an integrated gas and solar project.
The first of these assets, 2H Resources, is aiming to be a leading explorer for natural hydrogen and helium. The company has taken a large position in South Australia where it has been awarded over 29,000 square kilometres of permits that are on a geological trend with legacy natural hydrogen discoveries. It has also reported modest hydrogen readings from recent Canning Basin conventional exploration.
Buru’s second initiative, project Geovault, is targeting carbon capture and underground storage opportunities, particularly those near clean hydrogen industrial hubs or clean LNG production facilities. Its immediate focus is on feasibility and geological studies to identify and quantify new potential CO2 storage locations.
Whilst Buru will continue to exploit its conventional oil and gas assets, particularly given they are spitting out cash, it is also succinctly articulating a clean energy growth path on a number of fronts.
Triangle Energy Global operates in the Perth Basin gas hot spot and is primarily focussed on expanding production and extending the life of its Cliff Head field by drilling the Western Development, the South East Nose appraisal/development wells and the Mentelle exploration well.
Success here could see the field life extended beyond 2030 with the three wells drilled from Cliff Head platform and tied-in for near term production.
With BP cancelling its Kwinana refinery offtake agreement and closing the refinery however, Triangle is kicking off a concept study and pre-front end engineering design process to build its own 5000 barrel per day renewable fuel refinery in the Mid West.
Perhaps as insurance Triangle is also moving tentatively into the renewable space and has inked an MOU with fellow up and coming explorer Pilot Energy to develop a wind farm proposal that may utilise its existing offshore facilities before transmitting electricity onshore.
In its deal with Pilot, the two will form the Cliff Head Wind and Solar Project JV to study the development of an offshore wind and onshore wind and solar power project centred around the Cliff Head Offshore Oil Field production facilities and the onshore Arrowsmith sparation and processing facilities.
Further afield, Pilot, infrastructure group, APA and ASX-junior Warrego Energy are pursuing a feasibility study into separate Mid West blue hydrogen and carbon capture and storage projects.
Pilot said feasibility studies will look at blue hydrogen technology, locations for production and opportunities to commercialise and distribute low-cost blue hydrogen. It says it will also assess the potential use of the Cliff Head oil project and other reservoirs across the broader Perth Basin to store the carbon dioxide.
Pilot said it had earmarked $3m across the two projects for the next 12 months.
ADX Energy is another one dovetailing renewable and conventional hydrocarbon opportunities. The $30m market cap company is producing around 275 barrels of oil equivalent a day from its Austrian oil and gas fields whilst at the same time looking to leverage the clean energy opportunity by producing hydrogen with a local wind farm operator and storing the hydrogen in some of its depleted gas reservoirs.
The company has numerous bypassed oil legs and near-production opportunities in the legacy fields it has acquired over recent years and it is starting a three well drilling campaign to bring some of these targets to market. It has already booked a 154 per cent increase in the proven and probable, or 2P, developed reserves.
ADX’s Vienna Basin hydrogen project is planned to happen in two phases. Phase one will involve 370 tonne a year hydrogen production pilot project to demonstrate viability and position the project in the green hydrogen value chain.
Phase two will see the project upscale to commercial capacity which will likely see it churn out 8,800 tonnes of annual hydrogen.
The company has also announced plans with Siemens Energy to build and operate a pilot test site in Austria to evaluate geothermal power technology, further underlining its strategy to go hard into renewables.
ADX is a textbook case of an oil and gas company aiming to wring as much value from its existing traditional acreage as possible whilst at the same time planning for the renewable future.
Carnarvon Energy is also at an interesting stage and not far from making the leap from explorer to producer. The $415 million market capped company is a 20 per cent partner in the world class Dorado development in the offshore Carnarvon Basin with Santos, along with a number of nearby lookalikes it plans to drill within the quarter.
Given its focus on the Dorado discovery and surrounding follow-ups it came as a surprise when Carnarvon announced it was also taking a 50 per cent stake in a renewable biodiesel facility in WA's wheatbelt led by little known Sydney-based consulting outfit Frontier Impact.
Not much has been said to the market, however it may well calm those stakeholders wondering how Carnarvon is going to offset the carbon footprint from its impending offshore oil production. If the biodiesel project proceeds to commissioning, there will be no shortage of WA mining, plant and fleet operators looking to buy carbon-free diesel.
An interesting recent observation was made by high profile US market commentator Jim Cramer from the CNBC network, who admitted to making an about face on fossil fuel investment in the last two years.
In early 2020 Cramer said he was done with fossil fuels and went as far as saying oil companies were the new equivalent of tobacco companies.
Cramer said climate change concerns were keeping young investors away from fossil fuel securities and activist groups were having an impression on fund managers.
More recently however he said “Was I wrong to call them uninvestable? I don’t think so. Before the bottom in 2020, this group spent years in the doghouse. Of course, that’s no longer the case.”
In one of the great market ironies, the reinvention of some typical oil and gas companies as green energy tyros has helped to reverse the flight of capital out of the energy sector and the doghouse is most certainly no longer home – in fact energy finished 2021 as the top-performing sector in the S&P 500.
Some fund managers have been drinking the climate change kool aid and anything with a tinge of green is getting a look in – particularly oil and gas companies that are still reaping big profits from fossil fuels whilst talking the talk about green energy.
Conversely, the Investigator Trust, the choice of managed investment funds for the well-heeled, deep pocketed Perth western suburbs glitterati, has just turned heads by announcing a $130 million stake in the China National Overseas Oil company.
China and fossil fuels in the one portfolio – what on earth will Cottesloe’s chattering class say?
There is an old saying that the market never gets it wrong and individual views must be cast aside in favour of the collective view of the market beast- and it seems clear that the beast is well blooded for the renewable energy future.
Whilst wind and solar will inevitably take their place at the table amongst others, hydrogen appears to have a head of steam with both Government’s and billionaires like Twiggy Forrest looking to blaze the trail.
And how hard can it be – you just mix water with electricity and presto ! You have hydrogen – right?
The choices being made now in the oil and gas industry could either eviscerate shareholder wealth or carve a pathway towards extreme wealth and a clean energy future.
Much however rests on industry’s ability to create technologies that will render the renewable sector financially viable and hydrogen, whilst gathering supporters, is not yet out of the woods in that regard.
This is perhaps the reason that plenty of oil and gas companies are only tentatively dipping their toe in the renewables pool whilst continuing to take the path well-travelled by sticking to their traditional knitting and producing oil and gas.
Although perhaps they could learn something from literature and the poetry of Frost in The Road Not Taken. Whilst he wasn’t able to take both paths, his final words on the matter echo…
“I took the one less travelled by and that has made all the difference.”
By Matt Birney
