This is Blog #4 in our series of blogs to Jan 31 on overlooked “Lasting Changes To Oil & Gas” that emerged/solidified in the last several months and that are reshaping (both positively and negatively) the 2019 to 2025+ outlook for oil and natural gas. This blog could easily be called Blog #2B as we would have highlighted this in our Dec 20, 2018 Blog #2 “Lasting Change To Oil & Gas #2 – Speed Bumps On The March To Renewable Energy Means Oil Is Stronger In The Mid/Long Term” [LINK]. This week, Bill Gates highlighted the need to have breakthroughs in clean energy and “But solar and wind are intermittent sources of energy, and we are unlikely to have super-cheap batteries anytime soon that would allow us to store sufficient energy for when the sun isn’t shining or the wind isn’t blowing.” One of our mid to long term oil concerns has been that, by Jan 1, 2019, we expected that the breakthrough would be there for battery storage of electricity to be cheap enough (good economics) and available enough such that there is visibility for a predictive timeline in the 2020s of a major adoption reliance on renewable energy to start a more significant displacement of oil and natural gas for electricity. Gates still waiting for a breakthrough on battery storage is significant as he has specific insight into battery storage and other energy storage companies. His comments certainly suggest the visibility for a broad battery storage adoption isn’t here in 2019 (as we expected) for a predictive rollout. Any delay in broad big application of solar/wind (ie. Saud Arabia) is a direct positive to oil. Gates shares an important insight and supports our Blog #2 that there are speed bumps on the march to renewable energy and this mean oil is stronger in the mid/long term.
Gates says need to get a breakthrough in clean energy and “unlikely to have super-cheap batteries anytime soon that would allow us to store sufficient energy for when the sun isn’t shining or the wind isn’t blowing”. Bill Gates is saying we still haven’t seen the needed breakthrough in clean energy advancements and, more importantly, not likely to see super cheap batteries anytime soon. That is a major call. This week, Bill Gates posted his “What I learned at work this year” [LINK], which is a letter of “Here are a few updates on what’s going well and what isn’t with innovation in some areas where I work.” The key is that Gates is speaking of areas that he is involved and not just commenting from outside. It’s a quick read and he says he writes it similar to the corny tradition of the family letter that people send to update their friends and family on the past year. All of the reports we saw focused on his views on risk of flu, gene editing, polio, alzheimer’s and a little bit on his frustration on his nuclear power efforts. But none of the reports we saw mentioned his comments on batteries for electricity storage in his concern on GHG emissions. Gates raises global emissions and that “reinforces the fact that the only way to prevent the worst climate-change scenarios is to get some breakthroughs in clean energy.” He then says his comments that wind/solar are getting cheaper, but the problem is that we haven’t seen the breakthrough in battery storage technology yet. Battery storage developments aren’t happening fast enough to significantly increase wind/solar generation. Gates quote is pretty clear that he doesn’t see battery storage happening anytime soon, at least to the breakthrough needed to have a predictive timing for an impactful application of battery storage. Gates clearly says “But solar and wind are intermittent sources of energy, and we are unlikely to have super-cheap batteries anytime soon that would allow us to store sufficient energy for when the sun isn’t shining or the wind isn’t blowing. Besides, electricity accounts for only 25% of all emissions. We need to solve the other 75% too.”
Gates has involvement with leading edge battery storage developments. As noted above, Gates is commenting on “areas where I work” and he highlights his involvement in clean energy technology developments. He writes “This year Breakthrough Energy Ventures, the clean-energy investment fund I’m involved with, announced the first companies we’re putting money into. You can see the list at [LINK]. We are looking at all the major drivers of climate change. The companies we chose are run by brilliant people and show a lot of promise for taking innovative clean-energy ideas out of the lab and getting them to market.” We went to their portfolio and of their 10 investments, 2 are in battery storage – Form Energy [LINK] “Creating a new class of batteries to fully realize the potential of renewable energy” and QuantumScape [LINK] “Reinventing the battery for electric vehicles”. Breakthrough Energy Ventures is also invested in competing electricity storage with Malta [LINK], who are focused on “Electro-Thermal Energy Storage System: A Better Way to Enable Cleaner Reliable Electricity on the Grid”.
Not “anytime soon” must mean Gates doesn’t see this breakthrough for battery storage in 2019 if not longer. We have to believe that super-cheap to Gates means battery storage has to be cheap enough reliable enough to give confidence to make the capital commitment for wide scale battery storage reliance. The biggest takeaway, at least to our views, is that Gates doesn’t expect to see the technology breakthrough to have super-cheap batteries happen anytime soon. We don’t know how far away he is thinking but not anytime soon doesn’t imply he is seeing the breakthrough coming in 2019 or possibly 2020. This is later than our expectation that we would have visibility for this breakthrough by Jan 1, 2019. Long term readers of our Energy Tidbits know that we have been watching for the technology breakthrough in battery storage. We detailed our timing assumption for the technology breakthrough in our July 13, 2017 blog “Can Saudi Arabia Make SmartWater Flooding, Solar, And Fracking Work?” [LINK], “In Jan 2014, a Shell engineer involved in their future energy technologies initiative asked me “what do you think happens to the value of oil if Saudi Arabia were to stop using 400,000 b/d of oil for electricity after 2025?” He elaborated and said it wouldn’t all happen by 2025 but that it would take until 2030. He explained there was two parts to the solution of how to accomplish this goal. First, solar and battery technology in general had to get to the point that it can compete without subsidies and be reliable enough to provide base generation. Second, Saudi Arabia, despite being sunny, still had to solve its own unique challenges for solar and battery ie. sand/dust. He then shared his view that in 3 to 5 years (ie by Jan 2019), there would be visibility that solar and battery can be an economic, available, reliable alternative for electricity generation post 2025. Its been over three years and we aren’t there yet, but it certainly seems to be pointing to there being, by Jan 2019, visibility that solar and batteries could provide a broader competitive electricity alternative without subsidies in the long term. The baby boomer decision making process seems to have gone, decisions for alternative or clean energy are no longer made on payback periods making sense. So when I say competitive, it doesn’t mean as economic, but within a range close enough to justify the decision.”
Gates view is also likely a reason why Saudi Arabia seems to going slow on its solar plans. As Gates highlights, the breakthrough hasn’t yet come in battery storage ie there isn’t a predictive timeline for the widespread increase in solar and wind generation. Without battery storage, wind and solar cannot be the sole reliable provider of power. This Gates view of still waiting for a breakthrough in battery storage also likely fits to why Saudi Arabia seems to be going slow on its solar push. Our Blog #2 in our series used Saudi Arabia’s slow move on solar as the best example of leaders who are quietly just not pushing as fast on their renewable actions. Blog #2 said “We have written extensively on the potential impact oil demand in the 2020’s if Saudi Arabia uses solar to replace oil for electricity ie. eliminating ~400,000 to 500, 000 b/d of oil demand and much more during peak summer demand. The push to solar was another key part of the Vision 2030 plan. Bloomberg’s Dec 15 story [LINK] “It’s Hard to Be the Saudi Arabia of Solar, The kingdom has grand ambitions in greener energy, but virtually nothing to show for them” highlighted this pause. Bloomberg wrote “Over the past six years, the Saudis have announced investments of more than $350 billion aimed at making the sun-drenched kingdom the, well, Saudi Arabia of renewable energy. But virtually no construction has begun, and with crude more than doubling from early 2016 to this October, the Saudis’ commitment to renewable energy has wavered, says Fatih Birol, executive director of the International Energy Agency. “There has been a lot of stop and go,” Birol says. “There’s a need to increase electricity generation, decrease oil-based power, and make use of the huge solar potential.”
No breakthrough on battery storage is also positive to natural gas. Any delay in getting a breakthrough in battery storage is also positive to mid long term natural gas. Once there is cheap enough and reliable enough battery storage, there will be less of a need for natural gas to fill in the power gaps when solar and wind aren’t producing electricity. Natural gas has been a big winner in the regulated push for more solar and wind power in the US. RBN had an interesting take on natural gas demand in their “The Top 10 RBN Energy Prognostications For 2019 – Year Of The Pig: When Pigs Fly!” [LINK] RBN said “We are burning more gas than the degree-day-based models would predict, even if you adjust for the shutdown of coal plants and the impact of new gas-fired plants coming online. Our thesis is that the wild card is renewables. The more renewables in the power dispatch stack, the more the system relies on gas-fired plants that can start up quickly when the sun does not shine and the wind does not blow. But a lot of these quick-start peakers are less efficient than combined-cycle units, so more renewables means more gas demand, not less. Will this trend continue to cause gas demand to surprise to the upside? Pretty good chance.”
The most important factor for clean energy adoption continues to be government regulated changes. Our Blog #2 highlighted the speed bumps being seen in the speed of adoption of clean energy, but, absent a series of major disruptions around the world, we believe most governments around the world will, to the most part, continue to regulate to a path to a world where renewable (clean) energy growth accelerates and fossil fuels (coal first, oil second, and natural gas third) reach peak demand and then decline. The speed of the push is just being delayed in areas (ie. Ontario, US, etc), but the build up of clean energy regulations and incentives post the Kyoto Protocol in 1997 was given a push by the coming together of two major global leaders – Obama and Merkel. The path to a renewable/clean energy future is driven by new regulations, layered on top of these existing regulations. But our Blog #2 noted that the speed of march to renewables has slowed as evidenced the recently finished Poland climate change meetings and how an all inclusive, unified global push has gone away, at least for now. Most of all, we are seeing multiple speed bumps that are going to slow down (in some cases reverse) the rate of government regulated push to renewables. Its primarily all about the pace of government regulated changes. But items like the Gates view of lack of breakthrough for battery storage also impact the pace of clean energy, holding back items like a broader solar implementation in Saudi Arabia.
A later breakthrough in battery storage and other pauses/ delays to the push on clean energy also mean better mid to long term oil prices and cash flows, The Gates letter would have fit perfectly to our Blog #2 on Dec 20. There is no change to our Blog #2 conclusion that “one of our upcoming blogs is the most significant lasting change – the oil and gas sector has proven they can produce way more than expected and these shifting supply chains are causing price dislocations in the short term and a lower but still strong price in the mid to long term. We believe global oil and natural gas markets will adjust to the changing global supply dynamics and this will sort out over 2019. For the mid and long term, we believe that any delay in the timing and speed of the march to renewables from these speed bumps is why we believe there is a lot more money to be generated and made from oil and natural gas in the mid and long term, but just not as much as we expected a year ago. Pushing peak oil demand further out or increasing confidence that peak oil demand isn’t going to happen before 2030 may only bring back a portion of capital back to oil and gas, but it should help to keep capital in the space for a longer period. And having more investor eyes and capital on the space will only help once we get thru the seasonally low demand period for oil in Q1/19.”