Season 1 Episode 8: Julio Dal Poz Edited transcript
Conversations on Climate Season 1 Episode 8: Julio Dal Poz Edited transcript
Section one: the journey from big oil engineer to clean teach strategist
Chris Caldwell: Julio, welcome. Thank you very much for spending this time with us. I’m sure it will be a great conversation.
Julio Dal Poz: Thank you very much, Chris. It’s great to be able to share some of my experience within the oil and gas industry and also my journey through the energy transition and my role advising clients on clean energy. Thank you for having me on your podcast.
Chris: Fantastic. A real pleasure. Could you please kick us off with your journey to this point?
Julio: I’m an engineer by background and I’m originally from Brazil. When I was studying engineering, I always thought that I was going to be designing satellites or launching rockets into space but I ended up working on a different technology frontier. I ended up working in the oil and gas industry, which was looking to drill wells in harsh, ultradeep water environments — over 2000 meters deep. And those wells were crazy long — seven kilometers in length! The amount of technology development you can find in this industry is amazing! That was in the early days of adopting digital tools and remote monitoring. Very early on, I realized that the energy industry was so important to every aspect of our lives. I really enjoyed going into that industry.
I started working with what we call the upstream part of the industry — the exploration and production part. I worked as a consultant advising on digital and business transformation in places like Brazil, the UK and in the Middle East before moving into the industry itself. I had an opportunity to join the Strategy and Business Development team at Equinor. It used to be called Statoil back then — the Norwegian National Oil Company. At first, I worked with M&A opportunities — acquisitions and divestments of oil and gas fields.
When the Paris Agreement came out in 2015, there was a watershed moment for the industry. I was able to observe firsthand the efforts that the industry was taking to adapt itself into this new world of clean energy. Gradually, I started working more and more on the strategies the company was adopting towards a net-zero ambition. Before I left Equinor, I was working as a strategy adviser, mainly advising the company on its nascent renewables business — it’s nascent clean energy business. After a while, I decided to move back to consulting and advise other people and help them in their own energy transition and with their own investment ambitions in renewable power.
So that has been my journey. It was quite interesting to have been working for an energy major at the time when all those things were happening. It was also good to be working for the Norwegian Energy Company— Equinor. If you look at what Equinor has been doing over the past 20 years or so, they were some very early adopters of measures that are helping the industry to decarbonize and to move away from high intensity fossil fuels. For example, Norway has banned flaring in their oil and gas fields for several decades now. This is something that is very low hanging fruit to help lower the carbon footprint. Why would you flare? It doesn’t make any sense. Something else that was adopted very early on by Norway was a carbon tax in the country. Equinor had to internalize that carbon tax and use it, even in projects that were outside Norway. That helped the company in its efforts to reduce its carbon intensity. And it helped a lot to force the thinking around becoming a low — or lower — carbon producer in Norway.
Chris: Fantastic. I didn’t know that Equinor was one of the leaders in carbon credits and in carbon taxation. But first, I think we should briefly explain what flaring is.
Julio: Flaring is the regular burning of gas from oil fields as part of the production process. Those big flames that you see on some oil rigs are from flaring. Sometimes you have to burn gas as part of your production process for safety reasons. If there is a big increase in pressure on your production, then you might have to release gas and burn it to keep things under control and prevent accidents. But what usually is referred by flaring is the regular burning of associated gas just to maintain some oil production in the fields. Basically, you’re just wasting energy and it is generating pollution. You’re wasting resources just because oil is more valuable than gas. Companies do that on a regular basis in several parts of the world.
Chris: Just to put it into really simple terms, picture oil and gas in a big hole in the ground. Puncture it, put a pipe down — like a straw that goes in — and gas comes out but you just want the oil. So, instead of releasing the gas into the atmosphere, you light it, flare it off.
Julio: Yes. Both come together because it’s a reservoir of hydrocarbons under pressure. Usually, you have oil with associated gases. You can think of it as a kind of fizzy drink where you have many of the gas molecules together with the oil. When you drill your well in the ground, because it’s under such intense pressure, everything comes together. But then, if you only want to produce oil, what do you do with your gas? If you don’t have any gas infrastructure either, you reinject the gas and maintain pressure on the reservoir — or, in some places, you do what you shouldn’t, which is you burn the gas and then produce oil. That is such a low hanging fruit. It’s a shame that most countries haven’t banned flaring yet. There are some plans to ban flaring by 2030, but in my view that’s already too late.
Chris: I agree that is the lowest of low hanging fruit. It has value. Hold onto it and sell it.
Could you possibly draw some parallels between your own journey from being a dyed in the wool oil and gas guy, deep into the technical nature of drilling and extraction, to the renewable energy role that you’re in now? And could you draw a parallel between that and the journey that, say, Equinor has been on?
Julio: There is obviously an interesting parallel because I was very much focused on the commercial investment side of the oil and gas business at the time when the industry was also very much focused on that side of things. It was in the mid to late 2000s, right on the back of the mega-merger that several of the oil companies we know today have gone through. There was a time of consolidation. Companies were trying to build scale and were looking for investment opportunities across the globe. That’s when I joined the industry. It was a very interesting time because we were pushing the boundaries of where we could find more oil wells and there was a lot of investment and exploration. Companies were optimizing their portfolio assets as well — those are the more profitable oil fields and those are the least profitable ones. There was a lot of reshuffling of their portfolio assets but there was very little thinking about climate change. There was almost no thinking at all, at least from most companies, about renewables or investment in clean energy and so on.
Maybe some companies were pushing ahead with that — maybe BP, Beyond Petroleum, was there. We can argue whether that was a heartfelt effort or not but, either way, they were starting to think ahead and at least this topic was appearing on the radar. For most companies, that wasn’t part of their core strategy. That was almost a sideshow within their core business.
The Paris Agreement in 2015 was certainly a watershed moment. Up until then, the industry had spent the past 10 – 15 years more or less discussing climate, discussing the environment, from the perspective of preventing incidents, preventing the biggest cases of pollution and of environmental damage that it caused in a certain place. After 2015, not only governments but also the investors started putting a lot of pressure on companies to say, ‘look, if the world is moving towards net zero, what are you doing about that?’ And, not only, ‘what are you doing about that’ but also, ‘tell me how exposed you are to the risks of climate change.’
I would say there were two forces at play. One was governments, investors and the stakeholders in general putting pressure on companies to do something or maybe to do the right thing. But, on the other hand, there was the fear of companies about being left with stranded assets — assets that they could, in theory, be producing for several decades but that could be worth nothing if the world moved away from hydrocarbons.
That was around the time when everybody started to be really concerned about their product momentum. People were saying, ‘oh we have this fast-growing renewable industry. It’s growing at an exponential pace. What does it mean for our current business? Are we going to be left behind? Are we going to be the next Kodak? How do we avoid that fate? What do we have to do to change our strategy? How exposed are we and how do we adapt?’
So that was the journey. And from that moment on, more and more of my work had less to do with oil and gas. By the time I left Equinor, it didn’t have anything to do with oil and gas anymore. My work had everything to do with, how do we grow our renewables business? How do we create a new hydrogen and carbon capture and storage business? How do we grow? How do we become an integrated energy company? Even more important, two things that appeared during that period of time and became core parts of our strategy discussion were the pressure to think about ESG — environmental, social and governance issues — and also the topic of net-zero. What does it mean to have a net-zero ambition as an oil and gas company?
If you asked people that question ten years before and, if you had said that those companies were going to have an ambition to move towards net-zero by 2030 or so, they would have said, ‘no, you can’t be serious! That doesn’t make any sense. What do you even mean by net-zero?’ Now most companies have that ambition and everybody’s talking about it. So that was also part of my personal journey in the work that I was doing, ranging from finding oil and gas investments all the way to discussing how we’re going to get towards net-zero and what it means and what kind of investments and strategic moves we have to make to get there.
Section two: regional approaches to the oil and gas industries
Chris: There are two very fundamental points here. One is, you have very nicely framed the European oil and gas major perspective, but it might be interesting to dig a little bit into different parts of the world — the American oil and gas industry, the Europeans and then the petrostates and the different approaches there. And the other area, which we can come back to later, is what is net-zero? It’s a huge question. Most people out there many say, ‘oh, that means zero,’ but it doesn’t mean zero. Maybe we could also discuss that. But first, let’s look at the industry in general. How could you break it down?
Julio: You described the three groups of oil and gas players. And, by the way, when you mention the incumbents, the incumbent energy companies are the oil and gas players, in a way, but you might also argue that some of the incumbents are also utility companies that have any coal power plants and that kind of thing. My experience is mainly with oil and gas but, within the oil and gas space, there are those three types of companies. You have the Europeans, you have the Americans, and then companies from the Middle East, but you also have some of the Chinese companies, for example, or some of the Asian companies that have strong input and strong guidance from their nation states.
If you want to transition, I would say that there are roughly three models that those companies are adopting. The European ones were very quick to start redirecting some of their cash flow from oil and gas and invest into renewable power generation and into carbon capture and storage and in trying to develop a hydrogen market here in Europe. Some of those companies — like Equinor, for example — were taking their legacy as offshore oil and gas producers and using that expertise in offshore to invest in offshore wind. The UK was also one of the early movers into incentivizing the offshore wind industry. Companies were able to move very fast into that space. Renewable power generation is one of the first business models that those companies were adopting.
There are challenges because the renewable power sector is a very different one than the oil and gas sector. It has a very different profile in terms of returns and it has a very different profile in terms of risk and adjusted expectations as well. The reason why there are low returns on those power projects is exactly because they are much more stable than the oil projects, which are much more volatile in a way.
The second business model that some of those companies are adopting is to invest in hydrogen and carbon capture and storage. And that is the route that most of the American companies were taking — saying, ‘okay, maybe we don’t want to play into the power sector, so we don’t want to invest too much in renewables. Let’s focus our efforts on our industrial expertise. We already have big petrochemical businesses. We know how hydrogen works. We have been doing carbon capture and storage forever.’ In the same way that you can reinject gas into your reservoirs, into your oil fields, you can reinject carbon as well. The American companies, when they decided to move along on their journey to decarbonizing decided to focus on hydrogen and carbon capture and storage (CCS).
So you have those two elements and then you have the third model, which is all of the above. You have an integrated energy company. They do renewable power generation. Then they produce hydrogen and play into carbon capture and storage.
There are some downsides to each model. If you have an oil and gas company and you then have renewables, you do have to bring along your investors on the way. As long as your renewables business is not big, that’s all right. Investors won’t mind you shifting away your revenues from one side of the business that has a higher return into another part of the business that has a lower return. But, if the renewable business gets big enough, suddenly you start having some very tough questions about what you are doing. You have to keep increasing your dividend to keep your investors coming along. You’re going to get questions like, ‘is this a value industry where investors are along with you on the journey to get their money back from the dividend or is this a growth industry where you’re betting on a growing market share? Which one is it? These are very different investor profiles and they would like to diversify themselves rather than have you do it for them.
On the hydrogen and CCS business side, this might be a way for you to keep your business going on for longer. There is a strong case for companies to be in that space and help to decarbonize industrial clusters, for example, but that’s not really addressing some of the challenges of the energy transition head on.
Section three: the role of government regulations in supporting transition
Chris: what’s the role of governments in Europe and in the US? Has the transition been driven by regulation or has it been driven by other forces?
Julio: Regulation has played a big part. If you think about where regulation originates from, it originates from public opinion and public pressure on governments to do something — to move in the right direction and to put pressure on privately owned companies to actually move in the right direction too. Regulation is important both to force companies to move at the necessary pace and, also, to enable companies to invest in the right space.
The best example of where regulation is providing a strong lead to not only allow companies to invest into the energy transition but, also, to allow them to move at the right pace is offshore wind. Here in northern Europe, and in the UK especially, you have the government setting the pace with very strong ambitions to achieve net zero by a certain date, opening up leases and acreage and providing support schemes for the offshore wind industry to develop at a faster pace than in other countries.
In the US, for example, you saw how long it took before the country actually adopted offshore wind as a strong way to address climate change and to decarbonize their energy mix. Now they’re trying to catch up but, given that the industry is already investing billions of dollars a year in Europe, even the catching up process will take a while.
Regulation also needs to catch up with what the industry needs in order to move faster into clean energy. For example, even the European Union — who, you might argue, is at the forefront of achieving a net-zero ambition — even the European Union is trying to address the long lead time that it takes to consent a renewable project. Even here in the UK, where we have strong incentives to develop off-shore wind, the consenting process can take 8 to 10 years — for a wind farm that takes one or two years to actually build.
We need to address this imbalance. Companies might even be waiting to invest more. I would argue that they probably should be investing more and probably should be moving at a faster pace, but you need to address the bottlenecks within the process first.
Another bottleneck that needs to be addressed is the construction of infrastructure. Again, we go back to the role of regulation. For example, one of the key points of building a decarbonized energy system is that you need a lot of infrastructure and, if you are going to have renewable power generation, you need to build it where there is a lot of wind or where there’s a lot of sun. Those places are not necessarily the places where you actually have a big source of demand. They are probably far from the big cities. You need to be able to transmit electricity from one place to the other. And, because of the intermittency issues with renewables — the sun is not always shining and the wind is not always blowing — you have to balance out your renewable power generation with power generation from other sources or from other places as well. There is a high need for integrating your electricity grid and your sources of energy. To do that, you need to build infrastructure.
Building infrastructure is as hard as building anything offshore. If you are going to build a big transmission line, good luck! That might take you forever. If you don’t have enough grid connection, how are you going to be able to develop your renewable power generation sources?
So enabling a faster consenting process is something the government can do to accelerate the energy transition and to accelerate the process of achieving net-zero. Resolving some of the bottlenecks to building and constructing infrastructure is another point where regulation could play a strong role. Forcing companies to move fast and invest more is something that certainly regulation plays a role in as well. Those two things go together though. You can’t force companies to move faster if you don’t resolve some of the other bottlenecks that can’t be resolved from a pure company perspective.
Chris: That’s a very good point. The governments tend to take the carrot and stick approach where they set strict targets that companies need to be meeting on green electricity or green gas. If you can’t build it because there’s no planning or there’s no grid or whatever other kind of structural problems are there, well, there isn’t very much the company can do about it.
Julio: Or you can build it, but then you end up not connecting it, which is something that happened in Brazil. There were a couple of onshore wind farms being built in the northeast part of the country that were left waiting for grid connection for a couple of years before it actually arrived. That’s an issue all over the place as well. You see it in Germany where you have plenty of potential for offshore wind in the North Sea, on the north coast of Germany, but good luck trying to build a transmission line all the way to the southern part of the country. Infrastructure is such a big topic and it makes such a big difference in how society addresses the challenge of climate change. It’s not discussed enough.
I was thinking the other day about our relationship with energy and how it’s changing in the same way that our relationship with, let’s say, food or clothes is changing. We are much more concerned about how things are manufactured, how things are produced, and we’re much more concerned about how our electricity is provided as well. For the past 100, 150 years, we got more and more used to things being very far removed from the main source of energy, the source of electricity, the source of food, the source of the clothing and of all manufactured products as well. For years, you just had to turn up at the supermarket or in the store. Everything was there and you just had to pick and choose. You didn’t have to think too much about how is it that I can buy a shirt that is manufactured on the other side of the world for like a pound or something? There’s something that doesn’t add up about that. In other words, not all externalities are streamed. The social impact of this whole manufacturing process is not priced into the product that you buy.
The same thing is true with electricity and with energy as well. You turned up at the pump and you fueled your car. You didn’t have to think too much about where the diesel and gasoline is coming from or how it’s produced or what’s the cost of producing and transporting it and of having it available on demand at the fuel pump. But now, because energy prices and electricity prices are going up so much, people are starting to think again quite hard about how much energy they consume and also where it’s coming from.
If you have rooftop solar in your home and if you have a battery at home or if you have a smart meter on your home, you have a much closer relationship to the energy that you are consuming and you think about where it’s coming from. Maybe I don’t want it to come from a coal powered power plant. I want to buy electricity that’s produced from an offshore wind farm or from another renewable source. You bring that much more into people’s daily lives and that starts prompting the public to demand that government address the need to decarbonize the energy mix. That, in turn, starts putting more pressure on companies to move faster as well. It’s part of an ongoing cycle that has been a lot more embedded into our daily lives than it was in the past.
Section four: security, sustainability and affordability
Chris: Now, it’s interesting philosophical point you bring up. For the last 100 years people, certainly in this part of the world and in Europe, have not had to worry about either energy or food. You turn up at the supermarket and food will be there. You go to the pumps and energy will be there. Turn on the lights and energy will be there. For the entirety of human history, up until that point, this was a daily concern for people in this part of the world and everywhere else. Now we’re turning around again and we’re potentially going into a cycle of much higher energy costs and food scarcity caused by supply chain issues such as the Ukraine conflict. We may well be getting back to a point where we wonder as we reach the lights, will they turn on?
How does the industry deal with that? There’s a big balance between security and price and the green energy transition. How do you balance all of those issues up?
Julio: I would say it’s a system that’s inherently unstable in a way. If you think about this triangle — what the industry likes to refer to as the energy trilemma — between security, sustainability and affordability, it’s too easy to think that there’s a nice spot there in the middle where I can solve the optimum balance. There is no optimum space in the middle. This is an inherently unstable system where you have to keep resolving those dilemmas and those trade-offs as you go along. And there will be tough choices along the way. For example, think about the choice between security of supply and sustainability. You want to keep the lights on throughout the day, but you also want to have enough energy here in the north part of the world during the winter because it’s cold and you use more energy — or maybe in the southern part of the world during the summer, where you need a lot of air conditioning. Now you also want that energy to be clean — you want to have as much of that energy from renewable power sources as you as you can.
The problem is, when you have some of those disruptions in your energy supply, guess what is your closest power source. It’s probably coal. Most countries have a safe supply of coal at home. Then, if everything goes wrong and if they want to keep their lights on, ‘oh, let’s just go back to the coal fired power station.’ And the same thing as well, with security. If you have price spikes because of costs from one or another source of energy, you run the risk of a public backlash against some of the energy transition measures that you’ve been taking and against the whole idea of net zero — because, ‘we can’t afford that.’ Or, even worse, you have governments trying to shield their public from the worst effects of the price spikes, and then they start to provide subsidies to the fossil fuels. For example, when the price at the pump is too expensive, saying ‘let’s cut some taxes and enable the price to go down.’ Great — but then, basically, what you’re doing is incentivizing demand for the very thing that you actually want people to move away from.
My theory, and I think this is an inherent part of the journey, is that more and more countries will look at renewables as a way to solve some of those issues. If you have a bigger share of renewable production, you’re also insulating yourself from some of the global commodity markets. And if you move faster to electrify your economy, that will also help you to move away from the global oil and gas market.
Obviously, there are challenges. If you have a lot of renewables on your system, what do you do with intermediate chains? How do you take into account the challenges of keeping the frequency right on the system? And there’s our challenge with reactive power. The electricity system is built based on big rotating equipment — those big turbines, either on hydropower plants or gas fired power plants. When you don’t have big rotating equipment, you have other challenges that you have to take into account to keep the frequency in the right place. But all those things can be solved.
That is the exciting part of the industry these days. There’s a lot of innovation. There are a lot of startups working on incredible new ideas to resolve the technical challenges of energy generation — resolving how to deal with the intermittency of renewable power and how to deal with the challenge of storing renewable energy as well.
Chris: Could you tell us a little bit about how you see the innovation ecosystem working within this environment? You have got a series of smaller players working very hard to innovate and you’ve got in-house teams within your oil and gas companies within Europe trying to do things as well. How does that all work together in a European context?
Julio: Since my background is from the oil industry, it’s interesting because the two countries that I have worked with, both Norway and Brazil, have very strong incentives for companies to invest in research and development and in a startup ecosystem. In Brazil, for example, they dedicate 1% of their company’s revenue into research and development and into funding startups as well. They know that we have strong incentives for the industry to fund research and development programs. Since both countries are also focused on offshore oil and gas, most of the innovation and the startups and the research and the development that has been funded by this industry has been directed to solve some of the challenges of the offshore wind industry.
It’s interesting how some of that is being redirected over time into clean energy and into some very exciting new spaces. But, to answer your question, the innovation that is going to be needed and the solutions that are going to be needed for the energy transition are not going to originate internally from the big majors, from the big energy companies. You need a very active acquisition of smaller startups, smaller companies testing new things and seeing what actually works to be able find the best solutions. Big companies try to direct their research efforts too much and they try to bet too much on the things that they think are going to work out. That approach might or might not work well on some big oil projects, but that certainly is not the approach that’s needed when you need to move fast and when you need to find really transformative solutions within the clean energy space.
Chris: Drawing back on the investment thesis you were making a little earlier on, you described how you’ve got higher expected rates of return from oil and gas than you would have on renewables because renewables are more low risk, low return, whereas, drilling for oil and gas there is risk — you either you hit it large or it’s not economic. When you then put the extra layer of what you’ve just been describing, where you’ve got this industry that needs innovation, that needs driving, that needs to be taking risks — but that’s not the oil and gas industry, it’s the low rate of return renewables industry — how do we square that circle?
Julio: You square that circle because some of the investments that are needed in the renewable industry are actually unproven technologies. If you look at wind turbines and solar panels, obviously wind turbines are getting bigger and getting more powerful. That’s pretty much proven technology. There is a frontier part of the industry, which includes things like floating offshore wind, for example. Even then, you’re innovating on the floating structures but the turbines are pretty much the same turbines as you had on the bottom fix. And the offshore wind turbines and the onshore wind turbines are really the same things and have been used for a very long time — so it’s very low risk. Solar panels are the same. It’s a proven technology. You have a lot of research to make them more efficient, to make them capture more of the energy generated by the sun, but the construction risk is almost negligible.
Contrast that with the amount of risk that you run drilling for an oil well. Less than a quarter of oil wells — and maybe even less than that — actually find anything. Basically, you’re spending hundreds of millions of dollars to do something where your expectation is that most of the investment is going to be wasted. Even if you find something, you don’t know whether you’re going to be able to develop it or not. And when you develop it, you don’t control the price of your production. You depend on the global market. On the good days you have high oil prices, high gas prices, and you make outsized returns. Then, on the bad days, you might not even cover your costs. This volatility also provides a lot of uncertainty. Add to that the climate change horizon and you don’t know if you are going to have a market for long enough to recoup your costs. That is why you end up having a higher risk return equation on the oil and gas things.
In the renewable industry, the biggest innovations that are needed are on things like energy storage, for example. On the production side, this is like proven technology. You can have low -cost capital or capital that demands lower returns for investing because it’s stable, it’s boring, it’s predictable — but it provides a stable revenue stream for decades to come. The question is, what do you do when it’s producing more than you need? What do you do when it’s producing less than you need? How do you square that circle? And that’s where energy storage comes in. That’s where hydrogen comes in. That’s where some of those services that you can sell to the grid come. And that’s where innovation comes in, in a way which adds revenue streams to those projects and adds new solutions to infrastructure that is somewhat boring, but there is a lot of space for investment.
You were asking about regulation early on. One of the biggest challenges is regulation only goes so far because investment usually flows to the path of least resistance. Right now, you have a lot of roadblocks along the way for investing in renewables, going into energy source solutions or investing in the grid or infrastructure. Over the past ten years or so, we were very good at reducing investment in the oil and gas business. Investment in exploration and production, at least for the major oil companies, is probably half of what it was back ten years ago. But we haven’t been very successful at ramping up the investment that’s needed on the renewables side to address the challenge of moving towards clean energy. Until we address that imbalance, we will struggle with the price spikes on the fossil fuel side and not enough renewable generation capacity on the clean energy side.
Chris: Just to summarize, there’s the low-risk part of renewable energy and the clean climate space which includes the energy generators put together from historic, well understood technologies and then there’s the climate tech side where you might have the potential to get the unicorn — be it in battery storage or whatever else.
Could we come back to the point we touched on earlier on what does Net Zero actually mean?
Julio: And I would add to your climate tech unicorns — I haven’t even mentioned fusion.
Chris: The subject of a future of a future podcast!
Julio: Fusion is certainly a potential unicorn or disruptive technology that could change everything.
But to answer your question about Net Zero and what it actually means… that question was actually a very interesting question, especially when I was working at an oil company — a company that produces fossil fuels. The easiest way to get to absolute net-zero is just stop producing the fossil fuels and then you get there. But, consider that fossil fuels are still going to be needed — not only for use on the electricity or the power generating sector, but you also need fossil fuels in the transportation sector, in the heat sector, and so on. It is even harder to decarbonize in the petro-chem coal sector. Even in the agriculture sector, for example, you produce fertilizers that are a very big part of the agricultural industry. Given that you still need fossil fuels, something that you can consider is how can you produce them with the least emissions per unit produced — ideally with zero emissions as part of the production on a net basis? That’s where you get to the net zero discussion. How can I offset the emissions of my own production?
There are two ways that companies are approaching the question of how they decarbonize. First, they have to decarbonize their own operations. It takes a lot of energy for companies to actually produce fossil fuels. You need gas turbines; you need drilling equipment; you need all those pumps that transport fossil fuels across the pipelines. It’s a very energy intensive process even to get the oil and gas out of the ground. The first step is to decarbonize your own operations. To do that, oil companies are doing what everybody else is doing. They are investing in equipment that’s more energy efficient. They are investing to improve their processes so they use less energy. They are investing in powering up their production facilities with renewable power. And, again, Norway has been at the forefront of that, constructing floating offshore wind farms to provide renewable power to offshore oil and gas facilities. That, in a way, lowers the carbon intensity of your unit of oil and gas produced.
So that’s a first step that addresses scope one and scope two emissions — those are your emissions from your own operations. But the biggest challenge that those companies face is how do you address the scope three emissions? Scope three emissions come from the use of your products. That is in a different order of magnitude than your scope one and two emissions. Just to give you an idea of the size of the challenge, the current carbon dioxide emissions here in the UK are probably around 400 million tons of CO2 equivalent per year — and that is already half of the total emissions from 30 years ago. The UK has been one of the most successful countries in decarbonizing its economy over time. If you compare the UK, which has around 400 million tonnes of emissions per year, with Equinor — which is most likely the most efficient oil company in terms of having the lowest emissions per unit in the industry — Equinor alone probably accounts for 75% of the UK’s emissions. If you take Shell, Shell probably accounts for three times the emissions of a whole country like the UK. So those companies have big challenges in addressing their scope three emissions.
And what they are doing to try to tackle that side of the problem. Most often companies, especially European ones, are investing in renewable power generation that will help to decarbonize their own energy mix. In a way, they are investing in carbon capture and storage. That takes down the net intensity of their production but it will always leave a residual amount of emissions that they are not going to be able to offset in any other way. For that residual amount of emissions, they are investing in either the acquisition of carbon credits or investing in nature-based solutions like reforestation or afforestation, for example. If you are planting trees, the logic is that those trees absorb CO2 while they are growing and so generate some carbon credits that they will be able to use to offset some of the emissions that wouldn’t be able to offset in any other way.
We can discuss how robust that whole framework is but that’s what oil companies are doing to get to a point where they can say, from a net perspective, we have off-set some of the emissions from our operations and from the use of our products versus all the actions that we are taking either to produce renewable energy or to remove carbon from the atmosphere. On that basis, we will get to a point where one thing balances the other. That’s what they understand by net zero.
Chris: How do we, as consumers or as people who are interested in the market, know the difference between genuine moves to get to net zero and what’s known as greenwashing — things that may sound good, but actually they’ve got very little impact in in practice?
Julio: Greenwashing is a very loaded term. When I think about greenwashing, it’s an active measure by companies to deceive their customers, to deceive the public about what they are doing. I tend to believe that most companies are not in the business of actively deceiving people. Maybe in some cases they are but I would think that, for most companies, what they are actually doing is getting it wrong or getting it very wrong in terms of how they understand the problem and how they communicate what they are doing. They haven’t done their homework in terms of having the necessary plans to actually address the problem or address the expectations of their customers.
Usually, the companies that are accused of greenwashing are companies that have very muddled plans where it is difficult to understand the logic behind what they’re doing. You need to be very good at calculating what they are doing on a very big spreadsheet to see if things add up or not. It is difficult to look and say, maybe they’re actually moving towards net zero. In other words, what they are not doing is they are not being transparent enough. They are not making the effort to measure, disclose and communicate clearly their plans. They might not even have detailed plans of how they are going to get to the point where they can say that they are approaching net zero. The more difficult it is to understand what a company is doing, the less transparent it is, the less they communicate, the less trust there will be from the public in general in what they are doing. It would be far too easy to think that the company is hiding something and wasn’t doing what it should. Those companies open themselves up to charges of greenwashing.
Chris: Correct me if I’m wrong here, but you seem to be very positive about the role that the large energy companies, the oil and gas majors, are playing in the energy transition. Historically, we’ve been looking at a narrative of traditional oil and gas companies versus renewable energy. The two things have been very much in conflict — misinformation coming from one side and these poor activists on the other side being downtrodden. That is the narrative built up over years. You seem to be portraying a very different picture, one in which things are much more collaborative and co-operative and everybody’s trying to move in the same direction. Are there exceptions to that, or is that generally how you feel?
Julio: I might have been working with one of the companies that had more foresight than others in terms of realising we need to move into that direction but, in general, I tend to think that most companies want to do the right thing. Most companies want to address the concerns of society. They think about the importance of producing energy and the importance of energy in society. And then they see themselves as playing a strong role in providing energy in the way that is needed, in the way that is wanted by society.
Obviously, it’s a big industry. You have different players. Some companies are moving faster than others in terms of trying to move away from fossil fuels into a clean energy future. Some companies think that the faster they can move into a clean energy future, the more competitive advantage it will give us in that new space. Whereas others are saying, no, I will stick to my core capabilities, to my industrial heritage, and keep being as efficient as I can in that space and that will provide the returns demanded by my investors and so on.
By now, most companies are not being obstructive in terms of denying the need to change or denying that climate change needs to be addressed. That was certainly the case maybe ten, 15 years ago. We can certainly think about one or two American companies that were actually quite active into lobbying to stamp out discussion or even denying the need to change. Most of the European companies, they had bought up on the need to change a long time ago. The question is how fast? Or how will they go about doing that?
In general, the industry is trying to use its core capabilities, skills, its expertise in that new space. And this is an industry that has a lot of history and legacy and expertise in fields that are going to be very much needed in the clean energy space. Fields like engineering, for example. They have been able to manage megaprojects, projects at scale. They have been able to manage and develop pricing in very difficult environments like offshore, for example. They have developed industrial processes that are going to be needed. If we’re going to develop, for example, a hydrogen economy or hydrogen business or a hydrogen market, we will need a lot of engineering and chemical skills to actually develop this market. Even with some topics like carbon capture and storage, for example, those companies have a lot of geologists on their own benches. Those jobs are going to be needed to develop the subsurface reservoirs where you will store that carbon that you capture as well. By trying to redeploy the skill sets that they have, by trying to redeploy their cash flow from the cash cow business, from oil and gas, into the new renewables or clean energy business, by adopting this concept of net zero, I believe that most companies are actually very much committed to doing the right thing and to moving in the right direction. I wouldn’t say that’s true for everybody, but I would say that that’s certainly true for most companies. I’m an optimist.
Chris: You mentioned previously that you had direct experience working in two very different markets. One is UK obviously but the other two you particularly mentioned were Norway and Brazil — two countries that famously have very different approaches and very different — global north and global south — pressures and ways of looking at the energy transition. Could you talk a little bit about the differences between the two?
Julio: Having worked in both markets has been quite interesting. If I had to pick an archetype of the global north in the global south or maybe of the challenges of navigating the energy transition or addressing climate change in the global north relative to the global south, probably I would pick Norway and Brazil. They are very different countries, as you can imagine, but it’s interesting that both countries also have some very strong parallels as well. Most of their energy mix is based on hydropower generation — very different types of hydropower in both countries. They have a strong renewable base to begin with and they also have strong offshore oil and gas industries. There are some interesting investment flows as well within Brazilian oil, especially in the offshore oil and gas space, but maybe I’ll start with Norway.
Norway is an interesting example of a developed country, of an industrialized country, that is at the forefront of trying to decarbonize its society and trying move to a clean energy future. Usually, when you think about Norway, you think about a country that is very much the flagship of the green economy. It’s probably the country with the highest electric vehicle adoption in the world. At the same time, it is a country that is struggling to replace its oil and gas industry in a way that makes it sustainable for them to replace that industry with something else. That industry sustains a big supply chain and there are a lot of jobs in the country in that industry. It is also a big part of why the country is so wealthy. It has contributed to the country being able to accumulate a pension fund of over $1,000,000,000,000 over time. How do you replace that industry?
Now the country is in the middle of trying to transform itself from an exporter of fossil fuels into an exporter of clean energy. It’s very early stages for Norway in trying to take on this new role. It’s interesting because Equinor, as a company, has been investing in clean energy and renewable energy in places like the UK but Norway is still in a different stage in terms of its transformation. This is a big dilemma in that society.
Brazil, on the other hand, has an interesting dilemma from a much different perspective. It might be the archetype of the developing country that needs to invest in renewable power generation because it needs more energy to grow. It can’t develop any more of some of those huge hydropower projects that it has relied on in the past. Most of the electricity generation growth that we see in Brazil going forward is probably going to come from solar and wind, as it should.
There’s an interesting dilemma in the country between the need for energy and the need to also keep developing the economy and get people out of poverty and so on. The country is also an interesting example of a different dynamic because of the size of the country. There is a huge reliance on road transportation. How do you move away from the use of fossil fuels, diesel, gasoline and turn your road transport into something more sustaining — a clean energy mix? The advantage of having all those dilemmas, of having to grow its economy on the one hand and having to decarbonize on the other hand, is that you can experiment with lots of different things. For example, you are not going to ever have a fully electrified vehicle fleet in a country the size of Brazil — simply because you can’t install charging stations in a country that big.
Chris: And GDP per capita is also an important consideration.
Julio: Yes, you need to grow the economy. You need to keep moving people out of poverty. So how do you replace any fossil fuels for the transportation sector? Maybe a way to do that would be to invest in things like synthetic fuels, for example. If you have enough renewables, you can generate hydrogen and you can mix it with CO2 and then you can have synthetic fuels with a mix of biofuels, then you displace some of the fossil fuels.
In a way, that sounds like a big idea but the challenge that the country has right now is that it is also very much exposed to the global commodities markets. Any increase in oil and gas prices across the globe impacts heavily on Brazil and this is making the transportation fuels quite expensive. A way to get away from that would be to replace it with synthetic fuels and more biofuels, for example, which are more locally sourced. Then you decouple yourself a bit from the global markets. But there is a dilemma between economic development and environmental conservation. To grow your economy, grow your GDP, you need more energy. What kind of energy you’re going to invest in? Those are the dilemmas for most of the emerging markets as well.
Brazil is a good example, but it’s also a place where you can try out new solutions. For example, in Brazil you have like a well-developed gas pipeline infrastructure. Most residents, they rely on bottled gas to cook. If you can replace that with solutions like rooftop solar to provide enough energy for an electric stove, maybe that could displace bottled gas as a source of energy needed for the residential sector. Those innovative solutions are needed in developing economies like Brazil. If we are going to have every country moving along the energy transition journey, every country will have its own pathway, its own road map towards energy transition and a net zero future.
Chris: We tend to have a very Western, European perspective when we talk about these things. But it’s very important to bear in mind that the energy transition has got a larger impact on other parts of the world where GDP per capita is lower and there’s less money available for the types of things you need to be doing to prevent the worst impacts of climate change — like building dams, building rails or reservoirs, protecting yourself against heat waves in Africa or South America.
Julio: There is no one size fits all. The solutions that we are trying out here might or might not work in places like Brazil. Another interesting parallel is the offshore wind industry. Brazil has strong winds on the coasts and they are on the threshold of developing a strong offshore wind market. They are taking the legacy of their offshore oil and gas industry and repurposing it for the offshore wind space. There are all those opportunities to redeploy the industrial base that you have and to use the capabilities and the infrastructure and the ports and the supply chain that you already have within the industry and redeploy them to another one. This is the future of most countries that have invested heavily in the fossil fuel industry. Now they have this opportunity to repurpose it into a cleaner industry going forward.
Chris: Some of the technologies that have been much discussed in repurposing the assets and the expertise of the fossil fuel industry have been around things like hydrogen or carbon capture and storage. Do you see that them playing an important part? Are they overblown or under blown? Where do you see CCS in the future?
Julio: CCS, carbon capture and storage, is definitely going to be an important part of the solution. Or, maybe, taking a step back, both technologies are going to be an important part of the solution. Criticism of carbon capture and storage is usually that companies are only doing that because it allows them to continue their status quo and continue doing their business as usual without having to think too much about how to move away from fossil fuels. They just try to capture carbon on their side and then they keep going. I believe that carbon capture and storage has a bigger future than that. Together with hydrogen, it’s going to be an interesting part of the toolbox for decarbonizing society and decarbonizing the energy mix in most countries.
But let me disagree with that a little bit. Most companies that I know of are doing carbon capture and storage as a way to try to create a standalone business on its own. Some people don’t like this, but I like to compare it with the garbage collection business. How do you build a logistics business, a network business where you can help others to decarbonize their hard to decarbonize sectors? You have to have the expertise to actually take the carbon dioxide from them, transport it to a safe storage place and then store it safely in a subsurface reservoir. The oil and gas industry been doing that forever. Now they’re developing a flexible solution where they can get the carbon from others and then transport it and store it on their behalf. It’s third-party service to deal with some of the emissions that others find it hard to decarbonize. You charge a service fee for that and then you build a business on that.
Whether that business is going to be commercially sound or not, is something that the companies are figuring out right now. To start with, you need some government support to build up the infrastructure needed, to build the scale needed to get it going. I believe that will get to a scale where it might be a viable business on its own. Combine that with gas production and then you might get into the blue hydrogen discussion. So I can reform gas, hydrogen and then start a hydrogen market.
Chris: One question that I ask all interviewees on Conversations on Climate is why should people care about what you care about? Why — if you’re sitting behind your desk, if you want to make an investment decision, if you want to hire somebody or if you are a student wondering what career you should be going down — why should people who are listening to this or watching this care about what you do? Why is strategy important in this energy transition?
Julio: People should care about the energy space because, I truly believe, this is an exciting space to be in. I mentioned my background as an engineer when we started. I still get fascinated by some of the hard technology and bits and bolts but, also, the digital technology being developed in that space. There is so much innovation that can be applied in the energy space. This, by itself, makes it a very exciting space to be in. And energy is so important in everybody’s lives. It touches upon all aspects of our daily lives. It’s not only about transportation; it’s not only about empowering our homes. If you look at the petrochemical sector, it’s also about everything that we use on a daily basis.
So, given the sector’s importance, given the engineering and the nerdiness that entails as well, given the how exciting the technology aspect of this industry is, I think that’s definitely an attractive industry for people coming into that space.
I can clearly understand the reluctance of people who see the oil and gas industry as a legacy industry. I’m one who has moved away from oil and gas into renewables. The renewable space, the clean energy space, is almost like a blank canvas. There is a lot that we can still deploy and industrialize in that space. We need the brightest minds there. We need people with lots of interesting commercial approaches and technology driven approaches to actually move us away from the fossil fuel industry into the clean future — into the net-zero decarbonized world that we all envisage.
That’s why I think it’s an exciting space to be. That’s why I think people should care about the same things that I care about in designing strategies and advising companies on how they should navigate their own energy transition journeys, on how they should decarbonize their business and on how they should move towards a net-zero ambition. That’s what I care about. Every company’s journey will be different but we all need to get to the same place.
Chris: Well, thank you very much. You’ve been enormously generous with your time and I massively appreciate it. Thank you!
Julio: Thank you very much!
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