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The new 'peak oil'? A dollar invested in solar yields more energy than a dollar invested in oil
13th February 2016
According to oil company executives, oil is going to be a major energy source to 2100 and beyond. So after hearing an oil man make his case, Chris Goodall went home and crunched some numbers. Money invested in solar power already produces more energy than if it's put into oil exploration and production, and the gap is only going to widen from here. Is this the new 'peak oil'?
If Shell really sees its role as producing the energy the world needs, then its $29bn should go into solar energy rather than oil wells and pipelines. Rather than trying to destroy Shell, we need to persuade it to divert into the renewable economy.
A couple of weeks ago, 300 academics from Oxford and Cambridge issued a statement asking their universities to work with the fossil fuel divestment movement.
Energy scientists such as Sir David MacKay joined professors from across the full range of subjects to ask for "morally sound" investment policies.
Last Friday, a very senior executive from one of the world's largest oil companies participated in an open and good humoured discussion with undergraduates at one of our leading universities in a meeting convened under 'Chatham House rules'. I was present.
The executive, who I will call Harold Schreiber, said that the divestment movement was "anti-industry, emotional and populist." He said that the role of the "energy producers (is) to produce energy" and that those who worried about climate change should focus their attention on the consumers of energy, not those who extract it.
Schreiber said that oil companies will not respond to outside media pressure but that "constructive engagement" might be more effective. He based this opinion on what he saw as the positive effect of those oil companies that remained in South Africa during the apartheid years working to build the country's energy system and, in Schreiber's words, "helping to avoid violence".
Whether or not the divestment movement succeeded the world would continue to burn large quantities of fossil fuels for the rest of the century, he continued. About 80% of energy needs are met from carbon-based fuels today and in his assessment that number would still be about 25% by 2100.
Oil would have to be extracted and burnt in large amounts, although its role will diminish beyond 2030.
The oil man's view - net zero may be possible by 2100
Some of his company's scenarios for the future suggested that it might be possible to get to 'net zero' emissions by the end of the century but these were not necessarily the most likely. Moreover, they would require technologies that extracted CO2 from the atmosphere.
He referenced work at MIT that showed that the best the world could expect is a temperature rise of about 3C above pre-industrial levels, well above the figure of less than 2C agreed in the Paris conference. He implied that he regretted this probable failure but that the energy companies are not to blame. Governments and energy users are responsible.
Faster change is hugely difficult, he implied. One example was the UK's poorly insulated housing. Although it may be possible to reduce heat losses in homes, people would need "softening up" for a long time before they agreed to have contractors in their homes for six months of insulation work.
More generally around the world, people need proper energy infrastructure to live decent lives and the anti-fossil fuel activists don't understand that this cannot be provided by "iPhone apps" or other digital tools.
1.3 billion people have no access to electricity at all and these people require the mainstream energy companies to provide them with the means to obtain a reliable energy supply. A decent standard of living demands steel for buildings and the anti-fossil fuel movement has no idea how this might be provided without coal in blast furnaces.
Transport needs liquid fuels and no-one, he said, knew how this would be provided without oil from the ground.
'Corporations are servants, not masters, of the global economy'
As well as criticising the divestment movement for its anti-commercial and antagonistic attitudes, Mr Schreiber said that politicians were making huge mistakes. The UK's decision to abandon Carbon Capture and Storage (CCS) was "frankly stupid".
Obama was wrong to block the Keystone XL pipeline. Sensible policy-making is "paralysed" at the Federal level. More generally, politicians around the world "have to reach beyond grandstanding" and take decisions that are "rational", not driven by attempts to gather short-term popularity by appeasing climate activists.
When questioned on why the major oil companies operated in countries with poor human rights records, he asked whether the audience would rather the energy extraction in these countries was carried out by small private companies or businesses like his employer's, which are subject to high levels of scrutiny and requirements for transparency.
In summary Schreiber suggested that companies such as his are the servants of the international economy, not its masters. The role of the international oil company is to organise the efficient deployment of capital for the production of inexpensive energy, not to drive the low-carbon future.
He said that "we are only in the foothills of the move away from fossil fuels" and his company would continue to invest heavily in oil and gas exploration rather than renewables.
So I went home and checked the figures
After listening to Schreiber I went away to look at the latest accounts of some of the major energy companies. They show, of course, reduced profitability in the face of declining energy prices. Nevertheless, the divestment movement has a steep hill to climb.
Few, if any, oil majors have any need for new outside capital in the next few years. It might make sense for the financial health of pension and endowment funds to get out of fossil fuels but selling oil shares to another investor ('divesting') will have no direct impact whatsoever on the speed of the energy transition.
I think it may be more important to continue asking oil companies the question: "is drilling for hydrocarbons the most productive use of your huge resources of available capital?" To suggest an answer, I looked specifically at Shell's worldwide accounts because these have just been published.
Excluding its new acquisition, BG, the company spent about $29bn on its exploration and production activities last year. That money enabled the company to just about stand still in terms of the total amount of energy to which it has access in its proven oil and gas fields. It produced 1.1 billion barrels of oil from reserves that dipped slightly to about 11.7 billion barrels.
(Note: This is a complex area; Shell has to write down its reserves estimates to reflect that portion of its portfolio that is no longer economic to operate because of low oil prices.)
So, very roughly, $29bn is the amount of money Shell needs to invest in order to continue producing 3 million barrels of oil a day (1.1 billion barrels a year). This money could instead either be returned to shareholders or invested in renewable energy technologies.
Mr Schreiber said that at the start of the discussion that the role of the energy producer was to produce energy. In the case of Shell, as one example of this, is the $29bn going to produce more energy if it is invested in oil exploration and production or, for example, in solar PV?
Oil versus solar - the arithmetic
The numbers are relatively easy to calculate. A barrel of oil represents 1,700 kWh of thermal energy. So Shell's yearly production of oil has an energy content of about 1,800 terawatt hours. That is, very approximately, the same as the UK's total consumption of energy from all sources. How much energy would Shell's $29bn produce if it were invested in solar PV farms?
Assuming a 22% capacity factor (much better than the UK but below the average in the US), an installed cost of $1 a watt and a 35 year panel life, the number comes out just ahead of the energy value of the oil that Shell produces each year.
[Editor's note: In fact, it gets even better than this. Burning oil produces heat energy, while solar panels produce electrical energy. Battery electric cars can turn that solar energy in to motive power at an efficiency of about 80%, while gasoline-fired cars turn their oil into motive power at only 25% efficiency. So the energy produced by solar panels is worth about three times as much per kWh as oil energy in transport applications.
Likewise if oil or gas is used to generate electricity (typically at ~50% efficiency) then the solar energy is about twice as valuable as oil energy because it's electricity to begin with.
In a third case, where the solar energy is being used to make hydrogen by hydrolysis, then synthesised into energy-dense fuels and feedstocks like methane, methanol and ammonia, that can be done at an efficiency of around 60%, a figure that will surely increase with R&D investment up towards 70%. That creates a penalty for solar versus oil - but not a very large one, especially as solar gets ever cheaper.
The fact that renewable electricity can be turned into fuels and feedstocks currently based on oil and gas also, in the long term, sets a 'ceiling' for future oil and gas prices. As soon as the price of those fuels rises above a certain level - perhaps around $50 per barrel of oil using technologies now becoming available - it will become profitable to built huge solar to methanol plants in the Sahara, or wind to ammonia plants on the Falkland Islands.]
In other words, if Shell really sees its role as producing the energy the world needs, then its $29bn would be better going into exploiting solar energy rather than drilling wells and building pipelines. Rather than trying to destroy Shell, one of the world's most efficient allocators of energy capital, we need to persuade it to divert its considerable skills towards the renewable economy.
Or take BP. In the UK alone the company spends about £175m on energy R&D. This compares to DECC's boast of putting about £100m into clean energy research as year, of which half is devoted to nuclear.
Were an oil major to divert its efforts away from fossil fuels and towards the next generation of energy sources, the skill and knowledge in the private sector could make a dramatic difference to the speed of the switch to low-carbon sources.
The oilman saith: 'it's outside our field of competence'
I made this point clumsily to Mr Schreiber after the discussion. Wouldn't his company's exceptional skills and resources also be better directed towards - for example - using solar energy to make renewable liquid fuels, an endeavour Bill Gates sees as one of the most productive areas for new capital going into energy?
Schreiber disagreed, saying that this area involved a lot of difficult science not within his company's area of current competence.
Nevertheless Harold Schreiber knows there is an energy transition happening. Renewable sources of energy will eventually become very cheap and strand the existing assets of the major oil companies. Even the CEO of Shell said in September last year that solar would be the "dominant backbone" of the energy system.
This may suggest that outsiders, such as Oxbridge academics mentioned in the first paragraph, need to engage with the oil company to show how they should redirect themselves - and their huge resources of capital - towards those energy sources that are going to be cheaper than oil.
PV already produces more energy per dollar invested than oil. Shouldn't Schreiber's company be moving as fast as it can into exploitation of the sun's energy?
Won't shareholders' interests be best served by a rapid redirection of the company toward the most productive new sources of energy, rather than drilling for ever more recalcitrant sources of oil?
Chris Goodall is an expert on energy, environment and climate change, and a frequent contributor to The Ecologist. He blogs at Carbon Commentary. His next book, 'The Switch', is due for publication in 2016.
This article was first published on Carbon Commentary. The ideas expressed in this article are explored in far greater details in The Switch, a book about the global transition to solar power, to be published in June 2016 by Profile Books.
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