In order to find a place in a world that demands sustainable, long-term solutions, an increasing number of oil companies are having to transition from simply producing oil to becoming energy companies focused on creating ‘win-win’ scenarios for all stakeholders. Gone are the days when a marketing facelift could present the same business in different packages.

The problem arises when policy and decision makers on the world stage lay out objectives and non-binding agreements without paving the way for funding, local competence and other essentials to provide the deliverables and potential game changers required in the industry. The fact of the matter is that the gap between policy makers and people who actually can get things done is widening.

There is no green oil for which a customer is willing to pay a premium or black oil for which there is
no market

This is due, in part, to policy makers and ‘hands-on’ people speaking different languages (the voices of the hands-on people are usually absent at high-level meetings). Another reason for the widening gap is that in a cash-restricted market, energy efficiency will not be high on the pecking order of an oil company, given the fact that it requires long-term, out-of-the-box thinking. What is more, some decision makers within oil companies perceive energy efficiency projects as fund parasites that threaten their core business.

Most energy efficiency programmes, therefore, are either driven by regulations, consumer pressure (public opinion) or need some external incentive to make the transition from conference talk to boots on the ground. The exception being when energy efficiency is detrimental to the survival of the company; such as is the case in the airline industry.

Why is energy efficiency a fact of life in the airline industry, the downstream oil industry (mainly refineries), utility companies and the car industry, but not in the upstream oil industry?

Upstream oil
The upstream oil industry is not subject to a competitive environment; each drop of oil eventually will find its way to the market – at whatever price dictated by the market. Production facilities, pipelines, ports, and such are essential in getting the cash flowing towards the oil companies and shareholders, while energy efficiency indicators, in today’s business environment, will not be a deal breaker. In today’s oil industry there are no standards to which oil companies are held accountable in terms of their energy efficiency per barrel of extracted oil. There is no green oil for which a customer is willing to pay a premium or black oil for which there is no market.

Anything upstream in the oil industry is usually developed on an individual and local scale; not conceptualised on having a lasting impact and contributing to the prosperous development of a major region, beyond the border of oil fields.

Generally the perception is that the governments should not interfere in how each oil company develops its power generation/distribution requirements – not taking into consideration that the conceptual design selected by each oil company or industry has a direct impact on the income and wellbeing of the stakeholders on a national and local level, and is a determining factor in achieving the global sustainability of non-renewable energy resources. Why should the government not intervene if, by means of project clustering, all local and global parties benefit?

As strange as it may seem, project clustering is very common among oil companies when it comes to building pipelines, but for some unclear reason this is not applied for power generation and power distribution facilities. When an integrated project cluster approach makes sense to all stakeholders but individual incentives are not there to enforce the idea, the government should step in to guarantee sustainability indicators are met and, why not, make sure the footprint has a lasting positive impact, even after it has served its initial main purpose.

Such narrow and short-term thinking has resulted in oil companies flaring millions in standard cubic feet of associated gas on a worldwide scale (gas which is freed when oil is extracted from its reservoirs), focusing strictly on gross hydrocarbon production whereby often the end justifies the means.

Everybody wins
Ecuador, through its state-owned oil company Petroamazonas, decided it was time to move away from an era in which there were always winners and losers in the oil industry. With this in mind, the country, through Petroamazonas, decided to invest in a $1.2bn programme named Optimización Generación Eléctrica and Eficiencia Energética (OGE&EE). The programme consists of a cluster of 120 projects in an area covering 25,000sq km, 17 oil blocks, 56 oil fields and 66 facilities. The scope of the project can be summarised as following: multiple power plants using associated gas/crude oil as fuel adding up to an excess of 325MW; over 900km of power distribution facilities to deliver power based on economic and environmental merits; and approximately 100km of gas gathering and transportation facilities, bringing deteriorated facilities up to standard and implementing waste heat recovery systems. Interconnecting the integrated oil industry electric grid to the national grid will pave the way to optimise excess hydro power during off-peak hours – in essence transforming water into oil.

The project also covers research and development in areas such as flexible fuel solutions, which are capable of using associated gas, crude oil, condensates, or a combination of each . Developments will also cover monetising stranded associated gas by means of virtual pipelines, and making it technically and economical viable to bring to market small volumes of remote associated gas. The previous has been implemented before for natural gas but not for associated gas, with low volumes at the source and high CO2, heavier hydrocarbons and water content.

From the very beginning the potential economic benefits of the project (savings of up to $700m per year, depending on oil prices) and environmental benefits (CO2 emissions reduced by up to 800,000T per year) to Ecuador were clear, but it was by no means a done deal when selling it to industry decision makers. To develop a project cluster at this scale it is necessary to breakdown old habits and corporate cultures, and translate the OGE&EE programme into oil industry language. Projections show that the project could lower the number of barrels per day (BPD) required to meet demand considerably (see Fig. 1). The impact of the OGE&EE programme translates into increasing the net oil output by as much as 30,000 BPD – the equivalent of over 200 million barrels over a 20 year period – which at an investment cost of $1.2bn is very competitive compared to what a traditional oil project of that size would cost.

A sensitivity analysis was undertaken and proved the resilience of the project, demonstrating that, in the event of oil prices dropping to $41.18 per barrel, the internal rate of return (IRR) would still be 30 percent. With a crude oil price of $11.18 per barrel the IRR drops to 15 percent, although this does not take into consideration savings attributable to centralised power (instead of having over 600 individual power units).

The halfway point
As it stands, 50 percent of the project has been implemented so far, but with the price of oil recently dropping from $100 per barrel to between $45-$50, we have once again reached a critical point. It is one thing to ask for investment with crude oil prices hovering in the range of $80-$100 per barrel, and another to ask for it when prices drop to the numbers we are seeing today. It is during these times that bridges need to be put in place between objectives discussed at high-level meetings and projects that deliver on the promises made. In the past, various programmes and mechanisms on an international and regional scale have still not delivered, leaving it up to Ecuador and Petroamazonas to lead the way.

Under current circumstances, part of the programme will continue to be developed using state funds, but for some of the infrastructure to be developed external funds are essential. Petroamazonas has identified facilities that can be developed through build own operate transfer (BOOT) project structures.

Another development model consists of Petroamazonas handing over equipment and material it has already purchased to a strategic partner, such as power generation units, electrical equipment, process equipment and conceptual and basic engineering design criteria. Through this structure the strategic partner is required to close any pending engineering and procurement and assume construction work and start-up of the facilities. Immediately after provisional take over Petroamazonas will proceed with making payments sufficient to amortise the investment of the strategic partner and cover operations and maintenance expenses.

Given the urgency to reduce emissions, implement sustainable solutions and create win-win scenarios, it is essential to implement funding structures allowing for the transition from high- level, non-binding commitments, to technically and economically viable solutions. This will require strong top-down commitments, local competence, integrity and funding, helping programmes like OGE&EE weather the kind of storms that any such project will face over an eight to 10-year implementation period.