In Greek philosophy the Phoenix lives for 500 years before it dies in flames and is reborn from the ashes of the fire that engulfs it. It is an imagine that has been profoundly influential on western thought and popular culture for centuries. What is it that can rise from the ashes? The countries that fought in the Second World War rose from the ashes of that conflict. Those that were on the losing side, Germany and Japan especially, made economic miracles out of the destruction that was wrought on them in defeat. Their success was based on the gradual withdrawal of the allies who had defeated them and in West Germany and Japan the adoption of a differently successful new economic model. The Rhine model of capitalism and the East Asian or collective model of capitalism. The point is that from the very lowest, the ashes of the fire, something new, interesting and different arose. The non-renewable energy sector must achieve this kind of renewal, rebirth and reinvention.
The phoenix is also often a feature of company failure, business model failure and the individual journey of entrepreneurs. I do not want to take this analogy too far. It would be wrong to see the fossil fuel sector as something that has failed or been defeated. This language is unhelpful to grasping the inter-relationships that are central to the future development of the world economy. It is also unfair to the role of these energy technologies in the evolution of human society and progress. The energy consumption patterns of the world are changing because they have to change to avert climate disaster but our ability to change is built on the economic and scientific foundations that were built by economies founded on non-renewable energy. This may be ironic but it is also the reality: post-war booms in Germany and Japan needed oil and gas. We do not need to go so far as the climate change deniers or those who argue the moral case for fossil fuel but we also do not need to deny the important place in history and human development fossil fuels have played.
If we zoom in from the very high-level view and look at the individual life span of an oil field we can better understand what has to happen next. There are three ages in the life of an oil field before it is played out, this typically lasts 15-30 years with deep wells lasting for shorter time spans. The first age is that of discovery and exploration. The middle age is of the extraction and exploitation of the reserves in the field. Traditionally, we would see the third and final age as the tapping and ending of the life of the field after the most lucrative supply had been extracted. But today we have a third age, reinvention - the phoenix rises. This might mean that the middle age is stretched by new operators or by the application of new technology or we might rather see this as the third age before death.
The discovery and exploration phase of new oil fields is by no means over. For example, 53% of projected Norwegian reserves still need to explored and drilled. There are many discoveries still to be made and there are many reserves which we know are there but are harder to find. Much of the projected oil from Iraq still needs to be extracted because it needs deep wells and the political and security environment that will allow this to happen safely. Once found, drilled for and flowing the reserves need to be exploited to the full. They need to be taken out and they need to find a route to market. With prices fluctuating as demand patterns shift and change, there must be ever greater efficiency in all these delivery processes. In many places these first two stages are dominated by the large global oil companies. Towards the end of the life span of these reserves or when the margins of extraction and sale become less attractive, it is then that these larger firms withdraw and the third stage is entered. It time for the major oil companies to move aside and for the smaller players to come. This reinvention stage is where small energy firms and the more advantageous private equity firms move in. Their aim is to extract the final reserves.
What is happening now and what will develop much more in the future is that this final stage is also the stage at which new renewable energy sources develop in partnership with the end game of the old fields.
As I have argued elsewhere, in the North Sea as the rigs are decommissioned the platforms can be converted to the sites for wind and wave power generation. This will eventually pay for itself as the sale of these new renewable energy sources built out of the infrastructure of the older energy sources produce revenue. Many of the Middle Eastern fields are in desert locations. Before discovery these areas were often remote and hard to reach. The infrastructure that was put in place to reach the wells now provides the infrastructure that is needed to use their locations as solar power farms. If refining or natural gas works are also available then the last elements of these fossil fuels can be used to provide additional energy for the creation of much larger solar facilities that contribute power via the oil built infrastructure to national grids. When the old fuel is exhausted the new fuel will carry on.
As they are declining the reserves in their third age provide many opportunities: they are not finished. Our industry needs to harness new technology, for example AI and robotics, to deal with the harder to reach reserves and harsher environments and it is in this space that Napag Trading will increasingly play and it is opportunities in this space that we currently seek.
Francesco Mazzagatti is the CEO of Napag Trading
