49 - The Future of Oil & Gas with Wafa Jafri (Partner @ KPMG)

Because they are a massive part, like I said, of the solution.

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What are they doing? They're famously adding a coal station every week. But now adding pretty much as much renewables as all of Europe combined.

The balance sheet strengths that they have in order to accelerate that transition for the rest of the world is absolutely crucial. So what is it that the European oil and gas companies are going to provide to the UK customer?

Hello, everybody. Quentin here.

This week we're switching it up. So rather than having me in your ears on this podcast, you've got Ed, Ed Porter, who is an awesome guy, been with Modo and a friend of Modo for many years. And he talks to Wafa from KPMG about different approaches to how oil and gas companies should handle the energy transition.

So it's an interesting conversation because you've got two different points of view coming at it. And is there a right answer? I don't know. We'll let you find out.

Hello, and welcome to another edition of Modo's podcast. Today I am joined by Wafa Jafri from KPMG. Wafa, over to you to introduce yourself and KPMG.

Thank you so much for having me, Ed. It's a pleasure to be here today.

So I'm Wafa Jafri. I'm a partner. I lead our energy strategy practice for KPMG UK. For all my sins, I also lead our global corporate PPA practice, which is really to help a lot of the companies and corporates decarbonize and reduce their emissions.

From a background perspective, I mean, you've known me for a very long time. I started at RWE trading, retail, generation. Then moved to government for two years, and then I was asked to join KPMG and build out our energy transition practice, which is what I've been doing.

I mean, from a KPMG point of view, energy is of our four priority sectors. So it is absolutely at the forefront of what we do as a business, especially around the transition. We're very proud that we advise on all aspects of the energy transition.

Yeah.

And personally, I sit and deal advisory. And I've set up our legal strategy practice, which is really to help energy companies accelerate their ambitions through M&A.

And that is where we're going to focus today, right? So we're going to have a look at that transition piece. So it's a little bit more, for what is an energy storage podcast, we're going to be a little bit more sort of oil and gas or conventional energy company focused than we would normally be.

And so to kick us off, I've gone to go and find a quote.

Which is from Nigel Topping, who is UK's head level--

sorry, the high level champion for COP26.

And he said, potentially controversially, "We're possibly in the last bonanza of oil and gas profits. There are still big heads in the. Sand and their Kodak moment is high." Do we think that he--

or do you think he's right?

Well, I think if we were to take a step back, I mean, the transition is also about ensuring a just transition. Right? And oil and gas companies have such a massive role to play in that. If you look at the technologies that we are investing in, offshore wind, CCUS, hydrogen, the capabilities that exist within these companies can be repurposed in order to really deliver on that transition.

The second part is the balance sheet strength that they have currently in order to accelerate that transition for the rest of the world is absolutely crucial. And that is where most of them are headed as well. And lastly, the interest from oil and gas companies and the commitments that they've made publicly to their shareholders, to their consumers is absolutely critical in showing off the fact that they are there to enable that transition.

I think that strategy question is a really interesting one. Right?

So when you have had these conversations around strategies within oil and gas, so you're seeing that focus on transitioning to renewables. So from your point of view, you're saying, well, actually, we do see them recognizing that there's a need to make that transition.

And then, looking at the oil and gas companies, would you say that's kind of a consistent picture across them? Or is there sort of a difference?

So the business strategy and the commitments across the globe and depending on the organization tend to differ. The European oil and gas majors and the energy majors--

I would call them now, I think they're kind of moving away from being an oil and gas company into being an energy major--

so if you look across the Europeans, they're committed to actually fundamentally shift their business by committing to net zero target, scope 1, scope 2, scope 3--

Yeah.

--by 2050. If you look across to the US or even to the Middle East, there are some of the largest companies in the world, they have committed to ensuring that they themselves have zero emissions, i.e. ensuring and setting up targets of scope 1 and scope 2 being net zero.

Yeah.

So there is a difference almost in belief of what the market and what the energy world is going to look like across the different players.

The Europeans tend to believe that oil and gas is not going to have a use by 2050.

Whereas the US counterparts or the Middle Eastern ones would actually think that there might be a use. But what they're going to deliver is absolutely zero carbon products to the market.

OK. So let's rewind a little bit to scope 1, scope 2, and scope 3. So we hear it a lot. What on Earth do they mean?

All right. So scope 1 is emissions from your own operations.

OK.

So let's put oil and gas aside. The fact that you have a manufacturing plant, it is emitting carbon into the air through its chemical or industrial processes, that would be scope 1. Scope 2 are things that you actually directly use. So for example, electricity, which is generated by someone else but is imported by you in order to keep your plants and your operations going, scope 2. Scope 3 is more around supply chain and what happens with your product.

OK.

So if we bring it then back to the oil and gas sector, scope 3 would mean an oil and gas product which would, if you put fuel in your car and you drive it around, it is going to emit carbon into the air, that would be scope 3 coming from your oil and gas players and your energy major players.

That feels like a huge difference, right? So scope 1, scope 2 being the cost of bringing that oil out of the ground and the energy you pay to, say, run your pumps, so the carbon from those two things. Then scope 3 is the actual carbon from that barrel of oil itself.

Emitted by someone else, not by the company.

OK. So the challenge people will have with scope 1, scope 2, and scope 3 emissions is is that regulation tight enough on those energy companies in order to hit the target of 1 and 1/2 degrees of global warming?

Sure. I mean, that's not something I can opine on. It's more around the science of it all.

Whether we are on track--

I mean, we all know we're not on track to hit 1 and 1/2 degrees, right? That's something that a lot of scientists have opined on and shared data for.

How we accelerate that is another question. I think if we look across to how we are working towards it, we've just sorted out the reporting, whether it's TCFD, and that's something that's been taken over to the US as well, And understanding the emissions is probably step one. What you do with that data is definitely the step 2.

And I think that is something that is likely to come forward over the next couple of years. But regulation around that and what you do with the data that you're now getting around scope 1, scope 2, and scope 3 is going to be critical.

I want just to call out one of the acronyms there, TCFD. What does that stand for?

Task Force for Climate-Related Financial Disclosures, which really comes down to what are the emissions as well as what is your exposure to climate risk.

OK.

Yeah.

And in terms of the scale of those, so are they a similar sort of scale in terms of emissions from scope 1, scope 2, and scope 3? Or is one of those a much bigger part than the others?

Ooh, I actually don't know the answer to that.

OK.

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Well, it's a good question.

It is a good question. But I don't know the answer to that.

So let me--

so I think from--

Should probably know that.

--and this is where it's great, you can see that Modo's really doing some high quality research.

Yeah.

So for a barrel of oil, I think it's something like 10% to 15% is on scope 1. I think 5-ish to 10% is on scope 2. And the rest of it is scope 3.

Yeah.

So this is 80%-ish of scope 3. Which is really interesting, right? Because that sort of European versus American or say Middle East, that we're kind of just using as proxy terms, right, but that difference, including scope 1 and scope 2 versus scope 1, scope 2, and scope 3 feels like a massive amount of carbon we're kind of agreeing or disagreeing exists or should be the responsibility of the person producing it, that seems.

I get where you're coming from. But I think it's a response to where they think their customer and the market is.

Mhm.

Right? So from that perspective, if you're looking across to Europe, how many countries in Europe have committed to net zero by 2050? And that is 1, 2, 3, right, complete net zero. You can see that the customer in Europe is going to be different to potentially that in the US or in the Middle East.

Yeah.

And I should also preface the fact that these are early days. Right? I mean, it's not like Europeans didn't go on a journey. They started off with scope 1, scope 2 being net zero, then recognizing how the consumer and the market that they operate in is changing for them to then change their overall business targets, for them to change their overall business strategy.

Yeah.

That's not to say that the US or the Middle East won't.

But they do need that direction to be able to do that. If there are going to be no cars on the roads in the UK, I mean, what is the target currently? I think it's 2040?

2030.

'30, yeah, you're right. They've changed that. So if there's going to be no new diesel or petrol, you're not going to need diesel or petrol. So what is it that the European oil and gas companies are going to provide to the UK customer?

So the plan and the strategy within Europe is almost like an electrify everything type approach.

To a certain extent, or convert it to hydrogen, or convert it to CCUS, But they are much further along than the rest of the world in a way.

So can I ask you a quick question on CCUS there? What does that mean?

It's carbon capture and storage. So you're taking the carbon that is being emitted, you are capturing that, and then storing that permanently in the ground.

OK, yeah.

In which case, you do need to react to what your consumers want. Because the other part of ensuring that it's a just transition, which was one of the first things I said, is that a large part of the Paris Agreement was to ensure there's no fuel poverty as well. Right? And that often at times tends to get overlooked.

Yeah.

If you're not taking that on board, and if there are developing countries that are not on the same trajectory and they need the energy, the idea of not providing them with the energy that they need in order for them to transition is an open question as well. So your business strategy, as with any business, would reflect the demand of your consumer and that of your market.

And that is what they're responding to currently. If that changes over time, I'm sure we will see a change.

Yeah. OK. I think the just transition point is a really good one to bring up.

And I think also, just on that scope 3 point as well, there's an element of conversation around what are you displacing?

I know that feels a little bit like if you're still producing gas, you still should be involved in a scope 3 discussion. But if your gas is displacing, say, coal in--

Exactly.

--emerging parts of the world, then there feels like there's a bit of a discussion. It doesn't sit quite right with me. Feels like everyone should just include scope 3 and then it would all just be more straightforward.

No, I completely understand. And I'm very passionate. And I completely agree with that.

It's just there is this idea that, even in the UK, right, we need to move as fast as we can to decarbonize our power system. 2035 is currently the target. I would personally question our ability to achieve that.

Yeah, yeah.

But if you're going to go, I don't know, from 50 gigawatts to 75 gigawatts of offshore wind, you are going to have to figure out where that supply chain comes from.

Yeah.

Right? Where is the steel going to come from in order to deliver that 75 gigawatts? I mean, right now there's a question mark on the 50, but even that 75. So what is it that you're actually compromising on in order to accelerate the climate ambition?

OK.

And I think that needs to be considered in order to deliver it to be just. Because you wake up tomorrow, even in China or in some of the other countries, they're going to develop, like, 10 nuclear plants, 100 gigawatts plus of renewables.

Yeah, yeah. No, I think it's a really good point to focus down onto--

well, there's two really interesting examples there, one the UK, one China.

Yeah.

China is a fascinating example because they are hugely focused on delivering a system that works. But if you look at what they've added in the last few years, there's a massive amount of renewables that have been added. And possibly the question that gets asked a lot in sort of climate discussions is, well, what about China? What are they doing?

They're famously adding a coal station every week from sort of 5, 10 years ago. But now adding pretty much as much renewables as all of Europe combined in the course of last year.

In the course--

exactly.

So it's an incredibly changing dynamic, that one. But then to focus on the UK, right?

So there's one question you raise around--

so energy majors look to go into offshore wind. And offshore wind going to be massive in the UK. We've seen that over the course of this winter, where we saw some of the lowest carbon-intense periods in weekday peak pricing.

Yeah.

Which was a lovely chart that Robin Lucas pulled together from the Modo team. So we've smashed records this winter on that front.

But there's also a question for the energy majors. How much do they go beyond just the generation? So you're absolutely right. If we generate, say, 75 gigawatts of wind, well, do we need to bring the skill and the political nous and the capital, and the infrastructure of those energy majors into not only doing the offshore wind, but also into the flexibility part. So do you see those kind of strategies looking at that flexibility space as well?

Yeah. That's a very good question. Because an all renewable system is just not going to do. Because we've had some periods where we've had to keep coal online as well. I think it was a couple of years ago where we had to keep coal online because the wind wasn't blowing and it was a cloudy day.

And we brought back coal this winter.

Exactly, for security of supply reasons, exactly. So flexibility and flexible generation is a massive part of it. I mean, that's where my true background really is. And you know that. That's where we work together. I think it's a question that's been unanswered.

So storage becomes a very, very massive requirement. And then there are different forms of storage that you need to consider, right? Batteries have a massive role to play.

Yeah.

There is long term storage, where you're looking at something like pump hydro.

Mhm.

And then there's other form of energy storage that you need to think about, such as converting power into hydrogen, which is what [? Bayes ?]

is thinking about in terms of--

and I met with [? Paro ?]

yesterday. And we were talking about how she's creating a hydrogen economy, how you can take electricity to actually turn into hydrogen. Then whether you use that in cars, whether you use that in heating, you pump that into the pipes, or you use that to generate electricity, i.e. like a proper storage cycle for what you can do.

And there's a great podcast on hydrogen that went out from Octopus Hydrogen. So check that one out.

That's well worth the listen. Because there's a huge range of where do we use that hydrogen, what do we use it for today, do we use it to replace things that today use hydrogen, and maybe how does it come into the grid in terms of flexibility, so yeah, really interesting sector.

I think there's an element that's interesting there for me around the energy majors, the interest in hydrogen. It seems like there's way more interest in the hydrogen space than there is in, say, just the energy storage space. And this feels like a molecules versus electron--

Debate.

--debate. Is it that simple? Or is there some sort of reasoning behind that?

I think it's down to--

I mean, I would say that the interest is increasing exponentially.

OK.

Right? So quite a few have made investments in battery technologies because it comes down to what they can do with potentially batteries in the aviation sector as well as in the electricity sector. So that is coming. It's just taking a little bit longer.

OK.

I mean, power systems tend to be more complex and more localized then oil and gas because that's core to what they do.

There's a global piece--

Exactly, there's a global--

exactly. Which they're better at than the power sector right now. But they're getting there.

So there is a natural affinity with the molecules approach.

Exactly.

It can be a very localized, electrons only type business model. And trying to get into that sort of localized electrons model, the way in which they'll do that, do you think that we need the cash from energy majors and we need the nous that they have, do we think that will come from organic growth, or do we think it'll be acquisitions, or do we think they'll partner? What does that space look like?

I think it's a combination.

OK.

I think it absolutely has to be a combination. Right? So partnerships is something that we're seeing across the board from an oil and gas perspective. So you would have seen Equinor SSE partnership for offshore wind. You've seen the same on BP and EnBW.

What is more interesting is that's not just happening in the renewable sector but also more and more now in the CCUS and other low carbon technologies. So ADNOC and BP having a partnership around Humber, Teesside and decarbonizing that, that's extending beyond just acquisitions. Because [INAUDIBLE]

has acquired quite a few battery storage companies, similarly BP, Shell.

So why are they partnering? Because it feels like they've got the cash. They've got the expertise. Why partner?

I think they definitely have the cash, right? I think expertise is something that we've just touched on in terms of the oil and gas expertise being more with molecules than with electrons.

OK.

So that creates a natural area of partnership. When it comes to partnerships around other areas like new molecules, so whether it's carbon or whether it's hydrogen, something that they haven't really dealt with before, then it's actually quite an interesting one. Because different people have different parts of the puzzle and different capability.

And that partnership is really about bringing that together in order to deliver, whether it's a project, or a new area of a market, or a technology. It is genuinely the best way. I mean, we're seeing that not just in the oil and gas space, but even in the industrial sector.

The ones that have really significant commitments to decarbonize are looking for partnerships who have the expertise to then be able to decarbonize for them. And it's a similar concept that we are seeing in the oil and gas space. You don't have to do it alone, right?

Yeah.

You can bring different facets and different capabilities together to figure this massive puzzle that you have of how to get to net zero out.

Yeah. So we think that within those strategic discussions, there's a huge amount of partnership that's being brought about.

Yeah.

I think that's a really interesting thing for people who are building small companies that are focused on perhaps more niche areas thinking about, well, how do I scale this. We need to deliver something, like--

what's the number? It's over 20 gigs of energy storage into dB by 2050.

That's a massive amount. And will all of that come from just sort of existing capital that's looking to fund small growing companies? Possibly not. There's a real chance that there'll be some vertical integration, or there'll be some strategic alignment. And one of the things where that might happen is where there's a link.

So the classic example is hydrogen. Obviously there's a link between gas and hydrogen already. But other sort of byproducts going into the battery storage space, so things like sulfur, that could be an interesting--

Yeah.

--angle.

No, I think from a technology development point of view, I mean, the writing is on the wall. I mean, it was the first quote that you did on whether oil and gas is actually going to be needed in the future.

Yeah.

So the writing is on the wall. They do have byproducts. Sulfur is an amazing example of potentially having sulfur sodium batteries in order to accelerate that, right? It's not exactly core to the business. Because that's more manufacturing. That's more technology.

But it's still a question mark of what they do with the resources that they have in order to deliver on that transition. Which is why a lot of these companies have set up venture arms that are looking for businesses that they can grow. I mean, the small businesses that you've talked about, the start ups that you've talked about, the technology companies that can really benefit from the experience to then be able to deliver the transition.

And let's take one of those. Because I think there's a nice story here. So one of the companies that develops energy storage in the UK is a company called Arlington. They did a partnership with Masdar last year.

And Masdar is linked to the Abu Dhabi National Oil Co., which is--

As well as TAQA, the electricity company. Yeah.

Good. Yeah, very good. See, you have done more research than me.

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And I think that's a really interesting thing. So that is a partnership and what is, on the face of it, a very oil-focused company. But the cash and the expertise from that company is starting to come down and starting to get into the flexibility space.

Mhm.

So it's a good example of where we're starting to see that transition come through. The link that's interesting here is that the lead for COP28--

Yeah.

Yes.

I was going to come on to that.

OK. So I was going to ask you that. So what do you make of that appointment?

I, mean if you look at COP26, right, the one that was in Scotland, I had the pleasure of actually being there. It was just brilliant. It's just oof. I think that was termed as the COP of businesses.

OK.

Right? It was businesses driving how they can help accelerate the transition and get to net zero.

My hope from COP28 is going to be how the oil and gas companies are going to be able to achieve that because they are a massive part, like I said, of the solution.

Even though quite a few of us tend to look at them as a potential problem, they are a massive part of the solution. So an oil and gas company driving COP28 is a win, personally, for me, is a win across the transition.

OK.

Because you have an emitter who provides oil and gas products talking about how they are going to accelerate that transition to net zero.

Yeah. I think it's really interesting, right? So I think you see it as a win. And with very justifiable reason, so that they have all this--

They're at the table. They're driving the debate.

Yeah.

But so.

Whereas, I think for me, maybe I'm pessimistic in this. But the worry would be that the conversation stalls--

Yeah.

--in the attempt to try and bring them to the table and to try and find that sort of transition, we end up losing 5 or 10 years. And I think we're now in a position where we don't have 5 or 10 years.

Mhm.

Well, I see the opportunity. But I also feel like there's a risk as well from the outside.

Yeah, and I get where you're coming from. But for me, it's more about how do you get the most impact. Right?

I often get challenged. And this is by my own team, and I love them, but they often challenge me. Why do we work with oil and gas companies? And why are you so adamant that we need to work with oil and gas companies? Right?

For me, if you're going to make the biggest impact, it has to be with the largest emitters. So if you're changing the thinking of some of the largest emitters, or in this case, one of the largest emitters is actually driving the debate, what more could you want?

Yeah.

You've won them over. What more could you possibly want?

Yeah.

It's just about making it happen and holding them accountable. I get that cynicism that you have as to whether or not we're going to get to a point where we'll get to a structure where they're held accountable. I get that cynicism.

But the fact that this is happening, 10 years ago, even 5 years ago, would we have ever thought of that? Would we have ever thought that the major companies in the Middle East or the US companies are going to set themselves net zero targets let alone be the one driving--

Figurehead of COP28.

Yeah, of a COP period, 28, 30, 100, don't know.

Yeah.

I've got so old I am now the cynic to do it.

Completely get that.

Yeah, yeah. It happens to the best of us. OK. No, that's really good. All right.

So I'd like to ask one more question. And it's not in the same vein.

OK.

It's to go back to when you first came into the energy space. And it's to say if you had your time again and you wanted to work in a part of the energy sector that you thought was new and innovative, and it can't be Modo, and it can't be KPMG, where would you go? Where would you look to start out?

I would go anywhere where I would get the variety that I've gotten throughout my career.

OK, so it's variety that's kind of the key.

Oh, yeah.

Yeah?

I think the best--

Does that translate into consultancy?

I mean, it's the easiest one.

OK.

It is genuinely the easiest one where you can kind of get that. Yeah, I mean, it's the easiest one that you can get, right? Because you're working from project to project and everything can be very different.

Yeah.

But I was able to get that at RWE. I think the variety really helped. And it's not a variety on a daily basis or a monthly basis or a project.

Yeah.

It was just the fact that before my first five years at RWE, I saw trading, retail, and generation.

Hm.

Right? And it was the value chain that I was able to kind of see. And applying that to now the new and upcoming value chains, whether it's batteries, whether it is hydrogen, whether it's offshore wind, or anything which wasn't the go-to thing at the time,

Yeah.

--it makes life much easier. And it's so beautiful. You can sit there and debate it out.

Yeah.

And I said this to one of the managers in my team, which was it's really tough at times to see a puzzle come together.

Mhm.

But when you see it form, it is by far one of the most beautiful things. So having the depth and the breadth, that's what I would go for.

That's the sweet spot.

That's the sweet spot.

Brilliant. Wafa, thank you very much. Thank you for coming on.

Thank you for your opinions. It's been wonderful having you on. Thank you very much for listening.

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