 All right, good afternoon everyone and welcome to this session on diversification and divestment strategies for oil and gas companies. My name is Frederick Bauer, I'm an associate senior lecturer at Lund University and I'm very happy to be chairing this session. We will have five presentations which will give us some details and insights from different types of companies, both private and state-owned and from different geographies and contexts. So giving us some ideas about how these types of firms are going about the transition or hopefully going about the transition through divestment and diversification. And so with that I'm very happy to announce our first speaker who is Andrea Frunaro. She is an energy transition fellow at the National Resource Governance Institute in the US and she will present her work on Pemex and the energy transition with some insights from Mexico. Okay so today I'm going to be presenting about the case of Pemex which is Mexico's national oil company. This is an ongoing project, a broader project we are developing at NRGI about the role of NOCs in the energy transition. We are developing this with Fernanda Ballesteros that is here, David that should be somewhere here too, myself. So this is an ongoing research and we are very happy of being here and also listening and hearing ideas on this difficult topic because I think and one of the points I'm going to be making today is that in the case of NOCs when we think about the energy transition there are many many additional challenges that are not that easy to address when in comparison with other private companies. So the research question that that is inspiring this project is what are the challenges of a specific policy that the government of Mexico is developing that is this idea of self-sufficiency, the self-sufficiency policy in the context of the global energy transition. So today's session is a lot about divestment and diversification and what we see in Mexico is actually something a bit different, diversification in the sense of more investment in the refinery sector but actually deepening dependence in the traditional business on oil production. Why is this case relevant? Well for many reasons first Mexico is amongst the main a very large meter which make the case important from a climate perspective as I said before because this case brings some ideas about the specific challenges that national oil companies have in the energy transition so both for the energy transition and off the energy transition for national oil companies and I think this case can be interesting for other net importer countries that may be facing similar challenges and finally I find this case interesting because I have been seeing more and more some sort of kind of self-sufficiency narratives in different oil-rich countries and even in some more extreme cases some sort of oil outage narratives if you want. So this case can be very interesting to understand is that a possibility to kind of protect producer countries from a possible decline in demand and prices so we are working in an interdisciplinary group as I said before doing document analysis, policy analysis and different expert interviews, data analysis and some scenario analysis that we hope to do in the next month. So let me give you some context that I think is important to understand this case. So first Mexico was actually doing really well for many years in terms of energy security and that is starting to decrease in recent years. I'm not going to describe in detail the reasons for this but something that is important to keep in mind is first the trading balance that we are seeing since 2015 in which Mexico is mostly importing back crude oil as gasoline from the US and second a decline in production that we are seeing since 2005 and finally a decline in the utilization of existing refineries for different reasons but one important one is that Mexico is producing less light oil and the refineries are built for produce more heavy oil. A second important element in the context that I think you should keep in mind is Pemex debt. So in 2019 Pemex became the most in-depth NOC in the world and that's creating huge problems not only in terms of energy security but of course in terms of the fiscal budget and a third element of this context that I find important is that keeping fuel prices low is becoming more and more difficult in Mexico. The trading balance of course is an important reason but that doesn't mean that Mexico is necessarily paying higher prices of different oil products. This figure is showing that tend to pay lower however we have to keep in mind that incomes in Mexico are very low so the impacts of increases in fuel prices are extremely important for the population and the population is very sensitive to these increases in prices. So there are massive protests when there are increasing prices some cases more driving for market reasons other times because recently the governments have tried to reduce consumer subsidies and we see these kind of things right and that's shaping the political process of what we can do with Pemex in the energy sector in general. So what is this self-sufficiency plan that I was describing before? So one of the goals of the current president and Andres Manuel Antonio Lopez Obrador is very long so it's not that easy to say is to achieve self-sufficiency by the end of his administration and this means mostly stop importing through new refinery investments and this involves a huge transformation from what we were seeing in Mexico in recent years. So in 2013 we had the implementation of a huge new energy policy, the energy reform that what it was trying to do is promote the entrance of private contracts in the upstream sector and Pemex monopoly in the commercialization sector creates some measures for the liberalization of gasoline prices among many other things in the electricity sector as well that I'm not describing now and today we're seeing a very different approach in which Pemex gains relevance is at the center of the policy this idea of rescuing the national oil company appears as central as well as other SOEs in the energy sector and as well as more investments in exploration for Pemex one of the I would say more relevant aspects of this policy is the prioritization of investments in the refinery sector with this goal of achieving self-sufficiency. There are many challenges for this for this plan and one of the challenges that we see is that different research institute estimations by government agencies are showing that if Mexico want to meet domestic demand it's not very clear this is going to be able with existing expectations in term of future production. I'm not going to describe in detail the reasons for this we can discuss this later but this includes relatively unsuccessful exploration attempts by international oil companies recently increasing upstream costs and geological limitations and one of the point that we want to make is that of course all these challenges are going to become even more challenging in the context of a global energy transition where we see declining prices and this is even worse when we look even more further on time right the first one that the figure that I show are different scenarios for 2028 but this is one example of rise that a base scenario for 2040 that show that by 2030 Mexico will have to import actually almost half of the demand to almost half of the oil if it want to use the refinery capacity to meet domestic demand. Another key challenge is related to increases increasing costs I would just say increasing costs in the upstream sector but also in the refinery sector. There are many news articles from like research organization and different actors and stakeholders showing that the main investment in the refinery sector today that is this one new refinery that is called Olmeca or Dos Vocas is over budget in addition with what I said before there is declining in production since 2005 and a decline in utilization since 2030. So one of our theories is that Pemex is currently caught in two feedback loops that are deepening losses. The first loop on the left of this figure is related with the declining upstream production associated to a decline in investment. We can make actually refineries lose scale economies creating new financial losses and the second loop show how debt is becoming higher as the losses increase but also as the costs of debt are increasing for a company seeing a rapid drop in its credit rating. So one key corrective mechanism that is keeping these loops ongoing and not creating a huge crisis is the fact that the government keeps supporting Pemex and that feed creditors interest and they keep buying Pemex bonds. However and this is the risky aspect here we don't know for how long this correcting mechanism can keep operating and there are many reasons today to think that actually it may not be able to operate for very long term. If the government changed for example and has a different approach in which it may not support Pemex anymore or if for example if ESG start to be a much more important issue for investors something that we are seeing happening today. So some final remarks. Is this realistic and or maybe even a non-desirable plan? There are many risks associated to these self-sufficiency ideas of writing out better choices to promote energy security that is something we need to consider more seriously and then is really the idea of self-sufficiency a way of protecting from a global decline in prices and we don't think in this case that makes sense. First and one important issue is that here the real political resistance to and possibilities to transfer prices and costs to final consumers will probably not make that a possible outcome and finally just to finish this can of course raise all dependence and create an oil-logging in Mexico energy transition. So thank you. So I'm a research fellow at the Warwick Business School and this is Work in Progress a research project that I'll be presenting that is based on work together with my colleagues at Business School Mike Bradshaw and Tina Thomas. So this is all quite preliminary so if you have very critical questions I'm going to try to avoid them in the Q&A afterwards but nevertheless I'll try to provide some some insights on the question of are we keeping fossil fuels in the ground and we're studying upstream asset divestments by a number of international oil companies. So a little bit of background I'm sure this is an audience that I do not have to convince of the fact that the urgency to curtail fossil fuel supply is growing. I'm just citing some work by Michael Lazarus and Haruva Nassels who have been working on this topic for a number of years and our colleagues at UCL with their really interesting paper in 2021 saying that in order to maintain a 50% chance of 1.5 degrees warming by the end of this century we have to keep basically the the vast majority of fossil fuel reserves in the ground but again I mean you guys aren't the people that I have to convince of this fact. And so as a consequence of course there's a growing stakeholder pressure on the oil and gas industry not just from well activist communities and there are many climate activists here in the room and at the conference but also academics and basically even you know this synergy of academics and climate activists you have the fossil fuel non-proliferation treaty which I think is a good example of how activists and activist academia can work together in terms of convincing policymakers and oil and gas incumbents to keep fossil fuels in the ground. So a number of these supply side policies have been discussed here at this conference in the in the past year a couple of years. I've been working on a number of these myself you've got fossil fuel moratoria you've got bans production quota subsidy reform financial divestment divestment away from fossil fuels etc. So I mean the oil and gas industry is being pressured of course as we all know and then the question becomes okay so what are these international oil and gas companies what is the global oil industry actually doing to work with all this with all this pressure and so in our work at the business school we've been looking at these international oil companies the likes of BP, Shell, ExxonMobil, TotalEnergy etc that are coming up with these transition strategies and they're saying they're becoming integrated energy companies you've got TotalEnergy that changed its name a couple of years ago from Total to TotalEnergy actually to say or to showcase that they're becoming an integrated energy companies for example but there's also BP and Shell that have their transition strategies to become net zero companies by 2050 of course so and a lot of the research basically on these international oil and gas companies that are under transition focuses on their investments in renewables so they're all upping their investments in renewable capacity etc but I mean they're first and foremost still oil and gas companies of course so research should also be focused on okay what are they doing with their oil and gas assets their upstream assets their oil fields their gas fields their reserves etc so basically that's the start of this research project and and really asking the question of okay they're transitioning they're becoming integrated energy company companies what does this mean for their for their upstream investments and are they are are they actually as part of their strategy of becoming integrated energy companies divesting their their upstream assets so that's the research question that we ask ourselves so are these international oil companies the likes of BP Shell and Exxon Mobil are they're actually divesting their upstream oil and gas assets and and once they divested them if they do so once they sell them off are these oil and gas assets actually staying in the ground are these fossil fuels not being extracted because a lot of these companies they say okay we divest and it's a response to a climate activist or academia activist academia but once these assets are divested what happens um and well it won't surprise you that a lot of these assets are actually continuously developed but we'll come to that in a minute so basically some of the questions that we ask then is okay so who are those companies that they're that are divesting we look at six IOCs in particular but also looking at when do they divest which assets are they divesting what's the value of these divestment deals where do they divest geographically speaking those are interesting questions as well uh what's the rationale of their divestment is it really all about climate change and energy transitions or is it more about consolidation and and trying to um well to to to to um to deal with um well high costs that they've that they faced because of for example acquisitions of other companies those are divestment rationales as well and particularly interesting of course who's purchasing this and what are the types of actors that are actually purchasing these assets that international oil and gas companies divest um just a quick note on divestment so what type of assets do we look at so we look at upstream asset divestment which is a full or partial sale of upstream oil and gas assets such as exploration blocks but also assets under development these blocks under development producing or abandoned fields that are still in the portfolio of these these companies so we do not look at refineries or tankers or um um terminals and g-terminals that these companies also invest and divest from so it's basically purely their oil and gas reserves and the fields that they have so that's important and so which cases or which companies do we look at ExxonMobil, Chevron, BP, Shell, TotalEnergy and Equinoa and so so we've we've built a database of 2223 upstream oil and gas divestment decisions or deals in the post-Paris agreement era so from 2016 until September 2022 and this is based on on data provided by global data as well as triangulating this disinformation or this data with annual and strategy reports and press releases of these oil and gas companies and there are still some gaps in here because I mean it's very hard to come by this information and some consultancies actually do possess quite detailed information on this like restart energy for example but it's ridiculously expensive to access this so if there are any funders in the room that can miss $50,000 that would be really nice and you can tell me afterwards but anyway so 223 deals that also means that these deals can include one or more assets that are being divested at the time so this doesn't mean that 223 fields have been divested oil and gas fields for example have been divested so one deal can include the sale or the purchase of multiple fields of course which I think is quite important so we don't talk about how many fields have been divested it's really about the deals themselves so some only two minutes left so divestments so these are the companies here you see that Shell is the one that has divested the most 50 total energy 47 divestment deals Chevron 46 then Equinor 32 deals then Exxon 26 and then BP 22 this is just descriptive this is where you see that they've divested their assets so you can definitely tell that these are companies that are active worldwide and that focus on portfolio refinement worldwide this is you can't really see it but this this shows you where they've divested most or where most deals were located so it's in the United States and then also in the in the in the North Sea actually that's where most divestments took place on the UK continental shelf and the Norwegian continental shelf shelf interestingly in the US I only have one minute left in the US of course that was because you know those shale assets have been bleeding money in the past couple of years until very recently in the UK continental shelf it probably has to do with the fact that while these are or many of these are mature basins and these IOCs are divesting away from them interestingly so who are the purchasers you see a variety of purchasers but what is interesting is that 78% of purchasers are actually independent companies or smaller IOCs exploration and production companies and national oil companies so that means actually that these companies are far less susceptible to public scrutiny so if all these assets are being bought up or at least the majority of these assets are being bought up by these types of companies what happens to them there's far less public disclosure on them I'm going to have to wrap up I'm just going to go over this so we also did research on okay so what was the state of these assets at the time of divestment what's the current state of these assets again this data isn't 100% so there's still a number of or a degree of unclarity and then the rationale of these divestments which I think is really important as well it doesn't always have to do a lot with climate change and then so there's a diversity and divestment justifications our expectation is that these divestments will go up but asset divestment doesn't mean that these oil and gas assets remain in the ground and then as I said independence EMP and national oil companies are the largest group of asset purchasers and stakeholder scrutiny is much more limited and just a final note and that just goes more broadly I think fossil fuels must stay in the ground but and there's a big but production decrease without managed reduction of consumption leads to economic and political turmoil as we see currently with the global energy crisis so sorry sorry I went over time sorry I didn't get to go into detail about our findings but happy to have a discussion during the Q&A and afterwards as well thank you thank you good afternoon everyone and thanks for like pronouncing my name right my name is Bala you can call me Bala I'm a policy advisor with ISD based out of New Delhi and today I want to talk about state-owned enterprises energy enterprises and I originally thought I can contextualize the importance of SOEs in India by looking at India itself but actually empirically these are huge firms globally in the sort of trends that you're looking at and earlier when the presentation from IEA showed like the sort of big change that's required one of the most rapid transition which was needed is in Asia in the coal sector and that's really sort of the scope of what I'm talking about today so we are looking at coal sector in India coal sector SOEs are locally they're known as PSUs and a slightly different take on how we approach the topic it's like as I've seen like throughout the discussion today we tend to look at the entry points to discussion for diversification faceouts or shutting down through the lens of carbon budgets policy scenarios being aligned with 1.5 degree centigrade but earlier in a in a discussion I was attending a question raised was on like what happens when you tell the countries that like you know this is a cap and often your stone vault and that was a similar perception that we received in India so we thought let's look at it from the financial perspective let's take the approach of well there is a huge financial risk diversifying is in your own interest and then let's see where that goes in terms of shutting down the coal assets and that's really the approach at this point I also want to acknowledge a key contributor in this project Dr. Rabinav Jindal who is with NTPC limited and has a PhD from IEM Indore moving on and this perhaps is a slide which is more internationally kind of like it carries which is on the methodology that we used so it's three three it's in three parts first is we've used an energy model and it's a it's called the green economy model and it had two scenarios we picked the BAU or a business as usual scenario and an aspirational scenario these scenarios were aligned with IEA's India energy outlook and the aspirational scenarios roughly aligned with a net zero in the 2060s which in turn is roughly aligned with what the government has promised so what this set out is basically the spectrum of energy consumption across fossil fuels under the two scenarios what we did then was to translate that to a firm level at a firm level if the consumption of coal were to be at a certain level in business as usual and another level at aspirational the difference between the two is basically what you can call a risk spectrum as in your source of revenue is going to drop if India were to follow a more aspirational pathway and through for this we relied on publicly available disclosures and a key metric that you'd see me sort of repeating a couple of times in the presentation is a cash flow at risk this is basically the difference in cash flows across the two scenarios but a key element that we also wanted to add is a diversification strategy it's well and good to say that stop doing something but when you meet with these stakeholders often the question is right then what do we do instead so there is not often a specific answer in of course very context dependent and what we did was a semi quantitative semi qualitative we basically did a bunch of discussions picked out a couple of options from what they have already stated whether it is political buy-in institutional buy-in and saw how that fit in in the wider scheme of things so this is a methodology this is a summary graph sort of the star overarching assessment and what it says is that across the long term which is over 30 years between 22 to 28 percent of the business is at risk the cash flow is at risk this is not a lot and that's because it's discounted at 12 percent that is the cost of finance is 12 percent so every 100 rupees that say NTPC has it needs to pay back 112 so if you factor that in it's been discounted and it's sort of summed up but really the big the difference in the cash flows at 2050 is tremendous and that shows that there is a need and there is a crisis and there is a definite need to act upon it let's sort of break this down further as we go along but happy to discuss on our assumptions or methodology later well coffee or like in the panel discussion moving on so I have picked for you know using the time well two of the SOEs one is coal india limited CIL so it's another acronym that comes around the other is NTPC limited in standalone these are huge coal enterprises CIL is probably the single largest coal miner in the world with 600 plus million tons of coal mine annually and NTPC has 60 gigawatts of thermal power assets just studying these is probably like equivalent to a very sizable portion of the global fossil fuel market starting with CIL so immediately to the graph that you can see that in the more aspirational scenario the big drop in cash flows happen in the medium term which is between 2030 to 2040 the other thing that you notice is also that it kind of stagnates in the business as usual scenario what it also implies the strength implies is that the diversification needs to happen now use when you have cash flows so that before the risks and basically when the cash flows draw you as a business you're insulated so this is and this also exemplifies the need to act now for a risk which might happen 20 years or 10 years later down the line and that's and we found it as an interesting and sort of a way through which we can engage with CIL when we point out this graph one of the things as with any business in India is doing now is just putting out a bunch of solar power plants and this is what CIL said as well CIL a coal mining company has said we'll put out you know solar power plants and that sounds well and good I mean no one's really stopping you what it implies is based on their sort of fairly low targets if we assume that they just sort of maintain their market fraction all the way market share all the way to 2050 they can essentially reduce nine percent of their cash flow at risk which is not too bad when you consider it's like from 28 to 19 percent what it also shows is that it takes a while for the revenues from solar power plants to really kick in which further emphasizes the earlier point I made about like you having to cross finance your fossil revenue to diversify and it might be see a might be setting up solar PV it can be anything else the business model is up for discussion but whatever it is needs to be done with the revenues that you have right now this this approach also enables setting a target beyond like two years three years but rather a 2030 40 50 and that is also a useful metric when you consider if they say like oh we are going to do this gigawatt that gigawatt when you say a 10 20 gigawatts it sounds huge but in India's context where you need to install 200 300 gigawatts in eight ten years it really kind of the scales throw you off moving on to the second one which is ntpc here you see that the grabs are immediately a lot more you know wonky that's because there are multiple factors at play here and that is because ntpc has already committed to 60 gigawatts of renewable energy capacity and that's sort of exemplary that's demonstrated in the fact that on the long term the actual cash flows are going up and eventually the risks are sort of like you know offset in the aspirational scenario with more of the renewables this this basically shows that well yeah of course you're on track and there is yeah there is like a cash flow at risk but the trend indicates that there are multiple competing factors a sort of small caveat here is renewables are very capital heavy and that they will start producing they start generating revenue much beyond our assessment period what it does allow us is to now talk about strategic decommissioning or accelerated decommissioning so we moved on from diversifying and being a non-cold business into a sort of energy business to now actually talking about reducing your cold business um what what it says is that um when you are running if we have a coal plant and you have sort of an operational feat of whatever 40 50 gigawatts at some point in the future the plant load factor or like the sort of viability of those individual plans are going to be very poor instead even if you were to assume that the plan the plans were to run at like a higher capacity you can set an accelerated decommissioning target and that becomes an entry point to discussing how a business as big as ntpc can start looking at phase downs of their thermal power assets and that is another sort of like a way we can look at diversification this brings me to my last slide and hopefully i'm within my time uh we have six steps and these are sort of pretty general recommendations the first thing is a net zero roadmap of course the terminology of net zero is up for discussion but it comes from a national context where there is a net zero goal and that is a policy landscape issues which is going to affect your business so start planning for that it's pretty basic the second one is for the businesses to do their own planning as much as we could do as like sort of independent policy advisors with publicly available data they probably have a much better institutional sense on their cost of finance their risk their assets so on and so forth the third and fourth points are aligned set a clean energy business and more importantly set the targets for your clean energy or your diversification business in proportion to your financial risks and the fifth one is built strategic partnerships which is very important and the last one is making your ambitions public putting it out there getting the market signals in and that is important for basically ensuring that the investments come with that i would like to complete my presentation thank you for having me here okay thank you very much my name is max i'm from lund so i will talk about petrochemicals and diversification and petro states see like that okay first i just make some points here the energy market for selling oil and gas is as you all know if we sort of seriously intend to keep the 1.5 or even the two-degree target is in seriously decline we will there will be sort of too much oil or gas left they'll have to stay in the ground this will probably come quite close today we suddenly seem to have forgotten that before before corona and before ukraine the oil and gas markets were both actually in quite decline this comes quite rapidly when you know we when you the projections for future demand declines then the prices will decline probably even quicker so we might not so we might see that once sort of ukraine war is over and the sort of effects of the corona has sort of come into a more normal stage we might again see a quite rapid decline in oil and gas prices but you never know guessing is quite difficult in this business but that is a problem has been a problem for a lot of acknowledge problem for a lot of producer states or petro states that i'm calling them here for at least the last 10 years they known that some of these sort of revenues they cannot really be trusted and the diversification is sort of as we heard in another session today one of the main strategies to do this to diversify the economy and diversifying downstream in petrochemicals is one of these strategies it's sort of the one i would argue most compatible with what they're already doing but perhaps not the best one in the long term and we can already see this in the ia report from 2018 petrochemicals was already projected to become the main market for oil and gas eventually as any the market for energy purposes will dry up and also this is not necessarily in line with the Paris agreement at all especially if we're counting for scope free emissions i mean the petrochemicals typically have relatively short lifestyles and will end up in the atmosphere in the oceans or in a incineration facility and if that is not managed or in the landfill then it will cause climate mitigation climate problems so our interest in this study which is ongoing is to understand which petro states and why do they engage in downstream petrochemicals investments i would just show you some of the statistics so far this is from a database OG database from 2010 to 2021 where i have selected a number of petro states here defined as over five percent of GDP of coming from oil or gas rents and we can see the ones that are investing quite there's a number of them investing then there's especially Saudi Arabia but also the other ones are investment and there's quite a lot of projects actually going on but i would quickly show the next one this is perhaps what is a little bit more worrying about this is the projections that were done before the Ukraine crisis that would change quite a lot where you can see the total investments in petrochemicals projected for the coming sort of 10 years and as you can see there is of course we have those that have access to markets and feedstock that China and India usually we do not call them petro states are not that dependent on oil and gas but they still have a lot of coal at least and then we have other countries like Iran, Russia, Indonesia, Oman, Malaysia and Egypt that are sort of could be defined as petro states that actually do have a large dependence and this is one of their sort of ways of mitigating the risk of actually losing out future revenues we can also see United States access to gas and also South Korea i haven't really understood why they are there but i'm going there in November so i might find out but this is sort of some of the things that we have seen and just to remind that if we combined all these we see them the total production of petro states going from around 2 000 million tons to 3 000 million tons and that is sort of simply not really compatible with any kind of future climate targets since these are quite long-lived assets that will keep producing quite long this is we try to combine all whatever we had and as you see on the that's the left side it's a percentage of GDP of gas and oil rents as you can see they're quite high in some cases for some countries and in this here we have also listed in the dots the production ratio of oil and gas combined and for some of these countries it's really high but usually several hundred years but that's mostly due to that they have collapsed like i think we have then it's way ahead that has basically collapsed the oil production due to other factors but as you can see the striped bars are the ones that actually are investing in petrochemicals with a planned expansion to 2030 so what can we say just some some thoughts of it we can see that several of these petro states actually do invest in downstream diversification and they do it nationally but we have also and i haven't shown you this but there are also a lot of international diversification strategies especially from the middle east investing in china and india in both refiners but also in petrochemical clusters we haven't really found the data exact to say how much of it is but it seems to be at least a fair amount of it also second not all petro states have the ability to expand it requires quite a lot of institutional capacity and quite a lot of trustworthy technical capacity so it's mostly the rich petro states that once i'd have amassed quite a lot of funds that actually are have the ability to do so and as we said saudi oman katar have been the first movers now it is projected it will be followed actually by gas countries and central asia uh iran iraq and russia well we don't know russia because this is was before the ukraine war and that would most likely change russia would most likely not at all have any petrochemical investment that's one of the things that russia the ukraine wall has changed the other one is actually the value of gas has suddenly gone up and we're actually beginning to see a true international spot market so we might actually have some divestment away from the plans for using gas to petrochemicals might actually be gas to energy instead for replacing the russian gas some quick uh there concluding thoughts okay growth in petrochemicals is still a blind spot in climate policies uh it is really not talked about when we're investing in petrochemicals uh another thing that also is quite clear is in a centralized petro state logic where you have lots of this used to dealing with these huge projects like oil and gas exploration are then usually complementing it with a petrochemical cluster fits well with what you can do and what you used to do diversifying in other means of the economy like liberating the economy or opening it up for other things is much more politically sensitive and riskful so it fits well with what they can do and what they used to do government involvement is quite strong these are big projects and that's not only from domestically it also from internationally I mean I'm I'm an advisor to switch export credit agency in another paper I found with fear that actually we sweden also supports petrochemicals clusters in some parts of the world or have done at least through the export credit agencies which is also quite common it's as I said it's a climate blind spot and the worst thing is that actually few alternatives for this is being pursued so far I mean there are very few alternatives being for petrochemicals like non fossil feed stock or even end of life mitigation policies so far there are technical possibilities but they're actually not yet being followed am I over time now I have nothing more to say do anyone else have I have Pemex is going to tell me if they invest in petrochemicals I promise that's a cue to the next speaker thank you well yeah I am part of a CI based in their Latin America office in Bogota and Colombia so really quickly quickly I'm going to speed run through the first few slides because we've heard a lot about diversification already basically distinguishing this between national oil and gas companies and international oil and gas companies national oil and gas companies are expected to provide a lot to national economies they're expected to provide energy security expected to provide employment expected to provide technological development and to bring technology transfer and sometimes they're used as political tools so basically they are expected to give out a lot meanwhile international oil and gas companies are expected to adapt are expected to react to price movements to international markets and to basically consolidate as a shareholder pressure guides their decision making so the literature overall has already addressed the difference and I guess that balancing state mandates and shareholder demands achieving energy security and this technology and unemployment importance is one big difference that that national oil and gas companies face face for this reason the diminishing or possibly the diminishment of oil and gas demand might be an existential threat to them because what's going to happen how will they provide all of this without the revenues from oil and gas and what does that mean for their diversification strategies just a quick note when I speak about diversification I'm speaking about unrelated diversification because in order to mitigate many of the problems associated with keeping focus on oil and gas can only be addressed if you diversify away from it so I'm talking about moving into renewables into infrastructure development geothermal and not diversifying downstream depending carbon locking and really not moving away from any of the market risk or any of the technological risks that are associated with oil and gas so only one of the main concerns about this unrelated diversification is that especially for oil and gas companies it's not expected to bring in huge profits in the short term so it takes a little bit of time to adapt to these new sectors and it's one of the challenges that they might face into the future our work especially is focused on Latin America national oil and gas companies and something to highlight just early on is that even within the region the companies are very different from one another so there are so there are the ones that are very intensive in their emissions per barrel of oil produced and there are other that are less intensive on the same hand some of them are barely replacing their production by adding new reserves so YPF in Argentina Petroquador obviously in Ecuador are barely making up for their production meanwhile Petrobras in Brazil and Ecopetrol in Colombia are adding a lot of new reserves to make up for the production they are adding so Petrobras and Ecopetrol are likely to have more sustained production into the future meanwhile Petroquador and YPF are at risk of being one of those first losers of the energy transition so we would expect for YPF and Petroquador to have more urgency to diversify because they are more at risk Petrobras and Ecopetrol however we would expect them to take a back seat because they are adding a lot of production they are not as emission intensive however on the other hand this means that they have a lot of time to plan for a more thorough energy diversification or energy transition strategy Petroquador and YPF are already struggling with their oil and gas assets so they might not have enough time they might not have enough resources to really develop diversification strategies so unfortunately we do not have any companies in this area right here where you're adding a lot of new reserves you have a lot of time to work on this and you have a lot of emission intensity that makes you a little bit urgent so basically what what we're doing in this study that's just an exploratory approach to to these strategies is to look at these four companies Argentina, Ecuador, Brazil and Colombia and basically figure out if they are following this approach or they are following what their context would would say about the currency to start moving already by looking at business plans, policy documents, press releases from the government and so on and what we have found is that out of the four only Petrobras and Ecopetrol actually include unrelated diversification as part of their long-term strategies Petroquador explicitly said that they are not interested in that because they consider themselves to be working towards an ecological transition in which they produce energy sustainably I'm not here to judge but that's what they said YPF on their hand they address the importance of diversification but they do not include it in their long-term strategy however when we look at whether CAPEX is actually allocated to these strategies we see that there's no company actually putting any CAPEX into it when they talk about CAPEX they talk about CAPEX to decarbonize current production so they kind of mix up diversification with decarbonization and there's actually no money allocated to diversification as of yet in any of these four companies however we've seen that YPF in Argentina and Ecopetrol in Colombia have used some CAPEX towards diversification outside of what their actual strategy would suggest so YPF just very recently opened up YPF Lithium based on the current booming crisis of Lithium and the government's interest in developing that industry and Ecopetrol bought up ISA which is a Latin American Electricity Transmission Company that operates throughout the continent however none of these decisions were included in their long-term strategy so it seems like they are just they took advantage of specific market opportunities to make those decisions whether any of these companies has identified any potential new businesses they would be interested in only Ecopetrol has done that however they have been very very vague they list renewable energy hydrogen critical mineral for a transition they're still very open basically to everything so there's not really a selection of what they're interested in they basically have listed what everybody's already talking about so there's not really much work done there either so so far we have categorized what we have found in in these four companies in basically two diversification approaches not even strategies but only approaches toward diversification one of them is being opportunistic and assessing every every opportunity that you get in a case-by-case basis being state-owned companies this basically means that they are very dependent on government mandates on how policies going to shift decisions so they are dependent on political cycles they are dependent on political stability and they are depending on media pressure for the government to showcase that they are at least working in the right direction even if they are not doing so on the other hand we have an approach towards more of a corporate discipline status in which they identified diversification as part of their long-term brand both petrol, brass and Ecopetrol have mentioned that they are shifting away from being an oil and gas company into an energy group even though they have not done nothing to to actually do it but they are changing its its names and they do so with a more much cautious approach so they have no rush to decide right now in which to which new sector they want to diversify into they're basically open to everything they are waiting for the right market conditions in order to make that call and this this is very much in line with what many IOCs are doing in which they don't want to share too much about what their strategy is in the long term because they are depending on foreign capital in order to to keep operating their current oil and gas assets so they don't want to create too much instability by saying they are moving completely out of oil and gas very soon and the reason why we think that these approaches are being preferred is that out of all the requirements and implications of both operating within their legacy oil and gas assets and the new businesses they could be interested in the four main things that they are dictating their energy energy transition plans are maintaining access in international capital markets so that's one of the reasons why they want to diversify into being energy groups another one is keeping domestic relevance so keeping the social license to operate it's one of the reasons why they are investing in decarbonization and not diversification in order for them to say that they are decreasing emissions without risking any of their revenue and finally they have a risk management approach we have seen that many of these state-owned companies are now really operating like international oil and gas companies they have really really strict governance methods their executives basically operate as if they were running a private company so they are using using some of those same approaches in order to decrease risk and that means not making any radical decisions and what they are missing out is basically quantifying what would be the impact for the labor force because new sectors probably won't be as labor intensive as the oil and gas sector is so that's not being taken into account they are now developing technical capabilities that are needed to access these new sectors and even though they are open to any new possibility to diversify into they have not set up business units that are actually trained to understand those new sectors and to really uh yeah have a sense of how they're going to take advantage of those opportunities so yeah thank you very much sorry for a little bit over time all right thank you so much Patricio and the old panel for great presentations so we have time for a round of questions and thank you so much for helping with the microphone please tell us who you are and try to keep your questions short and we'll take a few ones starting at the very back thank you very much for your very interesting presentations this morning Christoph raised a question which is are high or low fossil fuel prices good for the energy transition and he said high prices are not good and I have a different answer I'm saying it depends on who you are and what you're looking at and my question for you is you're all thinking about diversification getting out of fossil fuels it's a declining industry in in that setting a moment of high prices is a moment when you have cash at your hands that you could be investing in diversifying and right now we're seeing such a moment of high prices and I imagine that in the cases that you have studied that reflects itself somehow so I'm wondering if you are seeing any actors that are wise enough to use those high prices and the extra revenue the windfalls to put it into diversification and a long-term strategy thanks all right thank you for that one show of hands again questions yes let's continue from the back hi Fergus Green from UCL a question for Matteo so I think it's really important research and I really really like what you're doing I just have sort of one question slight caution right so you know because the big companies themselves are also saying in response to for example like what Shell's saying in response to its appeal in the Milio Defensi case it's basically saying well if we're forced to reduce production right well someone else will just come come in and take you know take our leases and produce and and like what your research shows is clearly that's true but I suppose my question is so so I suppose the response to Shell I think would be and to that argument would be that the companies that are replacing them probably have a higher cost structure and so there would be a market effect and I wonder if you're you're looking at that or whether you might even if you don't have data on that which I imagine will be hard to get whether you might at least sort of make that that point and acknowledgement because otherwise I just sort of worry that Shell could take that research and say oh see um yeah it doesn't matter what we what we do and I suspect that these smaller companies that are coming in won't be able to produce at as lower lower cost as as Shell and that would ultimately you would expect have a market effect you know equivalent to a sort of a small supply restriction so I'd be really interested in your thoughts on that and whether you might consider that all right thank you for that question a new show of hands one or two more yes woman here at the front here yes hi hi yes my name is Adriana I work for climate strategies and I'm actually leading a project at the moment on oil and gas transitions so I was very interested in your presentation particularly regarding and divestment and I wanted to maybe ask if you can touch on a little bit more on their rationales for divestment of oil and gas companies because you didn't have time during your presentation and if you can emphasize the North Sea I would appreciate it but all other cases are interesting thank you brilliant and final one gentleman here in the front hello I'm Hugh Lee I'm a consultant in the international coal industry what's the point of divestment isn't it just better to tell the companies they've got to stop producing okay so Mathieu do you want to start with answering the questions directed to you and then the panel you can pick up on the others or if you also have something to say to to those questions but Mathieu there was a question of is there a market effect of divestments due to new owners moving in and what are the rationales for divestments and perhaps we can also say something about state owned enterprises rationales later but Mathieu please start yeah thanks for all the questions I'll start with Fergus your question no we haven't looked into that is the short answer but it's it's it's quite interesting that you that you put it that way because if you look at for example those divestments in the in the North Sea especially in the UK then it's basically those mature basins that are being divested by you know the shells of this world and BPD international oil companies and you have these specialized companies that come in and that say okay we're gonna we're gonna exploit the fund we're gonna exploit this reserve until the very last drop and they they're these specialized companies that say well we we we can do this but of course yes indeed that comes with a higher cost but I mean to my knowledge I haven't seen any effect in terms of them being able or no longer being able to to to sell this this oil or gas they're they're actually succeeding in that but it's it's an interesting point and and of course it's it's it's the important takeaway or or something to include in in our work yes the lady here climate strategies and and the rationale behind it yeah well it's interesting that you raised that I'm sorry I didn't have time to to go into that unfortunately you don't have too much time now either yeah but you can keep talking about coffee but a short answer please yeah but I mean it's interesting because the rationale of these companies two examples shell MVP in the past couple of years they had to both these companies had two big divestment programs multi-year divestment programs had nothing to do with climate change it all had to do with acquisitions of other companies and basically when they engage in these acquisitions I mean shell bought a bg group for 53 billion us dollars and then they have to cut costs and then they just start selling off acids worldwide so it doesn't have anything to do with that shell actually does final point about that it's exited from the Philippines and Egypt and there they've used the climate frame or there they've said well we're divesting away from these assets unfortunately these assets are still being developed and produced by those companies that have bought them and then the question about what's the point of divestment I mean if this is the outcome that they're continuously produced these assets then there is no point to it all right thank you very much Bala you've been looking at cash flow so this quite you'll take on if prices are good or low for diversification have you seen any of that already sort of I mean also cold prices have been affected globally in the energy crisis although the increase has not been as large as for oil and gas perhaps so have you seen any evidence there cool I like to answer the other question on the point of diversification yes because that's a super question on the point about you know using the windfall at least and I personally speak and I feel my expertise is with the Indian state on enterprises that has been a windfall tax so the government has absorbed the sort of revenues and they have sort of like you know reduced the prices at the other end that said whenever these entities like which have strong sort of revenues all of the seven major SOEs in India have indicated to various extent an interest in also investing in renewables I'm not saying they are moving away from their fossil business but they're expanding their presence to also cover the renewables business and they come up with things like oh we are going to be a clean energy company or you know we are going to be coal plus or oil and gas plus and there has been some sort of like momentum and that's the short answer I can go into details on like which areas and you know how it works but at least in India I see there has been an interest to move to the renewables I also want to answer the question on the point of divestment I can think of four and just wanted to say that the first one is particularly crucial in India is coal employs 15 million people give out a you know you can run the numbers and coal India limited accounts for 80 to 90% of coal production so you're looking at about 10 million people's livelihoods here and if that business were to run off that is a tremendous just transition issue and that right of the bad is a strong enough reason to sort of manage the divestment the second is these entities are very profitable because of their history of operating in the country for 100 years and India is not an easy country to work and they bring a lot of revenues because well they are owned by the government and they are profit making entities which bring in a lot of revenue the loss of revenue or like the money that it brings to the government is a big hit and that's a problem the third sort of reason for divestment is that if India were to move into clean energy or other countries as well these entities can get money or like can raise capital at very favorable rates because they are government entities which with lower risks and government can sort of underwrite the risks that's the third reason the final one is energy security if we see a future where the energy market in a country as because India is completely privatized that poses an energy security question and you can't have a clean energy future without a state enterprise having some sense of the country some sense of security these are my answers sorry for the long response yes thank you so much Max you said something about actually we're perhaps seeing less diversification now some states are moving back towards using gas for energy instead of diversifying do you want to say something more to that or is that about what what you have to say that that that was merely speculation actually but on the question raised by the first gentleman good prices high prices good or bad I don't think it's about the prices I think it's more about the political narrative that you can use when you have high prices that now suddenly gas is a national security issue if you look at who gains from the crisis in Europe I mean I guess Equinor and Qatar has gained I think the largest gas trader Uniper has gone bankrupt it's owned by the German state now so I mean it's too difficult to say it's too early to say all right and Patricio yeah on that same question I think that at least in Latin America within Latin America um first of all this current price boom followed uh completely I mean during the pandemic prices were really really low so I think that companies I wouldn't be sure that they have a lot of money or a lot of cash right now many of them were hurting during the pandemic so a lot this probably was very well received within them um the other one is yeah the the political narrative within Latin America there have been a change of government in Chile uh in Colombia um let's see what happened in in Brazil so this high uh all price environment also means high gasoline prices environment so using uh those revenues to diversify away from oil and gas instead of managing uh fuel prices or gas prices at the pump might not be the wisest political move at the moment so that those may be one of the few reasons why we have seen anything like that happen in Latin America at the moment and Andrea you had a final point just coming back with what Patricio just said in the case of Mexico for example I think when we see because he's a net importer and when we see oil prices there are more than $100 per barrel actually the government have to subsidize and that subsidies are much higher than what is making for those high prices so it depends again country by country but but in in the case of Pemex it's hard to to to see examples of actually this moment of high prices driving more diversification I actually have more interesting examples from Chile for example where I'm from which of course is not a fossil fuel producer but it has more interesting governance mechanisms how to deal when we see very high prices of copper and and using those and avoiding the temptation of not using those extra revenues in in in not diversification and just wanted to add one one idea that I find super interesting in the case of of of Pemex and other NOCs in Latin America that is them from the perspective of more the governance structures and the roles of investors and and what can be the drivers for diversification of what kind of factors can push in that direction in the case of Pemex it's not a publicly trade company right so in that case it's super interesting to compare with the case of Ecopetrol in which we do see a major role in the case of shareholders maybe pushing more in that direction right in the case of Pemex we have that that example that I explained in the presentation in which we see actually the state playing this role of an implicit a warrenter and investor kind of trap and keep buying Pemex debt bonds sorry and and and right then the question is to what degree in those cases taking into account these different structures right and who are the investors in each different different NOCs can push more or less to different investment investment plans so yeah looking at those different I think it's very interesting all right um do we have is there someone who knows they have a very short question if you're not confident that it's very short I'm not gonna allow it okay no one's raising their hand you all have long and complicated and very interesting questions I'm sure and you can ask those over coffee that we're gonna have after this I think this was a tremendously interesting session we're learning so much about the intricacies of governing especially national oil companies where we perhaps would hope that there would be strong political narratives to support the transition in these countries yet we're seeing that they're the ones buying up divested assets from from international oil companies so how should we understand that conflict how can we ensure that these national oil company companies move ahead in their transition I think that's some some you know we still have work to do as researchers that it's always good that we can ask you questions but I want to thank the panel for great presentations and thank the audience for being here and asking very interesting questions and I'll see you over drinks later