Houston: From Oil and Gas Capital to Green Energy Hub?
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With over five hundred oil and gas exploration and production companies and more than 4,000 energy related companies, Houston has been called the oil and gas capital of the world. Indeed, refineries in the metropolitan area, alone, produce over 2.6 million barrels of crude oil per day, according to the Greater Houston Partnership.
But as the energy transition gathers momentum, what will be the future of this region that is so heavily dependent on fossil fuels?
McKinsey & Company is betting that the city, which grew to prominence as the hub for the “gusher” economy, can reinvent itself for the low carbon, energy-transition era. The global consultancy recently announced the opening of what it calls a “global decarbonization hub” in Houston.
The company plans to invest over $100 million (USD) into people and insights to partner with regional leaders and clients to catalyze the energy transition, drive asset decarbonization programs, scale climate technologies such as CCUS and hydrogen, and build relevant new businesses in the energy sector.
In this interview, Filipe Barbosa, Senior Partner at McKinsey discusses the role of the company’s new decarbonization hub, why he believes that Houston is poised to take a leadership role in the energy transition, and his views on the year ahead for the industry.
Diana Davis, Oil & Gas IQ: What is the reasoning behind your decarbonization hub? Why are you setting it up now?
Filipe Barbosa, McKinsey: We think this is a matter of the right time and the right place.
In Houston alone, we have done over 50 energy transition, circularity, and sustainability-related engagements this year. They span from everything trying to build a clean energy business, through to technical engagements on hydrogen, power and CCUS capital investments.
Clients are coming to us with questions such as how to build a green business within a large corporate, or how to build a hydrogen hub that links to ammonia and domestic demand, or how to rapidly decarbonize their assets. We are getting a flood of tough, but exciting questions from our clients.
In a larger context, the Gulf Coast region is responsible for 10% of all the United States’ carbon greenhouse gas emissions. Globally, the US is second only to China as the largest source of GHG emissions.
Put in that context, the emissions in this area account for 3% of global emissions.
Houston also has an extremely important business community. There are over 25 Fortune 500 energy company headquartered in Houston. They make decisions and control assets across the world and, thus, influence emissions globally.
Our core belief is that if the world is going successfully decarbonize, Houston and the Gulf Coast region must lead.
Diana Davis, Oil & Gas IQ: What would that leadership look like?
Filipe Barbosa, McKinsey: We believe in what we call sustainable, inclusive growth. That means we must find a way of producing clean, affordable energy in a format that doesn't harm the planet.
The truth is that right now the world is not on track to meet its decarbonization goals. We need to accelerate.
Hydrogen is going to play a key role in helping that acceleration. It might be up to 20% of the decarbonization puzzle because there are a lot of industries that are hard to decarbonize using other technologies, such as the manufacturing of chemicals, steel or ammonia, and heavy-duty transport.
We see Houston and the Gulf Coast region playing a leading role in hydrogen production. The region already has one third of the world’s pipelines for hydrogen. It’s already got an enormous installed hydrogen producing base. Today, it’s gray hydrogen but tomorrow it will be blue and green hydrogen.
Companies in the region know how to build the capital projects. They know how to produce hydrogen and operate complex plants. In addition, Texas and the Gulf Coast region have significant advantages with respect to both the production of renewable energy and capability to capture and sequester carbon.
In the coming year or two, we think we will see an acceleration in big, clean hydrogen projects. There is likely to be a massive buildout on this coast because of the combination of expertise and existing infrastructure.
We’ve worked Greater Houston Partnership (GHP), which is the local CEO business forum, on the impact of the energy transition on the Houston economy.
We found some spectacular numbers. If we do nothing, under current energy transition scenarios Houston could lose between 300,000 and 600,000 jobs by 2050.
If you think about the number of people that those jobs support – 1-2 million people - that would be traumatic. But if we flip it around to look at where we can win – renewables, hydrogen, CCUS, energy storage, or advanced materials – you realize that we have some real advantages here.
We believe that we can offset this potential job loss, add another half a million new jobs to the region and play a leading role globally in the energy transition.
READ: SPECIAL REPORT: Planning for the Organizational and Operational Impacts of Decarbonization
Diana Davis, Oil & Gas IQ: I understand you're going to be investing over $100 million into driving asset decarbonization programs and scaling climate technologies. Can you talk me through what you're going to be doing at the decarbonization hub?
Filipe Barbosa, McKinsey: There are a lot of intellectual and technological challenges that need to be solved to achieve decarbonization. We’re going to accelerate our investment into talented people, and the knowledge and insights that our clients need. We will also continue to do select, high-impact pro-bono work to ensure that the region leads in this new energy world.
We want this region to be a magnet for talent. Decarbonization is one of the largest challenges on the planet; we need the best and brightest of all sorts of people.
We need traditional consultants. We need engineers who understand certain technologies. We need geophysicists who understand geology. We need renewable energy experts. We need data scientists and artificial intelligence experts.
We’re investing in attracting the right set of diverse talent that can help our clients solve these problems.
We want to plant a flag and tell the world that the future is going to happen here.
Diana Davis, Oil & Gas IQ: In what areas are you seeing the greatest demand from your clients with regards the energy transition? You touched on the organizational and technical challenges. Is there one area that seems to keep popping up?
Filipe Barbosa, McKinsey: The challenges are evolving. A year ago, the focus was on developing strategies. What’s important? What’s the pace? What’s going to win? How do I play into this while meeting the needs of my stakeholders?
Over the past year we reached a pivot point. Now people are asking for help organizing to action. They need to deliver on those strategies.
The type of work we're doing with clients now is the very real work of accelerating the decarbonization of existing assets.
We’re also working for multiple clients and consortia on how clean hydrogen can accelerate this. They want to break ground in two years.
Diana Davis, Oil & Gas IQ: How do you help them get started?
Filipe Barbosa, McKinsey: Part of what we do is help clients to crystallize insight. Then it’s about organizing for action.
The pivots that companies are currently making are not trivial. They are going to cost billions of dollars per company. The executive team, the board, and the shareholders, must believe that this is a good idea.
We can start off with base supply and demand projections and baseline gas emissions, or carbon profiles for different assets. We focus on getting the core insights that the decision makers need to have to organize and motivate action.
What's the organization I need to build this project or build this new business? How do I structure partnerships? How do I accelerate decarbonization of my assets?
READ: How the Russia-Ukraine War Will Accelerate the Energy Transition
Diana Davis, Oil & Gas IQ: In the near term we've got a very uncertain and volatile energy market. What do you predict is in store for the industry in the year ahead?
Filipe Barbosa, McKinsey: I think there are few times in history that we have ever faced this level of uncertainty.
CEO’s and board members of oil and gas companies, are thinking very carefully about investments. Oil prices will likely remain high next year, but we have huge uncertainties. We can’t control geopolitics or macroeconomics.
Before COVID-19, we did an interesting analysis that looked at the profits and the returns of the whole oil and gas industry value chain from private equity through to oilfield services, national oil companies and the big oil companies.
We looked at the returns these companies generated over a 30-year period versus the S&P 500.
What we found was that in the first 15-year period, the industry beat the S&P 500 by about 3% a year.
However, in the second 15-year period, the industry average was below the S&P 500 by about 3% per year. This was a period where, at times, we had oil above $100/barrel. This means that the industry was destroying value during this period.
This was a problem before COVID-19. But then a global pandemic comes along, and everything falls off a cliff.
As demand has come back, shareholders and investors are requiring that the industry be much more cautious about their investments. It’s a challenging predicament because global economies and oil companies have not been investing enough into future production, at a time when demand for energy, and for fossil fuels, is high.
So, on the one hand you have shareholders and investors in the industry who have seen subpar returns and are demanding more cautiousness about investments. On the other hand, you have geopolitics that are leading to huge uncertainties and large demand for all fuels, including dirtier fuels such as coal.
While the demand for dirtier fuels such as coal has gone up in the short term, I think the conflict has made people realize that we need to increase our use of renewables and accelerate the energy transition. That makes questions around capital investments in the oil and gas industry increasingly challenging as the energy transition accelerates.
I think 2023 will look like 2022. It will be a cautious year where people are doing their best to respond these circumstances of an enormous uncertainty, and of unprecedented change.
As we go beyond that, I see the energy transition accelerating and more capital will be deployed - both by new entrants and by existing incumbents - into various technologies that support the transition.
At the same time, many decision-makers have become a lot more pragmatic about the current and future role of hydrocarbons in the energy mix, as we all jointly strive for a world of sustainable, inclusive growth.
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