A Sustainable Future: Rob West, Thunder Said Energy, on What the Russia-Ukraine Conflict Means for the Energy Transition

Will the energy transition — now complicated by the drive to diversify energy sources away from Russia — lead to a full-blown energy crisis? Listen to Jason Mitchell talk to Rob West, CEO of Thunder Said Energy, about what’s at stake for the energy complex as we begin this diversification, the first and second order impacts of the conflict, and the trade-offs that we may face between energy security, decarbonisation and price affordability.

Recording date: 14 April 2022

Rob West

Rob West is the CEO of Thunder Said Energy, a research consultancy focused on the energy transition. Founded in 2019, Thunder Said Energy’s research examines different energy technologies, their economics, their technical challenges, and companies that can drive decarbonization. Thunder Energy’s clients include public markets investors, private equity investors and multi-national corporations that are themselves looking to reach net zero. Prior Thunder Said Energy, Rob was the Head of Global Energy Research at Redburn.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Hi everyone. Welcome back to the podcast and I hope everyone is staying well.

When talking to people about the energy transition, the thing that always comes to mind is the evolution of that transition, particularly in the wake of the tragic Russia-Ukraine conflict. Indeed, we’re already witnessing a substantial acceleration in the clean energy transition through the EU’s REPowerEU plan.

But, there’s a catch.

The transition will now have to coexist alongside a radically ambitious diversification away from Russian oil and gas supplies. That has consequences. As you’ll hear in this episode, cutting oil imports hurts Russia more than Europe. But cutting gas hurts Europe more. And when over half of headline inflation in the Euro-area can be tracked back to the rise in energy costs, the ECB’s warnings about greenflation, climateflation and even fossilflation are now a painful reminder than transitions are seldom simple.

So the point of this episode is to pose some uncomfortable but necessary questions: will the energy transition, now complicated by the energy diversification away from Russia, lead to a full-blown energy crisis? How are policymakers going to balance decarbonisation, price affordability and energy security? And do we need to consider more a pragmatic energy approach – call it the good over the perfect— to achieve energy security and price affordability at least in the short-term?

It’s why it’s great to have Rob West from Thunder Said Energy on the podcast.

Rob brings a clear-eyed and sometimes sobering perspective to the arc of the energy transition. We talk about what’s at stake for the energy complex as we diversify away from Russia, the first and second order impacts of the conflict and the trade-offs that we may increasingly face as policymakers choose between energy security, decarbonisation and price affordability.

Rob West is the CEO of Thunder Said Energy, a research consultancy focused on the energy transition. Founded in 2019, Thunder Said Energy’s research examines different energy technologies, their economics, their technical challenges, and companies that can drive decarbonization. Thunder Energy’s clients include public markets investors, private equity investors and multi-national corporations that are themselves looking to reach net zero. Prior to Thunder Said Energy, Rob was the Head of Global Energy Research at Redburn.

Jason Mitchell:

Welcome to the podcast, Rob West, it's great to have you here and thank you so much for taking the time.

Rob West:

Hello, thank you very much for having me, Jason.

Jason Mitchell:

That's great. I'm really excited in particular about this episode, so let's jump in. Look, Rob, we have a ton of questions to chew on, but I'd like to start with some scene setting. The Ukraine conflict is a tragic, terrible, terrible event, and we've seen a universal pushback in many different forms. But can you start out by putting Russian oil and gas supply in context for us? And what's really at stake for European and global energy markets, given Russia is no longer a reliable source of energy supply for the Western world?

Rob West:

Well, if we're going to start with scene setting, then I think we should start with scene setting. For that, maybe we need to go back a little bit further to what the numbers looked like before Russia. Back when I was a oil and gas analyst I would have an oil model or I would have an LNG model, but it's really only in the last six months that I have what I call an everything model, which is adding together all the world supply of coal, oil, gas, nuclear, hydro, wind, solar, to build a total market balance for all of global energy. The way that looked, we were about 2% light going into 2022 and that under supply was going to deepen to about 10% light by 2026 and stay at that humanitarian crisis level of energy shortage through 2030.

Rob West:

I actually think that's part of the reason that Russia has timed its atrocities for now, is because it's a time when it can weaponize its energy supplies. In terms of the numbers, generally if you want good rules of thumb whatever the commodity, you should assume that Russia is about 10% of the world supply and about 30% of Europe's supply. The numbers are a little different commodity by commodity, but higher in gas, a bit lower in coal, similar for metals like nickel or materials like graphite. This is going to ripple through every supply chain in the world and turn it all upside down.

Jason Mitchell:

Let's stay on this picture of global energy markets. If direct sanctions or self-sanctions frankly, of Russia put as much as I've heard four to five million barrels a day, you tell me if that's accurate, but if it puts that much oil and products exports structurally at risk, how do you see that gap getting filled in the short term?

Rob West:

I don't. I think you can't fill that gap with anything in the short term. What you can do is you can find ways of cushioning the blow by choosing what demand you cut. The analogy I'm afraid I would use is you're going to get punched, you can at least choose where you get punched. I've had conversations with policymakers about this. I mean, it's amazing if you could look just back to April 2020, we were in a world that cut 20 million barrels a day of oil demand voluntarily through behavioral changes linked to the COVID response. We could take out all of Russian exports, just about eight million barrels a day if we wanted to. If we were brave, if we decided, look here is the least bad way to do this. There's a combination of measures, things like lowering national speed limits to 50 miles an hour, making ride sharing and public transport effectively free, through to selecting the industries that are frankly, least strategic and deciding look, of all the things that we can do to reduce demand, these are least painful.

Rob West:

I think to get to that point where politicians are brave enough to do that, it's going to require prices to spike to a level where we have no other choice but to do that. I think if politicians are too proactive with this, there's a danger that we lose the political will. My base case scenario of what's going to happen is we're going to see prices spike to $200 a barrel this summer and then reluctantly, we have no choice but effectively a raft of demand sanctioning measures.

Jason Mitchell:

There are a lot of things in there that I want to put a pin in. Prices, let's come back to it. Behavior change is fascinating and I definitely want to come back to that. But let's talk about flexibility in the system, or the lack of flexibility, I guess, again, in the short term. Can OPEC come to the rescue despite what seem like diverging messages from the UAE and Saudi Arabia? What about Iran or the US oil supply response?

Rob West:

I think it's a question of can or will. My sense is there's a feeling among some OPEC countries that until last year, the message they've been receiving from the world is rollover and die. This is not to be a champion of OPEC, or even an OPEC sympathizer, but things in this industry take 30 years in terms of the life of these projects. There's this real mismatch between wanting the supply to be there and be available when we happen to want it, and then telling the companies and countries behind long life projects, over the long term we expect you to roll over and die. I know in my day job as a researcher focused on the energy transition, there are things that companies in this space want to do like carbon capture and storage, blue hydrogen, nature based carbon removals. These are all really good things to do, they're low cost, they're technically ready. They can help meet the energy needs of the world and take out all the CO2.

Rob West:

I think one of the push backs that we've seen against some of these options is, no, they perpetuate the use of fossil fuels, we want you to roll over and die. How dare you even suggest it? You're not invited to COP26. I'm not trying to be controversial, say things that inflame people, but I think if I were the head of a petrol economy, I'd be looking for long term reassurances about, okay, we want to work collaboratively and meet your energy needs over the long run, take out all the CO2 and do it in a way that's beneficial to all of us. One of the models that I'm really fascinated by is, could we see a return to long term contracting, the guarantee security of supply in the energy transition and help manage some of these uncertainties?

Rob West:

I'm fascinated by that, because it would be a really strange day where we wake up to a press release from a oil and gas company signing a 20 year, take or pay, fixed price contract with a European sovereign. I really don't know what the share price would do on that day, but I think it's things like that that I would be looking towards in order to see big commitments for big increases in supply on a short, medium, long term basis.

Jason Mitchell:

I feel like this takes us into the energy trilemma, because you've talked a lot about these points. I know that trilemma has been around for many years. I feel like it's fascinating that it's particularly activated over the last 12 months in particular, i.e, 12 months ago. Using the energy trilemma as a model, the point of that triangle was aimed at decarbonization, particularly going into COP26 and seeing the momentum behind net zero commitments from sovereigns, from corporates, from investors. Then it shifted to price affordability in the fall, ironically around COP26 with the volatility in the energy markets and now it firmly points to energy security.

Jason Mitchell:

I picture this flywheel that has just accelerated in its spinning. How do you see policymakers balancing and reprioritizing these three objectives in the short and medium term? The point of the trilemma is that policymakers, I've always thought, can't prioritize all of these objectives simultaneously. But we're trying to see that weird balance around, let's call it price caps on affordability, still decarbonization, in fact, potentially an acceleration around that, as well as a strategic diversification of energy sources from a security standpoint.

Rob West:

Well, it's a pretty depressing view of policymakers that they're like goldfish, you could only keep one thing in their mind at all times and bounce from crisis, to crisis, to crisis. I'm not going to get drawn into whether that's a good [inaudible 00:07:53] or not. But I would say from the research that we've done, you can do all three of these things. I mean, I have a fully modeled roadmap to get the world to net zero. Zero means zero, there's no funny business, there's no cheating. This is how to build a 100,000 terra-watt hour energy system with no net CO2. Average abatement cost $40 a ton, 90% of this using real technologies that are either at technical readiness level seven, eight, nine, mostly eight and nine.

Rob West:

I think what we've seen so far, if I was going to point a finger at policy people I've had interactions with, is this fantasy of the perfect derailing the implementation of the good. What I mean by that is you could take a theme like replacing coal with gas and you could say, "Okay, one MTPA of LNG is going to cancel five MTPA of CO2 emissions that would otherwise have come from coal," because burning the gas is about 60% lower carbon than getting the same energy from coal, half the energy in the methane molecule is from turning hydrogen into water in that CH4 molecule. It's not materially more expensive, especially if you do it right. The technology to do this has existed for better part of 70 years.

Rob West:

And yet one of the frustrating things that you might observe about this is no, no, no, no, 60% lower carbon, no good. We don't want that. I think part of 2022 might involve realization that having a 60% lower carbon solution is better than having no solution to a lot of the challenges that the world is now facing. Such as evil dictators raping and pillaging innocent countries for no apparent reason, or the ripple effects of food shortages or four billion people being priced out of the world and having to cut down their forests in order to keep themselves warm rather than using energy supplied by sophisticated modern energy industry.

Rob West:

I think it is possible, you can get to net zero in a way that meets the varying goals of the trilemma. Maybe a silver lining might be that we get more practical policies out of this horrible mess we find ourselves in between now and 2030.

Jason Mitchell:

Can you go into that? What do you mean by practical policies in the context of that trilemma model?

Rob West:

Well, I think the way I would spell it out is to go into the model of if I take the 300 different technologies we've looked at and the relative costs. Today, the world's about 50 billion tons a year of CO2. If we did nothing by 2050, it would be about 80 billion tons year of CO2. The options exist to take out about 200 billion tons of CO2. So you could decarbonize the world two and a half times over. The question is, what combination of these abatement options do you pick? The first thing you can do is to say, "Well, I'm not going to pick any of them, because none of them are perfect." I'm being a bit inflammatory there, but that's effectively what we've done, or at least we haven't picked enough of them. And as a result, this year will be a record year for CO2 emissions and a record year for energy prices, the worst of both worlds.

Rob West:

The model I would favor is take the lowest cost combination of things. If you think the average American is about 20 tons of CO2 emissions per American per year, the TSE roadmap to net zero costs an average of $40 a ton. You multiply through and that's about $800 per American. It's about 3% of the average person's disposable income. You have to go door to door in Nebraska and tell people you're taking away 3% of their disposable income every year forever without getting shot. That's tough, but it's a lot less tough than doing nothing or choosing an option that costs $400 a ton and is 30% of the average income of the average person.

Rob West:

What would go into that roadmap? Well, about 20% of the heavy lifting would be done by renewables, about 20% would be done by switching coal to gas, for the reason I mentioned above. About 25% would be done by efficiency technologies, finding ways of doing more with less and those get really granular. Everything from electric vehicles through to axial flux motors or whatever you want to pick. Then you'd still have conventional fossil energy in that system. You just can't ramp non-fossil energy fast enough. As a result of that, I'd have about 85 million barrels a day of oil and 325 TCF a year of gas in that fully decarbonized energy system. I'd have to get all the CO2 out and that would be through a combination of carbon capture technologies and carbon removal technologies.

Rob West:

Really, the last one is the most important, the biggest bar in the whole waterfall chart. It would involve reforesting about three billion acres of the world and restoring nature. If you're in the environmental movement and you like nature, to me, that seems like the most logical and direct way to help nature is to help nature and you can pull CO2 out of the atmosphere in the process. That would be what I would consider a good, practical, realistic roadmap. I mean, I've glossed over a lot of the details there, but it's doable and I've modeled where the bottlenecks are. Really, I think the opportunity for investors is we need to find those bottlenecks and de-bottleneck them. Because when you can do that, you can drive the energy transition and bottlenecks tend to be things where prices go up. That is the other reason that's a fruitful, interesting place to explore for opportunities.

Jason Mitchell:

That's a really interesting roadmap. How do you think about it relative to the reaction we've seen so far in the context of the Ukraine, Russia conflict? I guess what I mean is if we back up a year, Germany was shutting down nuclear plants and building a natural gas pipeline, i.e., Nord Stream 2 with Russia. But now as this situation has dramatically and tragically changed, that European energy narrative is also shifting. It's both about decarbonization and energy security. The European Commission, I think last month, outlined plans to end reliance on Russian supplies by 2030, I think by two thirds by as soon as 2025, which is incredibly aggressive. You're seeing a change even in the rhetoric. Germany's finance minister even called renewable energy, freedom energy, which I thought was interesting. What's your read on how this changes and/or accelerates the energy transition towards the roadmap that you just outlined? What's the rhetoric and what's the reality that you've seen so far?

Rob West:

Well, there's a hundred different pieces and they all change. But the biggest change that I would separate out is what we say we want to do and what we actually can do. They're completely different things. I'll give you an example. We obviously want to ramp up electric vehicles. I mean, over the life of an electric vehicle, it's 80% lower carbon than a conventional vehicle. Nobody who focuses on the energy transition is in any doubt that we want to ramp up electric vehicles as much as possible, but can we? There are reasons to question whether we can. The first one is the energy payback is about three and a half years. You invest upfront in producing the lithium, the nickel, the graphite, the cobalt, all of the materials that go into the battery and that costs you energy. Then it takes about three and a half years of driving that vehicle around for its energy savings to repay the upfront costs of making the thing.

Rob West:

If you think about it in years one and two, accelerating electric vehicles actually makes you more short energy. In years one and two it costs you more energy than it saves. Just from an energy balances perspective, the faster we ramp them up, the more short we're going to be of global energy in 2022, 2023, those crucial crunch years. Likewise, there is only so much lithium nickel, graphite, cobalt in the world and we are going to see huge shortages of some of these materials. So much so that recent TSE research notes have looked at re-shoring the nickel supply chain or the graphite supply chain or direct lithium extraction technologies and who are the companies in those spaces that can help de-bottleneck those bottlenecks? But basically, this stuff becomes unobtainium for the next couple of years.

Rob West:

What I mean by unobtainium is that the only way to obtain it is to outbid somebody else. When you think about what that does to commodity prices, the answer is it makes them go crazy and also benefits incumbents who produce those commodities. This is a really interesting illustration that there are things we say we want to do and then there's being thwarted by reality. Really, what I think the job of an investor is, is to figure out where those bottlenecks are going to be and help people de-bottleneck them. There are things that I think are just going to fall away for the next couple of years. Things like electric vehicles, the ability to ramp solar, the ability to ramp hydrogen, the ability to build grid scale batteries. We might want to do these things, CCS as well, but they get harder and harder to do in this world that we're in.

Rob West:

There are other things that we might have been really negative on before, or might have been lost in the noise that we actually can do. Coal is the most interesting example of this. Coal, we have to get it to zero as quickly as possible. It's the most carbon emitting energy source in the world. But if you look on a 24 month basis, you could add about 6,000 terra-watt hours of global energy from ramping back the old coal mines that have scaled back in the last few years. Does that allay more humanitarian suffering in the short run, then the carbon omitted from that coal? That's actually a really interesting debate.

Rob West:

Everything changes here and I actually think to your point, what we've seen from policymakers might be an epic bait and switch. Bring forward all of the renewables targets, relabel them as freedom energy. Of course, we want to do this stuff, but in the short term, it might be a bit of a smoke screen for ramping back all of the domestic coal production in Germany. I think that might be one of the few levers we can pull to alleviate these energy shortages on a one to two year time frame. So much so that you could even argue that temporarily, reluctantly coal could be an ESG investment.

Jason Mitchell:

That is actually quite interesting and provocative. Speaking of provocative, I don't want to sound like an alarmist, but this question keeps turning over and over in my head. Could the EU's approach in particular, could the EU's approach to replacing Russian gas end up triggering the very crisis it's trying to avoid, which is basically very high prices and a physical shortage of natural gas?

Rob West:

We were going to have this anyway. I mean, around this time last year, I read a note saying in 2022 gas prices are going to be $12 an MCF in Europe. Everybody laughed at me and said, "Twelve dollars? Don't you know we've got an energy transition?" I think they've hit $40 and that was even before Russia, so we were already hugely short. From here, my general assessment of this is that cutting the oil hurts Russia more than it hurts us. Cutting the gas hurts us more than it hurts Russia. In the short run, the answer is okay, we're going to get more LNG cargoes. But if you look at the LNG market, about 60% of it is locked in on contracts. These contracts specifically say, "This cargo is going to this port in Japan," and they're locked in there. They can't really divert.

Rob West:

The divertable liquid LNG market, in terms of upside volumes that could come to Europe is about 120 million tons. Russia's gas imports to Europe are about a hundred million tons of LNG equivalent. So to get our hands on this gas requires going to China, Korea, India, and taking all the gas they wanted to buy and outbidding them. I think that's going to stoke animosities and it's going to be really challenging. It's not helpful for some analyst behind a spreadsheet to say, "Well, don't start from here," but that is where I think we start from. What can we do constructively going forward? Well, the US last year was about 70 million tons of LNG. On my numbers prior to everything that's happened, I thought it might get to 170 million tons of LNG by 2030. It could be 370 million tons of LNG if we really choose to ramp LNG from the US.

Rob West:

The delivered cost to Europe is going to be something between $7 and $10 per MCF. Every MTPA displaces five MTPA of CO2 that would otherwise come from continued burning of coal. And the real bottleneck, it's not technology, it's not economics. It's not whether we have the materials to build the LNG plants. It's pure old fashioned politics. Can you get a pipeline permitted across a state border? Can you get the permit to export the gas to save your allies in Europe from devastating energy shortages? Really, I think that has been an area where people have been on the fence, "Oh, is gas clean or not? Do we want it? We need it."

Rob West:

Really, I think that's the biggest thing that I think we can add on top of what we wanted to do already, which is ramp renewals as much as we can, ramp efficiency as much as we can. There are good options in those different categories, but those were already in my model. Really, what we need is we need stuff on top of that because my model was going to make us 10% short in all of global energy by 2030.

Jason Mitchell:

Can you give a sense to the degree to which we have under invested in oil and gas development? Last year I remember reading some literature that I believe talked about oil and gas CAPX at near all time lows. How do you fill that short term gap that is fossil fuel oriented from an incentive perspective? I mean, effectively asking the oil and gas complex to spend 15, 20, 30 year CAPX to fill this short to midterm problem?

Rob West:

The under investment is about $500 billion going back to 2016. The way I've quantified that is I have this model of how you would get the world to net zero and how much wind, solar, oil, gas, coal, you would need every category in that model. Then I know what we would've needed to have spent, and I know what we actually have spent and that's the difference; about $500 billion. The industry spends about $1 trillion dollars a year in primary energy and $2 trillion dollars a year in broader energy, including downstream grids and energy consuming technologies. We're talking about a really big number here.

Rob West:

Your question about how do we get the buy-in to ramp supplies? I mean, I think this is exactly the right question. I would say that this is not a gripe between, is it wind, or is it solar, or is it gas? We need all of these things. And the best way to unlock the most uncertain ones is to remove the uncertainties, to remove the barriers that are stopping the investment from flowing in. This is why I think we might have this move back towards longer term contracts where sovereign governments say, "Look, we're going to need 100,000 barrels a day of oil every year through 2040, even on the most dramatic upheaval of our energy system links to the energy transition. So we're going to lock it in on a contract and we're going to take that contract out with a producer."

Rob West:

That certainty will allow that producer to finance that project. And hey, if through some miracle we manage to decarbonize even faster and we don't need that oil and gas, that's just fine. We will put it in storage, we'll still buy it and it will be a strategic reserve that we can call upon if there is ever a war in the future, or to draw it back out of storage if we turn out to need more supplies down the line. Really, I don't see how you build 30 year projects without that kind of security. Regardless, and I know we're going to talk about this, the time to build them is so long that we don't really have time to dilly dally.

Rob West:

If you think, the fastest thing you can build in the energy industry is a solar asset at maybe four years from conception, glimmer in the eye to commissioning the project. Wind average is about six years, LNG average is about six years, pipelines, God help you if you have a tough permitting process, but also on that five-ish year timeframe. Then you have stuff on the ridiculous end of the spectrum, like new nuclear plants that on average take 15 years from conception to commissioning. We don't really have time to waste. I think this is why this energy shortage we're in is going to last a very long time is because even if we started tomorrow, it would take four or five years to change this period of under supply. That really goes back to 2014, which was the peak of the last oil price cycle, peak of the last energy price cycle and all of that cumulative investment that has been just that little bit light for eight years now.

Jason Mitchell:

How do you read the politics of energy prices in all this? We talked about prices earlier, but I'm wondering, do you think decarbonization is possible without higher energy prices? Do you think higher energy prices are an obstacle for decarbonization? In other words, do high prices cut both ways?

Rob West:

High prices are not an obstacle for decarbonization, high prices are an obstacle for the world. Remember, there's eight billion people on this planet. Four billion of them live in countries with less than $2,000 a year of GDP per capita and they use 90% less energy than we do in the West, per person. The reason for that is because energy isn't available. If you look at where that energy is going, it's basic needs like fertilizer to grow food or not freezing to death. There's a stat that a hot tub in the West consumes more power than an African village of 42 people.

Rob West:

Really, I think the people who are out there who say we're going to do energy transition by making energy expensive so people can't afford to use it, I mean, it's like saying we're going to do an energy transition by causing a humanitarian disaster. I just don't understand, if the ESG movement is about maximizing the wellbeing of eight billion people in the world, how on earth is that compatible with this idea of we're going to do that by forcing half of these people into medieval living standards and abject misery?

Jason Mitchell:

I want to put another spin on this. There's that old adage that's often used in energy markets that the cure to high prices is high prices. What does that mean in the current environment? When I re-listened to the podcast episode with Alex Grant from Equinor, even he asked, he ruminated, what do high gas prices mean for gas? Does a high price ceiling ultimately drive greater investment back into carbonized fuels like gas, or does it drive greater diversification away from it?

Rob West:

This question is a great onion, and there are multiple layers of this onion. In the short term, people are going to have to be priced out of the market because there isn't enough gas to meet everybody's demand. That's going to put a floor on prices because as soon as prices come down, people who want to use gas and can't afford it will start using it again. In the medium term, it takes that six years to spec out a project, that's about two years and then build a project, that's about four years. So the cure to high prices might be high prices, but that's six years away if we start now.

Rob West:

Then the third component is what does the coal price have to be for people to un-divest from coal? I know it's an inflammatory way to ask the question, but if you are a ESG investor and there are people in this position, the world is short of energy. Eighty-five percent of the world's energy is fossil energy today. There are investors who have said, "Our fund, doesn't matter if oil is $1 billion dollars a barrel, we're never going to invest in oil ever again." I think in a way, one of the cure for high prices is high prices is that you have to bring the investment dollars back into the industry. If we have high prices, but the investment doesn't come back in, those high prices could stick around for quite a long time.

Jason Mitchell:

We've already seen some joint venture exits and write downs by energy suppliers exposed to Russia over the last four to six weeks. BP, for instance, and others. What are the second order implications? How difficult is this going to be? How fast do we get the supply chains repositioned? I mean, some of these LNG facilities to be built in Europe, presumably to take LNG exports from the US. I know the LNG export facilities in the US and the Gulf Coast, if I remember, I mean we're five plus years. I mean, they were big multi-billion dollar projects. This stuff, I can't imagine doesn't come into realization by what, 2030?

Rob West:

Well, it's effectively so long that it's outside a lot of people's investment horizons. It's also so long that other things will change, a second order effect, as you just said. I mean, one thing that strikes me is yeah, we could take $2 dollar gas from the US and build a giant supply chain to pipe it to the coast, liquefy it, ship the tanks to Europe and then re-gasify them and support our industry again. But if that's six years away, a huge amount of our industry in Europe could have closed by then. You start to wonder, "Well, why don't I just move the industry to the gas, rather than moving the gas to the industry?" I actually think that's what's going to happen. A lot of the energy intensive industries in Europe, particularly around chemicals, materials, metals, fertilizers, you're going to see the biggest industrial boom in the US since the second world war.

Rob West:

Because I mean, I'm just running numbers and I have about 120 different economic models of how do you make X, Y, Z? The difference between $20 gas in Europe and sub $5 gas in the US, it's just transformational for that move it to the US argument. I think the shortages might last so long that's one of the ways they cure, which is something that is just going to really transform the whole world. As part of that theme you mentioned as well, which is I think a 10 year consequence of all of this is going to be re-shoring. If you think about battery grade graphite, it's all made in China. Photovoltaic silicon, basically all made in China. Industries like this, I just don't know if that's going to be acceptable to the West, is to lean so heavily on supplies that we don't control both from a geopolitical and from a ESG perspective. I mean, there's something like 140 kilograms of CO2 per kilogram of photovoltaic silicon as made at coal fired fabs in China.

Rob West:

We can bring that back to Europe and the US. The only slightly annoying thing is when we bring some of that back to Europe and the US, it's inflationary. I think the price of photovoltaic silicon effectively rises two and a half times if you move it from China to middle America. That might be the right answer for the world in terms of strategic security, but it does take a little bit of a dent out of that old IA argument that by 2040, all renewable energy is going to be practically free. I think some models need to be dusted off as a result of that.

Jason Mitchell:

I want to change tact a little bit and move it into the regulatory lane. I'm wondering, how does the energy complex invest over the long term? Let's say 20, 30 year investments, when the political pendulum swings so rapidly, it seems these days back and forth. In the US, the EPA went from one direction under Obama, reversed under Trump, and then re-reversed now under the Biden administration. In Europe, just look at the EU taxonomy and the feud over natural gas and nuclear as green/transitional energy sources. How do energy companies, in your experience, make these long term investments with that kind of frankly, regulatory volatility in the midst of not just an energy transition, but also this conflict?

Rob West:

What I've been saying for the last three years is, if you build it, the demand will be there. We've been so short of investment that if you'd started building an LNG project three years ago and it was going to come online this year or next year, that would've turned out to have been a pretty good decision and helped the world through this painful period we're going through. I think now the answer feels a bit stale. There's a broader point here, which is we have a 70,000 terra-watt hour energy system today. That's equivalent to a kitchen toaster running 24 hours a day, 365 days a year for every man, woman and child on the planet. And by 2050, it's going to be a 100,000 terra-watt hour global energy system, at least.

Rob West:

The right answer for companies in this space is, we are going to deliver you energy that is affordable and has no net carbon in it. I work with companies who are trying to do that, and that goes across energy producers through to materials producers, through to manufacturers of manufactured products. All of these people are saying, "We want to make this thing. We want to make this thing that the world wants. We want to take out all the CO2 from our process." I think in a way, the answer to your question is make it impossible for customers to say, "We don't want that." If you build a better product and it's cheaper, clearly environmentally better, and clearly geopolitically better, people are going to be biting your head off to acquire that product from you. That sounds really obvious when you say it, but you'd be surprised how many wild goose chases companies have been out on to produce things that don't work or produce things that are way too expensive, or to avoid that decarbonization that I think the world is going to want.

Rob West:

That would be my answer to your question and the precise roadmap differs in every single industry. But I think the broad principles of business remain true in all of them.

Jason Mitchell:

Dan Yergin had written an article several months ago, well before the Ukraine conflict. And he posed a really interesting question. He said, "Is this energy shock..." Again, the one that he was talking about was in the fall with the price volatility, the fact that for instance, 25, 26 energy wholesale providers in the UK were going bust. But he asked, "Is this energy shock a one off resulting from a unique conjunction of circumstances? Or is it the first of what will be several crises resulting from straining too hard to bring 2050 carbon reduction goals rapidly forward? Potentially prematurely choking off investment in hydrocarbons, thus triggering future shock."

Jason Mitchell:

I have a feeling about how you're going to characterize this, but it seems pretty obvious. I mean, the energy transition feels like it's going to be incredibly bumpy in a lot of different forms.

Rob West:

I'm just sad that apparently it's the Dan Yergin position and not the Rob West position. I mean, I've been writing that for three years. I completely believe that it would be better to over invest and then find that we don't need this resource and leave it in storage, than to under invest and face a catastrophe of energy shortages, as we are likely to see this year.

Jason Mitchell:

Let's switch lanes again. Let's talk about technology solutions. I've been amazed at how many companies have backend loaded their climate transition plans, largely on the expectation that technologies like carbon capture, blue and green hydrogen, not to mention technologies like ammonium, which lack a global market outside of agriculture and fertilizers. What are the risks in this? I mean, I'm personally really struggling, discounting or applying discount rates to these technologies that are supposed to be realized from 2035, 2040 on, on a commercial scale global basis.

Rob West:

Yeah, I struggle with that too. The thing I've found best to tackle that is I just spend a day a week, locked in a room with a stack of patents, and I just read them all on a particular company just to understand, can I de-risk this technology in my roadmap to net zero? I always score them on the same five categories and they range from things where I'm a little bit worried whether the company legitimately has the technology it says it has, through to I always joke that you read a hundred pages of patents and then on one page you find the one killer piece of information that just changes the way you think about everything. You just get unbelievably excited about what a company is doing.

Rob West:

I like using that apples to apples framework. I've noticed that every time I do one of these patent screens, I make myself feel very stupid about what I did not know before I did it. But over time, I think I've tried to do about one of those per week since I started Thunder Said Energy. You just really find the things that you just think are so exciting and want de-risk in the models. The things where you think, "Well, I can't quite de-risk that yet because of challenges A, B and C."

Rob West:

The second way I found that's really useful to tackle that is just to model everything using apples to apples assumptions. I need a 10% [inaudible 00:35:45] return. I'm going to put in the same general carbon price, the same general electricity price, the same general labor rate into all those models and score them all apples to apples and just say, "What abatement cost does that imply for that technology?" And have that kind of quantitative framework and bring it all back to numbers. That has been helpful for me in building up a cost curve of 200 billion tons of global abatement options and scoring them all relative to one another.

Jason Mitchell:

I wanted to ask about your thoughts on nature based offsets. I've heard you talk about them before, you're a big proponent. How did these markets develop? In particular, I'm thinking back to a podcast or an article that I'd read about Microsoft's approach in transitioning from avoidance to removal offsets and going down the nature-based path. I think it was either last year in 2020, they could only find 1.5 million tons of offsets, and they basically ended up buying 90% of the market. But these markets are still very small. I think $1, $1.5 billion dollars in total for nature based. How do we get them to grow, given the potential that you see in them?

Rob West:

Well, it's becoming a really interesting question because on the precipice of this enormous growth trajectory, let me recap some numbers of why I think this is so important. Basically everything I've looked at has some CO2 embedded in it. I mean, if you want to make copper to go into a renewable asset, there's four tons of CO2 per ton of copper. There's two and a half tons of CO2 per ton of steel. There's 140 tons of CO2 per ton of photovoltaic silicon, everything in between. If you're going to build these things and ramp them up, then making them is going to have a CO2 footprint and you need to take that CO2 out. If you go back, there's about five billion acres that have been deforested by mankind, that has raised about one trillion tons of CO2 into the atmosphere. That's about 30% of all man-made emissions.

Rob West:

Clearly a solution to the world's carbon challenges has to consider the biggest carbon sink in the world, which is forests. The numbers are on average, a acre of forest can solve about five tons of CO2 acre per year. I think there's about three billion acres that can be re-forested. That would be about a 15 billion ton sink.

Rob West:

I often get the question of, well, are there any precedents that show this sort of thing as possible, to which I would point people to the tiny Arctic nation of Finland, my neighbor just to the north. Finland, superb, nigh sublime, they have the best data you will see on forestry. It basically goes tree by tree and goes back to 1920 and 70% of this country is covered by forest. They have taken out two billion tons of CO2 over the last century in these forests. About half in the accumulation of biomass in bigger forests than there were and about half in the long life locking in of harvested wood, into construction materials, furniture long lived. This is not wood for energy. This is the stuff that's actually removed from the atmosphere and stayed removed from the atmosphere and properly modeled. That's about two thirds of Finland's CO2 emissions as a country have been offset by its own forests.

Rob West:

The final point to make here is, this is Finland. We have the same climate here in Estonia. In winter, it is dark 19 hours a day. A third of Finland is in the Arctic circle. Yield class there is yield class five. That means about five cubic meters of biomass accumulation per hectare per year. Versus if you're growing Sitka spruce in the UK, you can get to yield class 20. And if you are in the rainforest you can get yield class 30 plus. To think that sustainable and active forestry management in a nation like Finland has been able to offset two thirds of this country's CO2 without any CO2 price whatsoever, you realize the potential we're talking about here.

Rob West:

I know more and more startups in the space trying to de-bottleneck these bottlenecks to help people to inventory the forest. I mean, this is really all about trust. You need to know five things and Microsoft made this point in that excellent paper you alluded to. You need to know the forests are real, additional, long-lasting, measurable and bio diverse. Really, we are getting more and more technology to do this through satellite data, drones, even blockchain technologies to guarantee that what you're buying in a carbon credit is a real trustable carbon credit.

Rob West:

Actually so much so, I don't think we should even use the word carbon credit. I think we should use the word verified nature based carbon removal to separate it from this old broken, bogus, carbon credit model, which is like, "I'm going to offset my flight by not taking a return flight." No, a carbon removal credit means one ton of CO2 has demonstrably, unequivocally provably been pulled out of the sky and stored in some long lasting reservoir with a buffer and it can be tokenized and you can trust it. The companies that get that right and combine it with their carbon emitting products are going to find that they're at the very bottom of the cost curve of decarbonizing those carbon emitting products.

Rob West:

And the biggest bottleneck of all, I think I would say is there are people who don't want this to succeed. I think in a way, sadly, there's a lot of lobbying for other technologies here that know that restoring nature and building businesses around that is going to push them off the cost curve. And for that reason, I think there have been attempts to discredit carbon removals because it's going to lower the subsidies that my technology gets, or it's going to mean that the energy transition produces a different set of winners that I want to be winners for my political ideological reasons. I just think that's really sad. We need to meet the energy needs of the world and take out all the CO2. How much do you have to hate nature to pay $1,000 dollars a ton for a direct air capture carbon credit, rather than $50 a ton for restoring degraded forest lands? I am very passionate about that space and I think you're going to see some remarkable things in the space in the coming years.

Jason Mitchell:

Last question. I want to come back to something that you mentioned in the very first part of the episode, which is around behavior change. I find this a much overlooked element in many climate transition plans. I keep noticing it appearing again, as this fundamental element. The IEAs net zero emissions by 2050 scenario points to it, as does the UK's net zero strategy. If I remember it's as much as 5% to 10% of the long term emissions reduction. How do you think about behavior change, especially driving energy efficiencies? What are the right incentives or disincentives? Where I'm coming from on this is I'm a complete nerd when it comes to paradoxes, that's a confession. But I always remember the Jevons paradox and-

Rob West:

Oh, yes. Stanley Jevons, 1863 as I live and breathe.

Jason Mitchell:

Absolutely.

Rob West:

As a technology becomes more efficient, you find that you use more and more and more of it.

Jason Mitchell:

Absolutely. So what I worry about is that as we drive behavior changes around more efficient technologies, there are just more use cases, right? There's this trade off that minimizes the net gains that are supposed to materialize.

Rob West:

Right, you're completely right. I mean, it's a pretty sad state of affairs if the world in 2050 simply looks like the world in 2019, but without the carbon. What I mean by that, is that you would hope that human civilization had advanced to doing things that it wasn't previously able to do. If you look at 30 year periods of progress leading up to 2019 or the 30 years before that, or the 30 years before that, I mean, there's clearly going to be new types of demand that crop up that surely, surely any model of global development wants to take into account of that. But this is why I have such a problem with these forecasts of, "Oh, we'll just assume that demand goes where it needs to go to meet our model."

Rob West:

I mean, I live in Estonia. Estonia is one of the most amazing countries in the world. Most digital country in the world, more startups per capita than Silicon Valley. I have had nothing but good experiences of this place since my wife and I moved here. But for 50 years, Estonia was illegally annexed by the Soviet Union and this was one of the darkest, most horrible periods of history you can possibly imagine. I mean, everybody has grandparents and great-grandparents who were sent to Siberia and never came back. People watched living standards in Helsinki eclipse their living standards here by a factor of eight X over that 50 year period. I mean, unbelievable. You think, it's 30 years ago Gorbachev is sitting there making five year plans for what's going to happen in the Soviet Union. Trust me, come to Tallinn. This is nothing like Gorbachev's plan and this is a very good thing for the world.

Rob West:

I think the same way about these forecasts of what energy demand is going to look like and how people should be living their lives in 2050, as laid down by policymakers today. I mean, it is no less ridiculous than assuming that I'm going to live my life according to the parameters laid out by Gorbachev in the late 1980s. I think we have to be really careful with some of these assumptions and some of these roadmaps to net zero that I've seen. Instead, I think effective change is built from the bottom up. We want to find a thing that is economical, practical, take CO2 out of the system. And ideally, it's also just pretty cool. And we want to get behind that thing. An example is what we talked about before to build trust in the restoration of nature for nature-based carbon removals, but also things like nuclear fusion that can take 3 million times more energy out of a kilogram of hydrogen than simply combusting it, all the way through to NextGen versions of plastics, renewables, electronics, batteries, CCS, and then just these totally weird, wonderful niches like additive manufacturing or autonomous technologies or all of the acronyms like CLT and CHPs and VFDs. And I know I've given a lot of big picture macro comments and complaints today, but really it's this bottom-up work that gets me most excited in my research at Thunder Said Energy. And also I think the building blocks that are ultimately going to build us these decarbonized energy system of 2050.

Jason Mitchell:

Well, it's a great, very honest way to end this episode. It's been fascinating to discuss the energy transition, the first and second order impacts of the Russian, Ukraine conflict on the energy complex and the trade-offs that we may increasingly face as policymakers choose between energy security, decarbonization and price affordability. I'd like to really thank you for your time and insights.

Jason Mitchell:

I'm Jason Mitchell, head of responsible investment research at Man Group, here today with Rob West, CEO of Thunder Said Energy. Many thanks for joining us on A Sustainable Future and I hope you'll join us on our next podcast episode. Thank you so much, Rob. I really appreciate this.

Rob West:

Thank you.