Cleaning Up Episode 99 Edited Highlights – Dev Sanyal
ML Dev, you’re the CEO of Varo Energy. What is it that Varo does?
DS We are essentially an integrated energy company. What we try and do is help our customers both meet their needs for energy in terms of energy security, but we are also helping our customers decarbonise. So, we are also helping their own transition. The business essentially has got two engines. Engine one is a conventional energies business, which we are increasingly trying to decarbonise. We've done a lot of work in that respect: 300,000 tons of reductions just this year. And engine two is a pretty significant business in what we call sustainable energies. We have identified five strategic pillars to grow the business - in advanced biofuels, advance biomethane (bio-LNG), in green hydrogen, in nature-based carbon solutions as well as e-mobility. In the next five years, 50% of our earnings will come from those businesses. To do that, we will deploy two thirds of our capital in these new businesses. The remaining third is what we call sustaining capital expenditure, because you do need to invest to keep your assets running safely and reliably. I think what's interesting about our strategy - at least I think it is - is that it's not one of those strategies that in the year 2070, it's going to be fantastic. We’ve actually got businesses in those five strategic pillars, what we need to do now is scale them up. So, we have the foundations.
ML There are a lot of people out there saying investment in your conventional oil and gas business should be zero. What do you say if you have somebody quite stridently putting that point to you?
DS I think at the end of the day we have to provide energy security, by which I mean reliable, affordable energy. We also have to meet the needs of more demand, 30% more demand in the next couple of decades, and we have to make it more affordable. At the same time, we also have to make a transition. You can't just say “I'm going to just produce more energy.” Yes, you do need to provide more energy, because the world needs more energy and the transition will take some time, but you also have to look at ways and means to decarbonise it. I'll give you an example… 70% of the hydrogen in Switzerland is consumed by us, by Varo. Now, if you convert that from grey to green, that is a good example of what you can do within the existing system. We are building the largest ground-mounted solar facility in Cressier, which will commission next year. 70%, at peak, of the refinery requirements will come from solar. That's another good example of what we can practically do in terms of existing assets. I actually believe repurposing the existing infrastructure is as important as building new infrastructure, because the truth is the existing infrastructure is not a stranded asset. Our strategy is founded on this fundamental belief, that we will basically convert all our hubs to clean energy centres.
ML But as we record this, there is this tragedy going on with the Russian invasion of Ukraine, on top of what was already a price spike. Are we going to forget climate for two years and just focus on energy security?
DS The current crisis is borne of a number of things. Number one, I would say, is a fundamental asymmetry. When I started my career 32 years ago, the total market share of Russian oil in Germany was 40% and Russian gas was 45%. And here we are many semesters later and it's identical. In any other industry, it would be unacceptable. I'm very proud of our track record as a company - from the start of the crisis, the 24th of February, we took a decision we would not buy Russian crude. The second area that I think has been brought to sharp relief is the demand for the new has not actually been as baked in as the degradation of supply of the old. So, this is also a story of underinvestment over the course of the last, let's call it, 2015 onwards when we had a price drop in in oil prices. And the truth is that if you have a stop-start cyclicality of investments, there will be impacts. I think making a consistent set of decisions and having an environment that enables consistent decisions is very important because the system is so large that you don't feel the immediate impact, but over time you do.
ML Last week, I had Bill McKibben on Cleaning Up, who is as close as it comes to the father of the divestment movement. If he was here on this call with us, what would you say to him?
DSI think we can’t go overnight from one narrative to another. I think this transition requires a complete re-plumbing. I think my own response would be, I wish it would be done as soon as possible. I fundamentally believe in the energy transition, but the question is how do we do it in a responsible fashion so that we don't have a situation where people are left behind? That’s why I'm so passionate about the repurposing of existing infrastructure, using existing assets rather than wasting money by creating a whole bunch of new assets which require steel and land and everything else. It doesn't mean we can repurpose everything. It doesn't mean that repurposing is the only panacea. But I think there's been a fascination in the last decade - I don't know if you agree with me - but I think there's been a fascination with building the new, because it's kind of cool to go and do a ribbon-cutting ceremony for a brand new shiny asset. I think in the next decade my own bet, and that's a bet we're making as a company, is that it'll be both repurposing the existing while also building the new.
ML Your own refinery margins, I'll bet right now, are they at record highs? I suspect they will be right? Many people want to take those profits away from you and help people who are perhaps not going to be able to run their heating this winter. How do you answer that?
DS I think what is very important is to be clear about what do you do with that money. The only way out of this crisis is producing more energy and actually creating more diversification. That actually will help abate the current challenge we are facing. Creating the signals that basically stop it, would be, I think, probably not the right thing to do from my vantage point, because I actually believe if we can create the conditions for certainty, and conditions where the money gets invested in the future, then we will undoubtedly get more energy and we'll have more diversified energy. What do you do in the present? The governments will have many options ahead of them, but the worst thing we could do is just get focussed on today because we'll never get out of this crisis, and we need to get out of this trough, and that takes time. Governments have to help incentivise new businesses. I mean, just look at what's happened to the UK with offshore wind. It was not developed by just great engineering; you also develop by incentives. That’s what created the scale which now has resulted in a virtuous cycle.
ML My last question is about finance. Are the glory days of energy over? Do you have to give up returns?
DS What we have said is that as we build out these businesses, we will maintain across the group 15% returns. The very idea that we're going to build quantity by degrading quality is not in line with our strategy. Europe is going to always be in need of energy, and the question is, can it produce more domestic energy and can it diversify more resources? If it can, I think we will see this episode as - and I really hope this is the case - the point of departure from the past. And that's what we're all trying to do, using this current narrative, which is borne out of incredible sadness and tragedy. I hope the choices we make today as individuals, as companies, as governments, as societies, can actually result in a future that is a lot more diverse, a lot more inclusive of different forms of energies, and frankly, providing what the world actually needs, which is clean, affordable and secure energy.