00:00:00 Jordan Yates
This episode of The Energy Pipeline is sponsored by Caterpillar Oil& Gas. Since the 1930s, Caterpillar's manufactured engines for drilling production, well service, and gas compression. With more than 2, 100 dealer locations worldwide, Caterpillar offers customers a dedicated support team to assist with their premier power solutions. The Energy Pipeline is your lifeline to all things oil and gas, to drill down deep into the issues impacting our industry. From the frack site to the future of sustainability, hear more about industry issues, tools, and resources to streamline and modernize the future of oil and gas. Welcome to The Energy Pipeline. Hey everybody. Welcome back to another episode of The Energy Pipeline. This week is special, because we are doing a two part series on the circular economy where we interview Peter Evans. Now, this is part one of two, and I won't keep you any longer. Let's get into the episode. Hey everybody. Welcome back to another episode of The Energy Pipeline. It's me, your host, Jordan Yates. And today, if you're watching via video, you'll see that we are all in person together, which doesn't happen often. So I'm really excited. I have my co- host, Lizzie here with me, and then our guest, Peter Evans. He is the chief strategy officer at McFadyen. Peter, say hello to everybody.

00:01:35 Peter Evans
Hello, everybody. Good to see you.

00:01:38 Jordan Yates
It's so good to see you. Today we're going to be talking about circular economy. I think this is going to be a great discussion because Peter and I actually met at a platform summit at MIT this summer, and we spoke a lot about circular economy there, the relations to platforms. And I just want to get it kicked off. So Lizzie, can you get us going?

00:01:58 Lizzie
Yeah. So to start us off, Peter, can you provide us with an overview of what is a circular economy? How does it relate to the oil and gas industry, and can you compare it to the traditional linear economic model?

00:02:13 Peter Evans
Yeah, sure, of course. And thank you so much for having me. It's great to be here. We're in Houston. And so I guess the best way to describe the circular economy is to contrast it, as you just did, with the linear economy. The linear economy describes an economic model of companies and society and the economy taking materials, and then producing, manufacturing, processing them in some way to produce goods and services. And then it's used by users. But then, it often ends up as waste. And so it ends up in landfills, it ends up in the ocean, or it ends up in the atmosphere. And the amount of material that is extracted each year is over 100 billion tons of material globally. And the vast majority of that does not get recycled. And in fact, they've been doing some analysis recently, and it shows that between, I think the estimates are between 7 and 9% is all that is returned back into the economy again. So tremendous amount of waste. So the big concern there is that we're going from a planet of 8 billion people today to nine billion people in just 14 years. The amount of material that you need to supply that many people in the world, it's possible to do, but it makes a whole lot of sense to start reusing things more effectively. So the circular economy is really this idea of, how do we get material back into production? And a lot of things can be recycled and reused or repaired, and so how do we go about doing that?

00:03:55 Lizzie
Absolutely.

00:03:56 Jordan Yates
Yeah. I was actually listening to a podcast on our way to this recording about the circular economy and its context with electronics. So basically, they were saying a lot of people with electronics, you just throw them away when you're done. You give them back. Sometimes it's just like if it breaks, why fix it? I'll just buy a new one. It's not that expensive. And so a lot of times when I think about circular economy, I think about the recycling aspect and the repairing aspect, but I don't think as much about the upstream part of it, of what manufacturers could be doing differently to make the downstream people have an easier time implementing the circular economy.

00:04:34 Peter Evans
Yeah. So there's a lot of elements that go into, how do we create a more circular economy? Because the system has really promoted and optimized for a linear economy. And what's interesting is I studied platforms and marketplaces and the whole digitization of commerce. And when we step back and look, some people say, " Wow, it's revolutionary. It's changed these markets," and they point to Airbnb and Uber and Amazon. But when you step back and look, marketplaces like Amazon are very linear. They're actually part of the linear economy. And what they've done is actually, they created more efficiencies. They've allowed you to buy things and get it delivered within a day or less.

00:05:22 Jordan Yates
Can't complain about that.

00:05:23 Peter Evans
But it hasn't really worked on the circular side of that. So I started to dig into this topic more. And obviously there's the sharing economy which has gotten attention, and the fact that you can find assets. There's actually very interesting platforms now. One is called Warehouse Exchange that allows you to identify where there's vacant space in a warehouse, so you can better utilize that asset. Obviously Airbnb did the same thing with accommodations. And so there's lots of ways in which marketplaces and digital technology can be used to discover, create the matches between the buyers and the sellers. And then provide the underlying support infrastructure like payments and things of that nature to support that. So I guess really interesting question, I hope we can talk about that today, which is how can marketplaces be applied in ways to promote the circular economy?

00:06:19 Jordan Yates
Yeah, absolutely. And in the context of oil and gas, is there any companies that you've seen that have done a good job, or at least are trying to implement this circular economy approach?

00:06:29 Peter Evans
Wow, that's a really good question. I think there's probably a lot more that they could do, but I'll give you some examples. The oil and gas industry actually consumes a lot of material for production and whatnot. In fact, the CapEx right now of the oil and gas industry is about$ 800 billion a year. So there a lot of steel, that's a lot of cement, that's a lot of water. There's a ton of material that goes into that. So the question becomes, how can you recover that? So one example right now of a platform that is helping in that area is that when you have these really big oil and gas projects, they tend to over buy in order not to get caught short on parts, because the costs of an overrun are tremendous. And the industry actually faced a lot of cost overruns. And so to protect themselves against that, they tend to overbuy so that they create the buffer or the insurance to have those materials. But at the end of the project, then they're left with a bunch of material that they purchased, but didn't go into the project. So there's a platform called Requis that actually catalogs the materials beforehand. And then if they're not used, then they can put them back on a marketplace to be repurchased, rather than just written off and maybe abandoned or put in landfills and things of that nature. So there's lots of interesting ways that the industry can become more efficient in that way.

00:08:00 Jordan Yates
That's nice that there's platforms that exist for that. Because like you said, it's not always the most economical thing to just buy exactly what you think you're going to need, and then have to chance it, and then buy things last minute, and then the materials are more expensive. And so definitely, we have it ingrained in us that we want to overbuy because we want to be comfortable, we don't want to be stressed. And that leads to these challenges. So it's nice to hear that there are some remedies that exist out there via platforms.

00:08:27 Lizzie
So you talked about how you can use platforms to really kickstart a more circular nature. What about examples of how people are using circular practices to extend life of equipment? Can you talk about that a little bit?

00:08:45 Peter Evans
Yeah. So there are quite actually a larger number of circular platforms in the apparel space. And one that I just learned about is called inaudible. And so what it does is it allows you to send the materials to them, and then they'll batch it out to various repair locations. And it could be shirts, it could be shoes and things of that nature. So there's an example of a platform. And the beauty of platforms is that they can actually scale. In the old days, there would be a place to repair something, but the platforms allow you to actually scale this to a very high percentage. So in the oil and gas space, there are examples of, for example, used machinery that can be taken back. In fact, Caterpillar has programs where they will take back material or refurbished. And these are high valued assets. They're made with durable materials like steel. And so they lend themselves fairly well to being refurbished. A lot of companies are doing this on their own. I think the question is can we scale it to even larger extent, and would a marketplace help facilitate doing that?

00:10:01 Lizzie
Yeah, absolutely. That's really, when I sat down and looked at the topic that we have for today, Caterpillar remanufacturing is the first thing that came to my mind just because I'm in Caterpillar every day. And the fact that we can make returned equipment like new again and reuse it, and save money for our customers is really cool. And that's what jumped out to me.

00:10:26 Peter Evans
Yeah, well, eBay has launched an industrial part of eBay in which they do heavy duty equipment now. And one of the elements that is very interesting is what is different between a typical e- commerce merchant based linear platform versus a circular one. And that is you have to really focus on quality control, because the buyers want to know that the secondhand material is of the quality that they need or expect. So one of the new attributes or the things that a circular platform needs to do is to put in place that quality assurance. And that can be done in really interesting ways actually. There's increasingly AI and computer vision technology being deployed in this space, particularly for plastics for example, because different plastics have different attributes. And so the machine vision can be used to tell the robot which things to pick. So that's one application. And in other cases, like the eBay case, they actually have a network of third party verifiers that will go and inspect the equipment in person. So for a very large equipment, which can cost hundreds of thousands of dollars, you will want that third party assessment. And the automobile industry uses this as well. Before auctions and things, they'll have somebody come in and assess that. Because the question is, what is the quality of that? There's a whole nother dimension to this if I can go on, which is the data layer associated with this. And so the more data you can collect about the usage of that material during its life, the better you're able to determine what is the actual quality of that, which helps on a couple things. Which is, are we setting the right price for that secondary transaction or that circular transaction? How long, should we put in guarantees associated with that or not? And then to also help the buyer understand, are they buying A grade stuff, B grade, or C? And there's actually a market for C grade stuff. Anyway, so it's a really interesting space. And understanding what is different between circular platforms versus the standard kind of linear platforms is I think an important distinction.

00:12:58 Jordan Yates
Yeah. I mean, it's interesting that you mentioned the vision and robotics aspect with the recycling and pick out the materials. Because episode three, we had Justine, the VP from Chevron Chemical come on, and she actually mentioned that. And she said that that's something they were looking into investing in, because then you can recycle those materials, break them down, and then send them back into, what are they called? She described it in a way of M& M's, you break them down to the smallest vertical and-

00:13:27 Peter Evans
You pelletize them.

00:13:28 Jordan Yates
Yeah. So she described that very specific example, and she said the hesitation a lot of times for companies to actually do that is that it is costly. It's not exactly a cheap and easy thing to do, even though the equipment's there, the technology's there. But a lot of times we push off, whose responsibility is it to pay for this? Is it end of life users? Is it people at the beginning? I was curious your thoughts on that, and if you've seen more cost- effective ways or ways that companies justify the spending on it.

00:14:03 Peter Evans
Sure. So one of the reasons we had a linear economy is the companies didn't have to bear any of these costs, but that's changing quite substantially with the introduction of what they call extended producer responsibility laws, which are putting more of the responsibility for end of life back on the manufacturer. And an interesting example that's getting the oil and gas industry's attention is four states already in the United States have passed laws regarding the containers that lubricants are packaged in. And so what's the issue there is that they have to use very durable plastic, which has recycling issues. But the really big issue is that it's contaminated with residual oil, and it can't go back into normal recycling systems, which are typically food and packaging related. So you have to separate that stream. And a lot of this stuff was ending up in landfills and the municipalities were saying, " Hey, no more. We can't handle this." And so it's now going back to the companies to address this. Now, the issue right now is that it's kind of an individual basis that the companies are doing, and I think it makes a whole lot of sense to create a marketplace that would both take back the used motor oil, which can be recycled, and the plastic containers that the motor oil is in, and create an opportunity, because these can be recycled, and then you find the buyers on the other end. So what's interesting is the automotive industry is starting to make more commitments to take recycled plastics. So if you could create a matching market between the automotive industry, which consumes a huge amount of plastics, with the companies that have a waste stream, boom, you've got a marketplace with a really big off taker, which would be the automotive industry can consume a tremendous amount of plastics every year.

00:16:00 Jordan Yates
Fascinating. Lizzie, anything else you wanted to tell? I know we've gone through a lot of our topics, but what else interests you in this?

00:16:10 Lizzie
No, the other thing that jumps out, we just talked about costs, and you talked earlier about quality and big data. And all of that has a cost to make this circular economy happen in the oil and gas industry. I think it's just a huge, huge challenge to have to-

00:16:31 Peter Evans
Yeah, but that's changing with, sensors now are much lower cost. The data centers are built now to be able to handle that, and then the algorithms are out there to do the analytics on this, so the systems are in place to actually deploy these technologies on them. So one area that's pretty interesting and is getting a lot of attention right now as we convert from fossil fuel related mobility to electric mobility, there's a lot of batteries associated with that. So these batteries have a life, and it ranges from three to 12 years. And so they're going to reach their end of life. And when you look at forecasts out to 2030, 2035, we're talking about millions and millions of batteries reaching end of life. So when it happens to those batteries, it's very useful to have a data layer associated with them so you know how many times they were charged, discharged. And so there's a lot of work going on into what they call a battery pass, which is the data analytics layer, which some people also call the digital twin, which you probably have talked about and heard about, which is creating this kind of digital representation of the physical asset. And that becomes very valuable both in tracking, evaluating the value of that, and all sorts of other attributes. So anyway, so they're working very hard to create global standards for battery data so that we have a better sense of the quality of that, and that helps you in the triage. Some of those batteries are going to be spent, and they need to go back into recycling. Others can have what they call a second life, and it can be in a completely different industry like the electric power industry for backup power.

00:18:26 Jordan Yates
Yeah. No, something that I've noticed is the center issue with all of these trends that we have in the industry of wanting to do better with emissions, wanting to do better in the circular economy, would be the data part. And you touched on that. It's like, whose responsibility is it to track this data? Once they track it, who is responsible to parse through it? I don't know how much our listeners have experience with data, but my goodness, even when I'm just parsing a bill of materials and trying to understand trends there, a very simple, straightforward thing, that is a lot of work. It's very time- consuming. It takes a special level of skills not only to collect the data, but analyze the data. And then having to actually put it together, trend it, and convince somebody to do something about it. The data seems to be a real key point in this. Have you seen any platforms that are particularly innovative or that interest you, in this data layer?

00:19:23 Peter Evans
Sure. So I think we know about the consumer side. Most of the platforms in the consumer side have been criticized for just taking consumer's data. So Instagram-

00:19:38 Jordan Yates
I forget about inaudible-

00:19:39 Peter Evans
Instagram, right? Instagram, Facebook, all of these guys. In the industrial space, it's a different set of conditions. Typically, the party that you're taking the data from is a very large company, and they have influence and power that an individual consumer would not. So actually, the issue in the industrial space isn't access to the data. It's getting permission from large actors that may not want to. So the biggest issue is convincing or creating incentives for parties to come together and share that data. Because they all have it, they all collect it. It's the sharing part. So what's interesting is when you look around the world, there've been several what they call data exchange or data consortium created. So in the automotive sector in Europe, you have a data consortium called Catena- X, and so it's brought together some of the biggest automakers in the world. So BMW, Mercedes, and others have joined this, and they have agreed to share their data. I've heard, and I need to dig into further what's going on in the oil and gas space. And so there is a data consortium for the oil and gas. And they're beginning to build one for the battery space right now.

00:20:54 Jordan Yates
Okay. Yeah, it's just hard because as you're saying these things, it's bringing back memories from my sales engineer days, where I remember I was trying to sell a wireless communications device that was basically just delivering a binary one or zero. And that's all it's sending to the other machine is ones and zeros. It's very, very simple. And they were concerned of the security of that, of it's wireless. Can someone hack into it? What are they going to do with that data? And I'm like, " Why would you care about that? That seems very, very low level." So now my wheels are spinning of if somebody were to actually collect meaningful data in manufacturing and things like that, like you're saying, I can only imagine how hard it is to convince somebody that is okay. Do you know of any specific incentives that are laid out for them, or could you think of maybe if you had it your way, an incentive you would place?

00:21:52 Peter Evans
Well, actually, when you get really big picture to the global level, some countries now have said, " Wow, this data is really valuable. We don't want to send it." And in fact, a lot of companies set up data centers and data analytics capability in Houston to collect data from around the world, to be able to provide recommendations around how to optimize those, or reduce downtime, and things of that nature. And quite a number of countries have said, " No, you're not going to be able to send that data."

00:22:25 Jordan Yates
You could turn it off.

00:22:28 Peter Evans
Yeah, sorry about that.

00:22:30 Jordan Yates
You're good.

00:22:31 Peter Evans
So what's happened is that the countries want those data centers and that data analytics in the human capital and the opportunities for professional development to happen in their countries.

00:22:48 Jordan Yates
Yeah, it is a weird competitive thing. Because sometimes it's like we're all in this together. We want to make the world a better place. It's like, " But we want to do it better than you, so we're not going to help you." Lizzie, you're pretty into sustainability in that aspect. What's your take on that?

00:23:04 Lizzie
I'm just kind of blindsided.

00:23:09 Jordan Yates
I'm sorry. Lizzie, I guess this is a tendency guys, I have, and I do this to Lizzie sometimes. I just look at her and I'm like, " This is an insightful person. I need to ask her." So Lizzie, we could always circle back to it, but I think it's interesting personally just the constant balance of, " We need to have these discussions. Oh wait, but we're not going to. But yes, we will, but we're not going to do it with you." And it's like we probably have the answers to these issues. We're just not willing to share.

00:23:37 Peter Evans
So countries have what they call data residency requirements. And they do not let the data go out of the country. And so that means the big data center builders need to build the data centers in those countries, and the companies that do business in those countries need to architect their services so that they use the data only in that country and not outside. So anyway, that's created another layer of complication to create a full- blown marketplace for exchange. You have to be able to layer in some of these restrictions. And then we know that Europe has passed various laws around what they call GDPR for data privacy and things of that nature. So the landscape for data is quite complicated, and you need to create a lot of domain expertise in the company to be able to understand how to comply with these rules.

00:24:38 Jordan Yates
There's going to be a ton of effort that has to be spent in that space to innovate and take care of what we need to take care of, to achieve what we want to achieve with respect to the circular nature and sustainability.

00:24:50 Peter Evans
There are restrictions and constraints and challenges. However, the value of data is so powerful, that it often... And big investments are going in. So one area that I've kind of gotten interested and excited about is when we think about how do we deal with carbon emissions, one strategy is to sequester them underground. And so we have these, what they call it, carbon capture and storage initiatives.

00:25:21 Jordan Yates
That is hot right now.

00:25:22 Peter Evans
Yeah. But think about this, there are a lot of abandoned wells all over the place, but we don't have a Zillow for abandoned wells.

00:25:32 Jordan Yates
Yeah, there are just plugged up-

00:25:34 Peter Evans
Just imagine if you created a marketplace and a data layer that would not just put a price of a home. Zillow doesn't come and ask you, " Can I put a price on your home?" They've got an algorithm that collects a lot of data and then calculates an estimate of what your house could sell for at this time.

00:25:54 Jordan Yates
Yeah.

00:25:55 Peter Evans
Imagine if you did the same thing for abandoned oil wells that have storage capacity, and then you create an exchange. And almost, you could create an auction for companies that are looking for storage capacity, and then this would reveal. So this is the power of marketplaces to be able to reveal information that right now is hidden.

00:26:17 Jordan Yates
Can I play devil's advocate for that?

00:26:19 Peter Evans
Sure, go for it.

00:26:20 Jordan Yates
Okay. So I am always the one who's very optimistic of, " We should do this, this, and this." But when it comes to implementation, I look to people like you with the PhDs from MIT to be like, " This is how we do it." But with my experience, say with the oil wells is there's a very strict, when you're done, you plug it, and you go and you fill it with cement. " It's done. We're washing our hands of it." It would have to be so upstream in that process to convince them not to do that. But not only that, is there's this thing that's really prevalent called PPQ, producing and paying quantities. And you essentially, for the lease holders, you have to prove that you are producing and paying quantities. And then a lot of times wells aren't, but they don't quite get around to the paperwork aspect. And if the leaseholder realizes that, " Hey, my well isn't in PPQ," then they can come and they can take that back. The contract will default. So then you're having to set yourself up and say, " I have all these wells that aren't producing."

00:27:20 Peter Evans
That's the beauty of a marketplace, because suddenly an asset that is no longer useful, it's not a producing well, suddenly it's just sitting there right now. Suddenly it could become valuable. And so you would then create a market for a bunch of services to evaluate those, to see if they're viable. What is the risk profile of that? Both for leakage, but also for earthquakes potentially. So there's a bunch of information, but that would all be revealed just as it is on the stock exchange, on the performance of a company. This would be related to the performance of well. And just sitting here in Houston, there are some companies that specialize in having a tremendous amount of data about the reservoir, but that was for production. Imagine if they turned their attention to evaluating it as a storage facility.

00:28:13 Jordan Yates
Peter, you've got to stop giving away these million ideas for free. I am just realizing writing this down, this is what you did last time we hung out too, was you're giving me these million dollar ideas. And I'm like, " Okay, someone's going to listen to this, and then they're about to go do that." And you know what? I hope they do. I hope somebody makes a fortune off this, give Peter royalties-

00:28:33 Peter Evans
As I mentioned, we have already digital marketplaces for warehouse space.

00:28:39 Jordan Yates
Yeah.

00:28:40 Peter Evans
Like the Warehouse Exchange. Why not have that for underground reservoir? Now, I understand it's a lot more complicated to understand what's going on underground than it is in a building with storage facilities. However, it is not impossible. And there are companies that specialize in understanding the underground geology, and the modeling around that, just in the last 20 years, it's gotten so much better. So it's not going to be perfect, but it would be pretty interesting. And the inventory would be on a scale from really attractive and secure that they could put some guarantees around to no, you don't want to put anything there right now. And that would be the auction, and so there would be a sliding scale. But it would induce all sorts of really valuable behavior, which is the people sitting on this land suddenly would be like, " Hey, I want to be part of that auction because that asset that I have right now isn't performing and generating revenue, but it could." And so they would reveal information about it, and then they could clean up the deeds problem that you just mentioned to figure out who actually owns it. And it would actually create incentives to clean that up, because right now nobody wants to have it because it's a liability. Suddenly it becomes a valuable asset.

00:30:01 Lizzie
What other challenges or roadblocks do you see, or what's the largest issue that we have to overcome besides just connecting all of these different players in the oil and gas space, to make that vision happen?

00:30:13 Peter Evans
Yeah. So one I think really interesting question is who would be the orchestrator of the marketplace?

00:30:21 Jordan Yates
You, Peter.

00:30:22 Peter Evans
So in a marketplace, you've got buyers and sellers. And then you often have what they call compliments, which are added value services. So in the apparel space, one kind of compliment would be what they call the tracing technology to understand the origin of that. So there's a bunch of innovation happening around tracing technology. And that can be embedded in the clothing or it can be other types of blockchain technology. In any event, so you have buyers and sellers. So then the question becomes, who would come into the marketplace to try to orchestrate and bring the parties together? And in the oil and gas space, you have some big heavyweight players. And then you have lots of mom and pop operations as well. And so how could you come in with an orchestrator? And then the question becomes, is it an incumbent company that comes and tries to do this? Or is it a startup? Or it could actually be a public- private partnership, or it could be an industry consortium. And so there's a bunch of different ways of organizing that. And I think in the oil and gas industry, they're still sorting that out. But there's a bunch of drivers that are coming into play. Like I mentioned, those extended producer responsibility laws, public sentiment, and the fact that there's valuable assets there that could be recovered. So it's a combination of incentives. On the one hand, economic incentives and regulation, that I think are creating the conditions for the industry to change from the linear to the circular.

00:31:59 Jordan Yates
Man, I hate to cut you off when it's getting good, but you're going to have to wait for next week's episode. We're going to get into part two of the Circular Economy with Peter Evans. I hope you guys enjoyed listening today. As always, I'm your host, Jordan Yates, and I'll see you next week on The Energy Pipeline. Bye, guys.

00:32:20 Speaker 4
Come back next week for another episode of The Energy Pipeline, a production of the Oil and Gas Global Network. To learn more, go to oggn. com.