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FUEL CELL AS A POTENTIAL DISRUPTIVE INNOVATION:
A CASE STUDY OF SAUDI ARAMCO
By
Noura Y. Mansouri
A business research project submitted in partial fulfillment of the requirements
for the degree of
MBA in Technology Exploitation and Management
Department of Materials
Queen Mary, University of London
September 2004
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Dedication
In the name of Allah, the Most Merciful, the Most Graceful
“For Allah hath sent down to thee the Book and Wisdom and taught thee what thou knewest not (before): and great is the Grace of Allah unto thee”. An-Nisaa,113
This work is dedicated to my parents, Zohour Mukhtar and Dr. Youssef Mansouri; my
fiancé Ammar Youssef, and my siblings, Maha, Sara, Feher, Aara, Reef, and Modhar.
For being them and for all their prayers, unconditional love, and continuous irreplaceable
support to me.
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Acknowledgement
My grand gratitude is to my Lord, Allah, who Has granted me faith, patience, knowledge and
power to complete this project.
“This is by the grace of my Lord! to test me whether I am grateful or ungrateful! And if any is grateful, truly his gratitude is (a gain) for his own soul; but if any is ungrateful, truly my Lord is Free of All Needs, Supreme in Honour!" An-Naml, 40
This space has been set to express my overflowing thanks and sincere appreciation to
much-needed efforts that contributed in completing this project.
Prof. Lakis Kaounides, my supervisor, for continuous support, valuable
guidance, endless feedback, joyful spirit, and mostly, his certain confidence in
me.
Mr. Jonathan Alltimes, co-supervisor, for professional guidance and challenging remarks
that aims for perfection.
Saudi Aramco: Dr. Mohammad Al-Ansari, Mr. Bashir Dabbousi and Mr.
Richard Horner; for an opportunity of an effective interview, tremendous
help and generous information, without which, this project may have proved difficult.
Sheikh Ahmad Zaki Yamany, Saudi Former Petroleum Minister, Chairman, CGES, for his
kind support, and an opportunity of an enlightening interview adding great value to my work.
Sheikh Hisham Nazer, Saudi Former Petroleum Minister, for his cooperation and
willingness to help, if it was not for his health problem, may he recover soon.
Dr. Akram Yosri, Professor of IT, New York University, Information Technologies
Institute, my mentor, for his care and continuous support and feedback
Dr. Paul Harbourne, Senior Research Fellow, Cass Business School, City of London, for
providing feedback and critical information to my project.
Rajen Shah, my colleague and friend, for all his cooperation and feedback throughout the
project and generous sharing of information.
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Executive Summary
This project argues that fuel cell technology is a potential disruptive innovation to the
automotive industry and eventually to the oil industry. The research question that this project
aims to answer is: is fuel cell a disruptive innovation to the oil industry? 47% of the
petroleum products find its way in gasoline which powers the automotive sector. Since the
oil industry is owned by Saudi Arabia in terms of reserves, thus, if disruption occurs it will
not only affect the automotive sector, yet, it will reach out to affect the Saudi Arabian oil-
based economy and ultimately, the global oil industry.
This hypothesis is put into test to further comprehend the problem at hand, by
reviewing the literature on disruptive innovation we hope to understand the scenario in the
automotive industry through employing the theories and frameworks. Moreover, interviews
with practitioners in the field have been conducted to identify the current activities and future
plans of concerned areas of the project.
Through examining and analyzing the oil industry using Porter’s five forces model,
we comprehend the: suppliers, buyers, new entries, competitors and substitutes which are
exerting power that could re-shape the current oil market. For instance, the power of
substitutes has been of importance in recent years. The challenges foreseen in the medium-
long term could bring about the end of the oil age (estimated to start decreasing between
2005 and 2025TP
1PT); in particular, we point out the legal and environmental pressures created by
the Kyoto Protocol which satisfies the objective of the 1992 UN Framework Convention on
Climate Change.
In addition, the depletion of oil is another concern of the future, although major
suppliers of crude oil in the market, such Saudi Arabia, have reassured the energy market of
the ability to provide sustainable and reliable supply for at least until 2020. However, the
concern remains worrying with the many opposing views and statistics and for the period
after 2020.
Furthermore, new technology innovation such as fuel cell could result into new
‘attacking’, ‘disrupting’ or ‘invading’ products (as the theorists Foster, Christensen and
Utterback respectively denote it). These new products of hydrogen fuel cell vehicles may
TP
1PT Energy Information Administration, 1998
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have the potential to transform the automotive market, if not in the medium-term then in the
long-term. Especially with the increasing investments by leading automotive companies,
such as: Toyota, GM, Daimler Chrysler, Honda, Ford…etc, in the fuel cell market.
Continuous R&D efforts in the automotive sector predicted the entry of fuel cell technology
as an emerging technology today, holding the potential to become the leading key technology
by 2020 and not further than 2050 rests as a base technology in the automotive market.
Through comprehending the theories and frameworks in ‘disruptive innovation’,
strictly, Foster’s S-curve model, Christensen’s disruptive innovation, and Utterback’s
dynamics of innovation model; these theories are then employed to the scenario in the
automotive industry to further understand the impact of fuel cell. In conclusion, we found
that hydrogen fuel cell is not a disruptive innovation (at least not in the literal terms of
Christensen’s context) However, it holds great potential to transform the industry and basis
of competition within the timeframe given.
To further understand the situation, we utilize Utterback’s model of innovation and
have reached the conclusion that fuel cell is estimated to be a dominant design in the
automotive sector around year 2016.
Therefore, hydrogen fuel cell technology possesses a threat to the automotive market
and eventually the oil industry, if not considered wisely. The case study that is exploited in
this project is Saudi Aramco, the Saudi state-owned oil company controlling the world’s
largest oil reserves in Saudi Arabia. According to their current investments and R&D efforts,
we believe that not much concern is given to fuel cell technology. Hence, using A. D. Little
framework of technology strategy we assess the current technology position of Saudi Aramco
considering its competitors R&D efforts. Afterwards, we develop a technology strategy
framework for Saudi Aramco.
Through the continuous assessment and development of this strategy we hope to
secure Saudi Aramco from any threatening technology, such as fuel cell, and eventually
securing the oil-based economy of Saudi Arabia and consequently, the global oil industry
within the ‘energy’ market.
Noura Y. Mansouri
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Table of Contents
TUCHAPTER 1: INTRODUCTION UT .........................................................................................................................1
T1.1 INTRODUCTIONT ................................................................................................................................1 T1.2 BACKGROUNDT ..................................................................................................................................1 T1.3 RESEARCH QUESTIONT .....................................................................................................................1 T1.4 AIMS AND OBJECTIVEST....................................................................................................................2 T1.5 METHODOLOGYT ...............................................................................................................................2 T1.6 PROJECT STRUCTURE T......................................................................................................................3
TCHAPTER 2: THE OIL INDUSTRY: AN OVERVIEWT .....................................................................................5
T2.1 INTRODUCTIONT ................................................................................................................................5 T2.2 THE OIL INDUSTRYT..........................................................................................................................5
T2.2.1 Clarification of IndustriesT ........................................................................................ 6 T2.2.2 Petroleum RefineryT .................................................................................................. 7
T2.3 OIL AND PETROLEUM INDUSTRY ANALYSIST ..................................................................................9 T2.3.1 Porter’s Five Forces ModelT...................................................................................... 9 T2.3.2 General TrendsT....................................................................................................... 13 T2.3.2 General TrendsT....................................................................................................... 14 T2.4.1 Environmental and Legal PressuresT....................................................................... 18 T2.4.2 New TechnologyT .................................................................................................... 19 T2.4.3 Energy source scarcityT ........................................................................................... 20 T2.4.4 Social and Personal PriorityT................................................................................... 20
TFINDINGS AND CONCLUSIONT...............................................................................................................21 TREFERENCEST ........................................................................................................................................22
TCHAPTER 3: FUEL CELLS: AN OVERVIEWT ................................................................................................24
T3.1 INTRODUCTIONT ..............................................................................................................................24 T3.2 WHAT IS A FC? T ..............................................................................................................................24 T3.3 HOW FCS WORK T............................................................................................................................24 T3. 5 TYPES OF FCST ...............................................................................................................................28
T4.5.1. Alkaline FC (AFC) T ............................................................................................... 29 T4.5.2. Proton Exchange Membrane FC (PEMFC) T .......................................................... 29 T4.5.3. Phosphoric Acid FC (PAFC) T ................................................................................ 30 T4.5.4. Molten Carbonate FC (MCFC) T ............................................................................. 30 T4.5.5. Solid Oxide FC (SOFC) T........................................................................................ 30
T3.6 FC APPLICATIONST .........................................................................................................................31 T3.6.1 TransportationT ........................................................................................................ 31 T3.6.2. Stationary PowerT ................................................................................................... 31 T3.6.3. Portable PowerT ...................................................................................................... 31
T3.7 BENEFITST ........................................................................................................................................32
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T3.7.1. Reduce Greenhouse Gas (GHG) EmissionsT ......................................................... 32 T3.7.2. Reduce Air PollutionT............................................................................................. 32 T3.7.3. Improve Energy EfficiencyT................................................................................... 32 T3.7.4. Other Benefits include:T ......................................................................................... 33
T3.8 CHALLENGEST .................................................................................................................................35 T3.8.1. Cost T ....................................................................................................................... 35 T3.8.2. Storage T .................................................................................................................. 35 T3.8.3. InfrastructureT......................................................................................................... 35 T3.8.4. Other challenges:T .................................................................................................. 35
T3.6 FUEL CELLS TODAY AND BEYONDT ...............................................................................................36 TUSAT................................................................................................................................. 36 TJapanT ............................................................................................................................... 37 TUKT................................................................................................................................... 37 TEurope T ............................................................................................................................. 38
T3.7 FINDINGS AND CONCLUSIONT .........................................................................................................41 TREFERENCEST ........................................................................................................................................43
TCHAPTER 4: THE IMPACT OF HYDROGEN FUEL CELLS ON THE AUTOMOTIVE INDUSTRY: TECHNOLOGY FRAMEWORKS PERSPECTIVET..........................................................................................46
T4.1 INTRODUCTIONT ..............................................................................................................................46 T4.2 THE ENERGY ECONOMY AND THE AUTOMOTIVE SECTORT.........................................................46
T4.2.1 The Technological LinksT ....................................................................................... 46 T4.2.2 The Economical LinksT ........................................................................................... 49 T4.2.3. Findings T................................................................................................................. 59
T4.3 TECHNOLOGY STRATEGY: THEORIES AND FRAMEWORKST ........................................................59 T4.3.1 Foster’s S-curve Model (1986)T .............................................................................. 59 T4.3.2 Christensen’s Disruptive Technology Framework (1997) T..................................... 64 T4.3.3 Utterback’s Dynamics of Innovation Model (1994)T .............................................. 71 T4.4 Findings and ConclusionT........................................................................................... 76
TREFERENCEST ........................................................................................................................................77
TCHAPTER 5: THE IMPACT OF HFCV ON THE OIL INDUSTRY: A CASE STUDY OF SAUDI ARAMCO T.............................................................................................................................................................80
T5.1 INTRODUCTIONT ........................................................................................................................................80
T5.2 SAUDI ARAMCO: A TECHNOLOGY STRATEGY PERSPECTIVET ....................................................81 T5.2.1 Brief History of Saudi Aramco T .............................................................................. 81 T5.2.2 Saudi Aramco TodayT ............................................................................................. 81 T5.2.3 Assessing Saudi Aramco Technology PositionT ..................................................... 82 T5.2.4 Saudi Aramco: Building a Technology Strategy for Leadership in Fuel Cells for the Automotive SectorT .................................................................................................... 92
T5.3 ECONOMIC IMPACTS ON SAUDI ARABIAT ......................................................................................96 T5.3.1 Importance of Saudi ArabiaT ................................................................................... 96 T5.3.2 Economical OverviewT............................................................................................ 96 T5.3.3 International legal participation for Ssustainable development ST ............................... 97
T5.4 FINDINGS AND CONCLUSIONT .........................................................................................................97 TREFERENCEST ........................................................................................................................................98
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TCHAPTER 6: DISCUSSION AND CONCLUSION T ..........................................................................................99
T6.1 INTRODUCTIONT ..............................................................................................................................99 T6.2 THEORETICAL FINDINGST.............................................................................................................100
T6.2.1 The oil industryT .................................................................................................... 100 T6.2.2 Fuel Cell TechnologyT........................................................................................... 100
T6.3 EMPIRICAL FINDINGST ..................................................................................................................101 T6.3.1 The Energy Economy and the Automotive SectorT .............................................. 101 T6.3.2 The impact of hydrogen fuel cell on the automotive sectorT................................. 102
T6.4 FURTHER DISCUSSION AND CONCLUSIONT..................................................................................108 TREFERENCES: T.................................................................................................................................... - 1 -
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List of Tables TTABLE 1: TYPES OF FC TECHNOLOGY THEIR CHARACTERISTICS AND APPLICATIONS (FUELLING A GREENER
ECONOMY, 2004) / (FC TECHNOLOGY HANDBOOK, 2003) / (FC SYSTEMS EXPLAINED, 2000)T ......................28 TTABLE 2 THE APPLICATIONS AND MAIN ADVANTAGES OF FCS OF DIFFERENT TYPES, AND IN DIFFERENT
APPLICATIONS. (FC SYS EXPLAINED, 2000)T .................................................................................................30 TTABLE 3 THE AUTOMOTIVE FC MARKET: DRIVERS, ENABLERS AND DRIVERS, ENABLERS AND CONSTRAINTS
(SOURCE: AUTOMOTIVE COMPASS, 2002)T ...................................................................................................50 TTABLE 4 EXAMPLES OF POSSIBLY DOMINANT TECHNOLOGIES (SOURCE: AUTHOR USING DATA FROM ICCEPT,
2002)T ...........................................................................................................................................................52 TTABLE 5 BASIS OF COMPETITION AND KEY SUCCESS FACTORS (SOURCE: A. D. LITTLE CITED IN FLOYD, 1997)T .87 TTABLE 6 IDENTIFICATION OF TECHNOLOGIES UNDERPINNING KEY FACTORS OF SUCCESS (SOURCE: AUTHUR USING
ARTHUR D. LITTLE FRAMEWROK) T ...............................................................................................................87 TTABLE 7 OIL COMPANIES PARTICIPATION IN THE FUEL CELL MARKET (SOURCE: AUTHUR)T.................................89 TTABLE 8 STRATEGIC IMPLICATIONS OF COMPETENCE LEVELS AND THE GENERIC STRATEGIES FOR TECHNOLOGY
DEVELOPMENT (SOURCE: AUTHOR USING ARTHUR D. LITTLE FRAMEWORK)T .............................................91 TTABLE 9 STRATEGY TRANSLATION INTO SPECIFIC TECHNOLOGY OBJECTIVES (SOURCE: AUTHOR USING RICHARD
GRANGER, 2004)T .........................................................................................................................................95 TTABLE 10-6 U.S. DEPARTMENT OF ENERGY, ENERGY INFORMATION ADMINISTRATION, INTERNATIONAL ENERGY
GROUP, JANUARY 1998.T ............................................................................................................................- 4 - TTABLE 11 FUEL ECONOMY TRENDS DATA FOR LIGHT-DUTY VEHICLE CARS (ICEV, HYBRID AND HFCV)T..........12
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List of figures TFIGURE 2 CRUDE OIL REFINERY (SOURCE: BRITANNICA ENCYCLOPEDIA, 1995)T....................................................7 TFIGURE 3 ATMOSPHERIC DISTILLATION TOWER (SOURCE: COURTESY OF THE PETROLEUM COMMUNICATION
FOUNDATION, 1998)T ......................................................................................................................................8 TFIGURE 6 PRICE FLUCTUATIONS (SOURCE: BP STATISTICAL REVIEW OF WORLD ENERGY, 2004)T .......................14 TFIGURE 7 MAJOR TRADE MOVEMENTS (SOURCE: BP STATISTICAL REVIEW OF WORLD ENERGY, 2004)T .............15 TFIGURE 8 CONSUMPTION PER CAPITA OF OIL (SOURCE: BP WORLD STATISTICAL REVIEW, 2004)T ........................16 TFIGURE 10 THE POTENTIAL ENERGY TECHNOLOGY DISCONTINUITIES (SHELL SCENARIOS TO 2050, 2001)T............18 TFIGURE 11 FC OPERATIONS (SOURCE: USDOE, 2004)T..........................................................................................25 TFIGURE 12 FC COMPONENTS (SOURCE: USDOE, 2004)T........................................................................................25 TFIGURE 13 FC CHEMICAL PROCESS (SOURCE: USDOE, 2004)T..............................................................................26 TFIGURE 14 HYDROGEN FC VEHICLE OPERATIONS (SOURCE: ARGONNE NATIONAL LABORATORY, 2004)T ...........28 TFIGURE 15 USES OF DIFFERENT FC TYPES. (FC TODAY, 2003)T .............................................................................29 TFIGURE 16 FC DEMONSTRATION CARS BY NISSAN, TOYOTA, SUZUKI AND HONDA (SOURCE: FCS TODAY, 2003)T
....................................................................................................................................................................31 TFIGURE 17 WELL-TO-WHEEL GRAPHICAL DEMONSTRATION (SOURCE: GM, 2002)T..............................................34 TFIGURE 18 WELL-TO-WHEEL ANALYSIS IN TERMS OF PERFORMANCE (SOURCE: GM, 2002)T ..................................34 TFIGURE 19 ANNUAL GOVERNMENT EXPENDITURE IN 2002T...................................................................................36 TFIGURE 21 THE FC MARKET SHARE OF COUTNRIES, AUTOMOTIVE COMPASS 2002T...............................................39 TFIGURE 22 FC MARKET SHARE OF AUTOMOTIVE COMPANIES (SOURCE: AUTOMOTIVE COMPASS 2002)T .............39 TFIGURE 23 MANAGEMENT QUALITY ASSESSMENT: FC TECHNOLOGY (SOURCE: SAM & WRI, 2004)T ................40 TFIGURE 24 FC STRATEGIES FOR PASSENGER CAR MANUFACTURING (SOURCE: ICIET, 2003)T ...............................41 TFIGURE 25 CLARIFYING STRUCTURE OF CHAPTERS 2, 3, AND 4 (SOURCE: AUTHOR) T ............................................47 TFIGURE 26 THE ENERGY ECONOMY: TECHNOLOGICAL LINKS (SOURCE: AUTHOR, INCORPORATED FROM
BRITANNICA ENCYCLOPEDIA REFINERY FLOW CHART AND GENERAL MOTORS WELL-TO-WHEEL
ANALYSIS DIAGRAM) T ..................................................................................................................................48 TFIGURE 27 TECHNOLOGY MATURITY (SOURCE: AUTHOR USING DATA FROM ICCEPT, 2002)T...............................52 TFIGURE 28 AUTOMOTIVE FC VEHICLES MARKET GROWTH, (AUTOMOTIVE COMPASS, 2002)T ..............................53 TFIGURE 29 CUMULATIVE GLOBAL FC APPLICATIONS AND SYSTEMS BUILT (SOURCE: FUEL CELL TODAY, 2003)T
....................................................................................................................................................................53 TFIGURE 30 PERCENTAGE OF FC TYPES IN ALL ACTIVITIES DONE GLOBALLY (SOURCE: FUEL CELL TODAY, 2003)T54 TFIGURE 31 SHARE OF FC MARKET BY COUNTRIES (SOURCE: FUEL CELL TODAY, 2003)T.......................................54 TFIGURE 32 WORLDWIDE GOVERNMENT SUPPORT IN $ US MILLION (SOURCE: FUEL CELL TODAY, 2003)T ..........54 TFIGURE 33 GLOBAL GROWTH OF FC PATENT (SOURCE: FUEL CELL TODAY, 2004)T..............................................55 TFIGURE 34 QUANTIFICATION OF THE RISKS (VALUE EXPOSURE) AND OPPORTUNITIES (MANAGEMENT QUALITY)
OF CARBON CONSTRAINTS (SOURCE: SAM & WRI, 2004)T..........................................................................56 TFIGURE 36 EUROPEAN HYDROGEN VISION (SOURCE: HLG, 2003)T .......................................................................58
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TFIGURE 37 S-CURVE (FOSTER, 1986)T ....................................................................................................................59 TFIGURE 38 S-CURVE DEFENDER AND ATTACKER (FOSTER, 1986)T ........................................................................60 TFIGURE 39 S-CURVE OF ICEV FUEL ECONOMY IMPROVEMENTS FROM TECHNOLOGY COST EFFORTS (SOURCE:
AUTHOR USING DATA FROM TA ENGINEERING, INC, 2002 AND EPA, 2004: SEE APPENDICES C1 & C2) T ....62 TFIGURE 40 S-CURVE OF ICEV FUEL ECONOMY IMPROVEMENTS FROM TECHNOLOGY COST EFFORTS (SOURCE:
AUTHOR USING DATA FROM TA ENGINEERING, INC, 2002 AND EPA, 2004: SEE APPENDICES C1 & C2) T ....62 TFIGURE 41 S-CURVES OF ICEV VS. HFCV (SOURCE: DERIVED FROM FOSTER, 1986)T............................................63 TFIGURE 43 PARADIGM SHIFTING (SOURCE: AUTHOR DERIVED FROM KAOUNIDES, 2004)T .....................................66 TFIGURE 46 FUEL ECONOMY AND GHG EMISSIONS OF HFCV / ICEV (SOURCE: MIT (WEISS ET AL, 2000))T .........70 TFIGURE 47 COMPARISONS OF EMISSIONS BY VEHICLES (SOURCE: CALIFORNIA FC PARTNERSHIP, 2001)T .............70 TFIGURE 48 THE DYNAMICS OF INNOVATION (SOURCE: UTTERBACK, 1994)T..........................................................72 TFIGURE 49 PERFORMANCE OF AN ESTABLISHED AND AN INVADING PRODUCT CONTRASTED ALONG ONE
PERFORMANCE DIMENSION (SOURCE: UTTERBACK, 1994)T ..........................................................................73 TFIGURE 50 PERFORMANCE OF ICEV AND HFCV CONTRASTED ALONG FUEL ECONOMY DIMENSION (SOURCE:
AUTHOR - INCORPORATING FIGURE 44 AND 49)T...........................................................................................74 TFIGURE 51 HFCV COST / PERFORMANCE RELATIONSHIP - DOMINANT DESIGN EMERGENCE (SOURCE: AUTHOR -
INCORPORATING UTTERBACK’S DOMINANT DESIGN MODEL TO HFCV)T .....................................................75 TFIGURE 52 CURRENT TECHNICAL COMPETENCE OF OIL REFINERY (SOURCE: WWW.OSHA.SLC.GOV) T ...................84 TFIGURE 53 COMPARISON HFC AND ICE (SOURCE: SCIENTIFIC AMERICAN, 2002)T................................................85 TFIGURE 54 STRUCTURED APPROACH TO BUSINESS AND TECHNOLOGY STRATEGY (SOURCE: ARTHUR D. LITTLE) T
....................................................................................................................................................................92 TFIGURE 55 DETERMINANTS OF TECHNOLOGY STRATEGY (SOURCE: BURGELMAN, R., CHRISTENSEN C.,
WHEELWRIGHT S., 2004)T.............................................................................................................................94 TFIGURE 56 FUEL CELL TECHNOLOGY POSITION BASED ON FINDINGS (SOURCE: AUTHOR) T.................................102
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List of Appendices
TAPPENDICES T.................................................................................................................................................. - 2 -
TAPPENDIX AT ...................................................................................................................................... - 3 - TAppendix A1: Brief History and DefinitionsT................................................................- 3 - TAppendix A2: Petroleum ProductsT ...............................................................................- 4 - TAppendix A3: Oil Distillation ProcessT .........................................................................- 5 - TAppendix A4: Oil-related groupsT..................................................................................- 6 - TAppendix A5: Oil ReservesT ..........................................................................................- 7 - TAppendix A6: Oil ProductionT .......................................................................................- 8 - TAppendix A7: Chemical Releases from Petroleum RefineriesT.....................................- 9 -
TAPPENDIX BT..................................................................................................................................... - 10 - TAppendix B1: History of FCT.......................................................................................- 10 -
TAPPENDIX CT .................................................................................................................................... - 12 - TAppendix C1: Fuel Economy Trends for Light-duty Vehicle CarsT ............................- 12 - TAppendix C2: Data on Fuel Economy for ICEV, Hybrid V, and HFCVT ...................- 14 - TAppendix C3: GHG emission Performance DataT .......................................................- 18 -
TAPPENDIX DT .................................................................................................................................... - 19 - TAppendix D1: Sheikh Yamany InterviewT...................................................................- 19 - TAppendix D2: Legal Restrictions on Saudi Arabia (Saudi Aramco) T ..........................- 21 - TAppendix D4: SABICT .................................................................................................- 22 - TAppendix D5: Naptha-based fuelT................................................................................- 22 - TAppendix D6: Saudi Aramco Competitors participation in FC marketT......................- 22 - TAppendix D7: Ballard Power Systems, Inc.T ...............................................................- 24 - TAppendix D8: Interview with Saudi Aramco T .............................................................- 25 -
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Chapter 1: Introduction
1.1 Introduction
We are facing a future that is full of potential disaster due to the many challenges
expected to be facing the world economy’s most precious resource, oil. If this is true, then it
is important to learn how to avoid the collapse of our oil-dependent economies and transport
systems and how to react wisely to these problems. This project is concerned with the
emerging technology of fuel cell with a particular emphasis on the automotive application of
its use. The aim is to study the impact of this new technology on the energy economy,
dominated by the oil industry today, through examining the scenario in the automotive sector
we hope to reach signifying conclusions for Saudi Aramco, the case study of this project, to
react intelligently.
1.2 Background
The importance of the topic of fuel cell and its impact on the oil industry stems from the
current environmental, economical and legal pressures facing our energy economy. The oil,
for many years, has served as the world’s source of energy. However, the challenges
anticipated including: greenhouse emissions from the automotive vehicles, the legal
conventions on climate change, the geological future depletion of oil, the emerging of fuel
cell technology and its automotive application, are all exerting pressures on accelerating
R&D on renewable energy.
1.3 Research Question
The research question that this project aims to answer is: is fuel cell a disruptive innovation
to the oil industry? The scope of the project embraces the case study of Saudi Aramco, the
state-owned oil company, considering its current activities and together
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with the outcome of the disruptive innovation theories utilized in the automotive sector, we
wish to develop a recommended framework for the company to develop a technology
strategy which takes into account the emerging technology of fuel cell, seizing an
opportunity that would have been a threat if it were not to be considered.
1.4 Aims and Objectives
• Analyze the oil industry and realize the threats imposed from the power of substitutes
created by the legal, environmental, technological and social pressures in the energy
economy
• Understand the technology of fuel cell and identify the future potential it holds in the
automotive sector
• Comprehend the links between the hydrogen fuel cell, automotive sector and oil industry
• Utilize the disruptive innovation theories and frameworks and well-employ it on the
problem at hand in the automotive sector, considering the merging hydrogen fuel cell vehicle
versus the conventional internal combustion engine
• Measure the outcome from the analysis provided in the automotive sector on the oil
industry and realize the threat it could possess
• Assess the current technology position in Saudi Aramco and recommend a solution by
developing a technology strategy framework to react to the situation
• Tackle the consequent impact on the Saudi oil-based economy
1.5 Methodology
Out of the eight modules completed during the year as part of the completion of the MBA in
TEXMAN program, I opt to incorporate two modules: Strategic Management of
Technologies will help me in presenting clear overviews, construct valid arguments to
answer the thesis question; through the assimilation of the theories, models, frameworks and
case studies in the area of ‘disruptive innovation’ that is utilized in Chapter 4. In addition, the
International Economics Engineering module offer the tools, concept and theories to help in
measuring the economical impacts on the industries and economies of the new technology
which I wish to undertake in Chapter 5.
The method that I chose to endure starts in the early chapters, the theoretical part,
with a brief literature review of, relative written materials by practitioners in the field in the
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areas I wish to discuss starting with the oil industry, the technology of fuel cell. Next, the
analytical part includes the disruptive innovation theories followed by technology strategy
framework. The discussion comes in later stages with the findings from the models adopted
and the application in the case study, conclusions and recommendations is drawn at the last
chapter.
The theories and models used throughout the project are:
• Porter’s five forces model, chosen because it is a most effective model reflecting a
holistic view of any industry to be analyzed
• Foster’s S-curve, applied to give the basic fundamentals of the problem understanding
• Christensen’s disruptive technology framework, it was taught as part of the module of
Strategic Management of Technologies, and applied to test the hypothesis
• Utterback’s dynamics innovation model, provides a more suitable model to our problem
• Arthur D. Little’s technology strategy, provide a step-by-step framework for developing a
technology strategy
In addition, the collection of various sources; involved primary data, this was mainly
interviews carried out with relevant people. This include: Sheikh Ahmad Zaki Yamany, the
Saudi former petroleum minister and the current CEO of the centre of global energy studies;
Sheikh Hisham Nazer, a former Saudi petroleum minister; Senior researchers in Saudi
Aramco, Dr. Mohammad Al-Ansari and Mr. Hisham Dabbousi. Secondary data was
extracted from books, websites, statistical studies, articles from journals, previous papers and
reports by research institutes, companies and government agents. This mosaic of opinions,
facts and figures supports the analysis and answering of the thesis question throughout the
project.
1.6 Project Structure
The structure of the paper reflects the logic and focus behind the presentation of the
arguments and discussions throughout the thesis.
Chapter 1 introduces the reader to the project and summarizes the general idea, the
background of the problem, issues presented and the arguments discussed with a brief
explanation of the thesis question, aims and objectives, methodology and project structure.
Chapter 2 portrays the global oil industry; the analysis of the industry using Porter’s five
forces, spotting the general trends in the industry. It then presents foreseen challenges in the
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future trends of the industry, exerted by legal, environmental, technological and social
factors.
Chapter 3 presents an explanation of fuel cell technology; its history, types, generation, and
the basics on its applications, benefits and challenges. It also summarizes activities and R&D
efforts done by leading automotive companies and major countries in the area of fuel cell.
Chapter 4 argues the impact of fuel cell on the oil industry by linking it through the
automotive sector using disruptive innovation theories and frameworks. Hence, concluding
the outcome of this application.
Chapter 5 examines the case study of Saudi Aramco, measures the impact of the outcome
found in Chapter 4 on the Saudi oil-based economy. Using the technology strategy
framework to assess the current technology position in the company, and develop a future
strategy for reacting to the foreseen challenges.
Chapter 6 concludes the theoretical and empirical findings of the thesis and presents a
discussion on the project with concluding remarks and recommendations.
A schematic structure of the project chapters with relevant percentages:
Theoretical Findings
30 %
Empirical Findings
65 % Chapter 4: Automotive Sector: Technology Framework
Chapter 5: Saudi Aramco: Technology Strategy
Chapter 6: Discussion and Conclusion
Chapter 1: Introduction
Chapter 2: Oil industry
Chapter 3: Fuel Cell
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Chapter 2: The Oil Industry: An Overview
2.1 Introduction
This chapter provides an overview of the oil industry, it first starts by a descriptive
summary defining the industry and follows it with clear classification of the overlapping
industries, it then presents a brief understanding of the oil refinery process. The following
part presents an analysis of the oil industry using Porter’s Five Forces Model; afterwards
highlights for some general trends taking place in the oil industry, and forecasted future
trends and explanations for some challenges that could be faced by the oil industry and the
global energy markets in the medium-long term.
2.2 The Oil Industry
The geological origin of oil begins with the proliferation of algae, most commonly in shallow
oceans. Organic matters sink to the sea-floor forming layers of bacterial substances. These
conditions persist for hundred of thousands of years which are then buried and heated by
earth’s heat flow, enduring chemical changes which converts it into what is known today as
‘oil’ (Fleay, 1995).
Oil TP
2PT in its crude state has very minimal value, thus, it need to be refined to be of high-value.
The crude oil enters petroleum refinery which uses chemical, thermal and physical processes
to separate it into its major distillation factors that convert it into a various array of useful
petroleum products. (Speight J., 2002)
The fuels derived from petroleum accounts for ⅓ – ½ of the world energy supply. These are
used not only for transportation fuels, such as gasoline, diesel fuel, and aviation fuel, but also
to run power plants. However, the transportation fuels account for 90% of the petroleum
products (US DoE, 2004), alone, gasoline automotive fuel accounts for 47% of the petroleum
product (EIA, 2004). Petroleum products are used in various forms, from gaseous to liquid
fuels to near-solid machinery lubricants (Speight J. and Ozüm B., 2002).
TP
2PT Petroleum, Crude oil and Oil refer to the same term, the terms are used interchangeably - For further
definitions of related concepts, refer to Appendix A1
6
Exploration, Production & Supply of Crude Oil & Natural Gas
Processing crude oil/NG for the manufacture of Gasoline
Oil & Gas Industry
Automotive Industry
Petroleum Industry or Refinery
Powering of the automotive light-weight vehicles Internal Combustion Engine Vehicles
The majority of energy consumption in the world is produced from fossil fuels, such as coal,
petroleum, natural gas, which are carbon-based. Smaller amounts of energy are also been
explored and produced by alternative ways such as nuclear, hydroelectric, and renewable
sources (fuel cells, wind power, biomass).
Petroleum products are petroleum-based products which include: refinery gas, ethane,
liquefied petroleum gas (LPG), naptha, gasoline, aviation fuel, marine fuel, kerosene, diesel
fuel, distillate fuel oil, residual fuel oil, gas oil, lubricants, white oil, grease, wax, asphalt, as
well as coke.TP
3PT
This project focuses on the gasoline, derived from the petroleum products, powering the
automotive sector, more specifically, the light-weight vehicles with internal combustion
engines (ICE).
2.2.1 Clarification of Industries The Oil and Gas industry act as the source to the petroleum industry or refinery. It
supplies the crude oil and natural gas as feedstock to the refinery. In the petroleum industry
or refinery, the crude oil and natural gas are processed and manufactured into a various array
of petroleum products, amongst these, the major are the fossil fuels: Diesel fuel and Gasoline
fuel which are massively used today to power the automotive sector.
The classification of industries is shown in Figure 1.
TP
3PT Full range of major petroleum products available in Appendix A2
Figure 1 Classification of industries on the basis of feedstock and products (Source: author)
7
2.2.2 Petroleum Refinery
Figure 2 Crude Oil Refinery (Source: Britannica Encyclopedia, 1995)
Petroleum refinery products that are used as fuels for the motor vehicle engines for
transportation are mainly GasolineTP
4PT and Diesel Fuel. The automotive sector is dependent on
these fossil fuels to power their vehicles. Figure 2 shows a clear detailed diagram of the links
from the crude oil, to petroleum refinery, to the gasoline fuel used the end-user product.
TP
4PT Gasoline is also known as, motor gasoline, petrol in Britain and benzene in Europe. Used as a fuel for internal
combustion engines in motor vehicles excluding aircraft.
8
Figure 3 Atmospheric Distillation Tower (Source: Courtesy of the Petroleum Communication
Foundation, 1998)
The oil has to go through a refinery or distillationTP
5PT tower. The crude oil is first extracted from
the oil wells in the ground. It is then pumped into the fractioning tower where it is subject to
high temperature that converts the oil into the array of petroleum products. Including: light
gas for fuel and chemicals, LPG, propane, gasoline, jet fuel and kerosene, diesel fuel,
petroleum coke and asphalts. These products are then used to generate energy and power for
different uses. (Britannica Encyclopedia, 1995) The most significant and mostly used are the
fuels in the transport sector which accounts for 90% of the petroleum products as mentioned
before. Gasoline, alone, accounts for 47% of these products.
TP
5PT For crude oil detailed distillation refer to Appendix A3
9
2.3 Oil and Petroleum Industry Analysis
This part examines the current oil and petroleum industry trends and analyzes the general
trends using the Five Forces model.
Organization of Petroleum Exporting Countries (OPEC) today is the powerful group of oil-
producing nations and amongst its members are the major oil-producing countries with the
world largest oil reserves and production output. The top net exporting country of crude oil
and refined products is Saudi Arabia.
Non-OPEC exporting members are simply the member countries who export oil and are not
OPEC members. Non-OPEC net exporters exported about 12.3% in 2002, in oppose to,
OPEC net exports of 52.7%. The top net exporting non-OPEC country is Russia.
Organization for Economic Cooperation and Development (OECD) has minor exports of oil
and major imports. Commonwealth of Independent States (CIS) is amongst the exporting
region of oil refined products after OECD Europe, Middle East, Western Hemisphere, and
Asia, consecutively. CIS are mainly importers of oil and minor exporters of refined
products.TP
6PT
2.3.1 Porter’s Five Forces Model
This model was originally developed by Michael E. Porter. It is used here to enable the
understanding of the dynamics in the oil industry competitive structure. This model focuses
on five forces that shape competition and determine the competitiveness and the long-term
profitability within an industry, these forces are the following:
1. The risk of new entry by potential competitors
2. The degree of rivalry among established competitors
3. The bargaining power of buyers
4. The bargaining power of suppliers
5. The threat of substitute products
TP
6PT For oil-related groups clarification refer to Appendix A4
Entrants
Substitutes
Industry Competitors Intensity of rivalry
Buyers Suppliers
Bargaining power of suppliers
Bargaining power of buyers
Threat of new entrants
Threat of substitutes
Porter’s Five Forces Model, 1980
The oil industry, like any
However, the political, ec
over the demand and the s
industries (oil and gas indu
treated as one. The followin
Industry Competitors
The competition is not sev
existing between OPEC, n
also be sensed within the c
in the oil industry lies be
capacity. OPEC could be s
Saudi Arabia exerts an abso
Saudi Arabia has an abso
production operations, co
Economies of scale are a
exports, spreading financ
Competition is fierce be
economies of scale and lo
0
Figure 4 Porter Five Forces Model, 19810
industry, is determined by the supply and demand of the market.
onomical, social and technological factors exert greater pressure
upply of oil. Usually the oil and petroleum refer to two different
stry and petroleum industry) for simplicity both industries here are
g are the five forces that underlie the foundation of the industry:
ere in the oil industry. It could be reflected in the competition
on-OPEC members, OECD, CIS and others. Competition could
artels itself between the member states. The basis of competition
tween the oil reserve of a nation and its petroleum production
aid to own the market, more specifically, the Middle East of which
lute advantage.
lute cost advantage over its competition as it enjoys superior
ntrol of inputs of oil reserve, and access to cheaper funds.
lso gained through mass production of petroleum for massive
ial costs, and using technology in the production process.
tween world best practice plants; on the basis of achieving
w average costs through maximization of throughput and use of
11
cheaper source of crude oil. In this scenario, Saudi Aramco competitors could be: Shell, BP,
Exxon Mobil, Chevron.
From a broader view to the energy market, competition could be interpreted amongst the
different sources of energy. This include: oil, gas, coal, nuclear, hydro and renewable energy.
Unless these sources are commercially viable they hold no threat to the oil industry.
Entrants
The entry to a market largely depends on the barriers of entry in an industry. Factors like:
economies of scale, differentiation, capital requirements, switching costs, access to
distribution, cost disadvantages beyond those of scale, and government policy; all increase
the barriers that obstruct the entry to the market. Other factors worth mentioning, hence it is
the oil industry, are the legal and environmental factors. Since, the oil industry is based on
the refinery of crude oil to produce oil-based products, these operations produce byproducts
that are emitted in the air causing considerable amount of pollution. Also, the transportation
sectors contribute in these emissions by its end-user use of the vehicles. (see Chapter 4)
There are high barriers to entry; large capital investments necessary to build and operate
refineries restricts new entrants to established global oil companies. Also, the consumption
within the oil-producing nation is considered. E.g. USA produces 7454 barrels per day (bpd)
but is the highest oil-consumption country which is 20071 bpd, the reason why it has to
import oil to cover the gap between its production and consumption. On the other hand,
Saudi Arabia produces 9817 bpd and has a relatively low oil-consumption which is 1437.
(BP, 2004)
Suppliers
There are few suppliers in the oil industry from which stems their bargaining power; they are
referred to as the oil exporters. The major ones are the OPEC member countries with very
few non-OPEC exporters. OPEC share of the oil market was 51% in 1970. In 2001 it slowly
reached 37% and today its share is about 33%. However, it is still perceived as the world’s
most powerful and successful cartel and accounts for 52.7% of the world total net exports.
(Blackwell energy research, 2003) So, we can say that OPEC owns the market in terms of oil
export, more specifically, OPEC Middle East, of which Saudi Arabia remain the world’s
12
largest oil net exporter of crude oil and refined products, it also holds the world’s largest oil
reserve.(BP, 2004) TP
7PT
In 2003, statistics showed that the largest oil exporter is Saudi Arabia accounting of the total
net export for 16.2%, then Russia for 11.9%, then Norway for 7.4%, then Iran for 5.7%, then
UAE for 5%, Nigeria for 4.3%, Mexico for 4.2%, then Kuwait for 4.1%, and Iraq for 4%...etc
the list goes on and on with Saudi Arabia remaining the largest for the past years and years to
come. (World oil trade, 2003)
Hence, the major player in the oil industry is Saudi Aramco the state-owned oil company of
Saudi Arabia, which controls the world largest reserve of oil and produces the largest amount
of 554,000 million bpd.
Substitutes
Threat of substitute is the major threat to existing markets. These may lead to changing the
basis of competition and eventually bringing the existing industry to an end. This is observed
throughout the shift of product uses by the introduction of newer products that suggested
newer ways of doing things.
Moreover, if we consider the oil market as part of the global energy market, then the
possibility substitution is more threatening. Considering alternative ways of obtaining energy
such as biomass, solar energy, wind power, nuclear energy, and renewable energy (hydrogen
fuel cells); this could impose a threat on the oil market. Increasing R&D has been done in the
area of renewable energy (fuel cell) this will be further explained in Chapter 3.
Buyers
The buyers are usually reached through channels of distribution, in our case is from the
process of manufacturing, to the exporting, then usage in the automotive sector. These starts
at the buyers of the oil industry, the Importers, whom act as the distribution channels through
which the petroleum products are sold to reach the end-consumer in the automotive industry.
There are many buyers in the market, thus, there is no monopoly power of buying. The major
importers are USA and OECD Europe members. (BP, 2004)
The automotive fuels are bought by oil companies in the importing countries, such as, BP,
Shell, ExxonMobile who in turn sell them to power the automotive vehicles. Thus, we can
TP
7PT Refer to Appendix A5 and A6
● Many imports can provide alternative supply option for the major fuel exhausted, gasoline. ● The development of viable alternative energy sources can readily be applied (such as solar energy, wind power…) ● Other viable sources in the long-term might pose threat on petroleum industry (such as fuel cell)
Industry Competition ● Competition is fierce between world best practice plants; on the basis of achieving economies of scale and low average costs through maximization of throughput and use of cheaper source of crude oil. ● Main players are: Saudi Aramco, Shell, BP, Exxon Mobil, Chevron.
Bargaining power of suppliers
Bargaining power of buyers
Threat of new entrants
Threat of substitutes
● Relative power and influence of OPEC has been maintained through low crude oil commodity prices and massive oil reserves of its members. ● Vertical integration is common. Main supplier of crude oil in terms of oil reserve remains: Saudi Arabia
Saudi Aramco Automotive Industry
● High Barriers to Entry; Large capital investments necessary to build and operate refineries restricts new entrants to established global oil companies.
● Few differentiation points in the market, for crude oil commodity. ● Price is highly elastic, resulting in swing productions. Major petroleum product is Gasoline (accounting 47%) and bough in automotive transport vehicles.
Through its state-owned oil company
End-consumers are in the
conclude that really the main end-user buyers of the petroleum (gasoline) the automotive in
the transport sector.
We can arrive at Figure 5 which summarizes the oil industry and five acting forces.
Figure 5 The Current Forces in the Petroleum Industry
13
14
2.3.2 General Trends Price fluctuations
Figure 6 Price Fluctuations (Source: BP Statistical Review of World Energy, 2004)
Figure 6 shows the wide fluctuations of oil prices over the last two decades which are
primarily caused by political events shaping market forces. The oil industry is simply
reacting to these political events which consistently lead to disruption in the supplies of oil.
Moreover, prices have been exceptionally unstable over the past twenty years. The Middle
East, more specifically Iran and Iraq, political disruption could be major causes.
Economically, when supply increases prices consequently increase, yet, in the oil industry
the economical factors will not do without the political events taking place.
15
Major oil movement
Figure 7 Major Trade Movements (Source: BP Statistical Review of World Energy, 2004)
Figure 7 shows the major oil movement in the world. Instantly we can note the largest
exporting arrows flying from the Middle East, Saudi Arabia. The major arrows flowing from
Saudi Arabia supplies the Far East (333.7 bpd) then Asia Pacific (244.2 bpd) then Japan
(208.4 bpd). We can note that the larger supplier of oil is Saudi Arabia; this could mean that
the world oil market could be easily affected by any changes made in Saudi oil supply.
16
Consumption per capita
Figure 8 Consumption per capita of oil (Source: BP World Statistical Review, 2004)
Figure 8 shows the consumption patterns of oil by areas, the dark purple areas shows that oil
is consumed at its highest, which is 6 tons and more per capita this is mainly in North
America, areas with lighter purple colors reflect less consumption of oil.
From the trends we have examined above, we know that oil today is the major source of
energy for the world. However, there are some challenges predicted in the future that is
expected to disrupt the oil industry, this is examined in the next part.
T2.4 Future Trends Current R&D is showing the possibility of oil reduction in demand in the medium-long run.
Figure 9 shows a study by EIA (1998) that projects a gradual reduction on the use of oil in
electricity generation. Figure 10 shows another estimate, provided by Shell, which shows a
gradual takeover by alternative sources of energy. This could be based on four fundamental
drivers, (1) environmental and legal pressures, (2) new technology, (3) energy source
scarcity, and (4) social and personal priority; each one is examined in details below.
Figure 9 Electricity Generation by Fuel Types (source: EIA, 1998)17
18
Figure 10 The potential energy technology discontinuities (Shell scenarios to 2050, 2001)
2.4.1 Environmental and Legal Pressures The Global temperatures have risen 0.6°C over the last 140 yearsTP
8PT; throughout the past
decades, there has been detection in the earth’s atmosphere of increased emissions of
greenhouse gases (GHG). These emissions are mainly due to the automotive sector and the
oil and petroleum refinery plays a part as well.TP
9PT
Kyoto Protocol
In 1997, the 160 member nations met in Kyoto, Japan to negotiate the issue of the limitations
on GHGTP
10PT for the developed nations, meeting the objectives of the UN Framework
Convention on Climate Change of 1992. The result of the meeting was the creation of the
Kyoto Protocol; it has established new emission targets for each member nation, relative to
their 1990 emissions, levels which have to be achieved over the period of 2008 - 2012.
TP
8PT According to BBC news,
TP
9PT Refer to Appendix A7 for petroleum chemical emissions
TP
10PT The GHG approved by the protocol include: carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, per
fluorocarbons, and sulfur hexafluoride.
19
According to (EIA, 1998) the accumulation of GHG over time would cause global climate
changes, proven that by 2070, significant increase in the level of temperature on the earth’s
surface will cause:
• Flooding as polar ice caps melt, raising sea levels
• Extreme weather events due to shifting ocean currents
• Deserts to spread across Europe as land dries up
• Affecting the sea level, agricultural patterns and ecosystems
(EIA, 1998)
Thus, The Kyoto protocol legally pressurizes its members to meet their targets, and it legally
binds industrialized nations to reduce worldwide emissions of GHG by an average of 5.2%
below their 1990 levels over the next decade. Nevertheless, in 2001 the US pulled out of the
agreement. Hence, the treaty was left shattered. Efforts remain active to pressurize US to re-
sign the protocol.
2.4.2 New Technology Continuous interaction between the industry, technology and R&D is the core of the
industrial innovation, and particularly in the petroleum industry. Such interaction is
necessary for successful application of science & technology for sustainable development
which will lead to many improvements in the industry as an end result.
New technology innovation which offers superior quality, even if costly, can dramatically
change energy use. For instance, hydrogen fuel cell, which offers high performance and clean
final energy from a variety of fuels, is potentially a disruptive energy technology; it will
benefit from manufacturing economies but presently has fundamental weaknesses (Shell
Scenario, 2004). (see next chapter)
We can expect ‘disruptive technologies’ to occur. Typically it has taken 25 years after
commercial introduction for a primary energy form to obtain a 1% share of the global
market. With new possibilities including alternative energy forms; by 2050 the energy
industry will be very different. Fuel cells require new fuelling infrastructure, they provide
sufficiently superior qualities – beyond environmental benefits. It is particularly so in a
period of innovation and experimentation. Government efforts to accelerate adoption of a
particular technology may be counterproductive.
“Fuel cell research is to be strongly recommended as a route to protecting the earth's sources”
Professor Wilhelm Ostwald, 1897 (cited in Shell scenario, 2004)
20
2.4.3 Energy source scarcity This occurs when the current sources fail to meet the demand of the market. It occurs rarely
at a global level, when demand growth cannot be met because resources are limited or the
costs of new production capacity are too high. It would inevitably trigger discontinuity in the
energy system. Oil production has long been expected to peak. This is now imminent, but a
scarcity of oil supplies is very unlikely before 2025. This could be extended to 2040 by
adopting known measures to increase vehicle efficiency and focusing oil demand on this
sector. Technology improvements are likely to outpace rising depletion costs for at least the
next decade, keeping new supplies below $20 per barrel. Scarcity could occur as early as
2025, or well after 2050. The key issue is whether there can be timely development of the
infrastructure to transport remote gas economically. (Shell Scenarios, 2004)
BP’s John Browne estimated that ultimate global oil production would reach 2600 billion
barrels (Petroleum Gazette, 1992 cited in Fleay, 1995) The global oil production peak
(midpoint) is likely to occur between 2003 and 2012 (Fleay, 1995)
On the other hand, Saudi Aramco (Saudi Oil Company) reassured that it has conservative
reserves with significant upward potential, capacity and commitment to continue as a reliable
and cost-effective global oil supplier, sustained production levels at 10, 12 and 15 million
bpd, well beyond 2054 (Saudi Aramco, 2004).
However, Sheikh Ahmad Zaki Yamany, the Saudi former Petroleum Minister said “The
Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs
out of oil.”TP
PT(The Economist, 2004)
Hence, oil scarcity issue remains arguable, yet, potentially viable.
2.4.4 Social and Personal Priority Energy choices are ultimately social choices. Government and public attitudes towards
energy security or self-sufficiency will alter the means of obtaining energy. It could also be
the driving force in government support for renewable energy. Personal choices – related to
values, the environment and lifestyles – influence the energy system. Affordability is not the
key constraint especially in developed countries. Many options exist for reducing GHG
emissions, often linked to local air quality improvement. When concerns prompt demands for
change, much depends on what technologies or resources are readily available. Timing can
make the difference between evolutionary or revolutionary solutions to problems like climate
change. (Shell Scenarios, 2004)
21
Findings and Conclusion
In this chapter we found that the oil industry is owned by Saudi Arabia, in terms of oil
reserves, since they have the world’s largest reserve. The petroleum refinery industry
competition is fierce between world best practice plants; on the basis of achieving economies
of scale and low average costs through maximization of throughput and use of cheaper
source of crude oil. Main players, we found, are: Saudi Aramco, Shell, BP, Exxon Mobil, and
Chevron. We have also found that gasoline, the most important transportation fuel powering
today’s automotive vehicles, account for 47% of petroleum products.
In addition, we found that the power of substitute could influence the existing market, if it
was to be commercialized. Potential substitutes in the energy market include: bioamass, wind
power, solar energy and renewable energy. Although oil remains for many years the source
of energy empowering the world, yet, the legal, environmental, geological, technological and
social challenges predicted to be facing the energy economy in the future, leads us to the
tendency towards renewable energy. Renewable energy resources, in particular, fuel cell
technology will be examined in the next chapter.
22
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kyototreaty.shtml>
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Enav, Peter (2000) The Saudi Oil Dilemma. London: Financial Times Energy.
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Fleay, Brian J. (1990) The Decline of the Oil Age. Australia: Pluto Press Australia Limited.
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http://alum.mit.edu/ne/whatmatters/200401/index.html>
23
Mohammad, Yousuf H. and Mead, Walter J. World Oil Prices: Demand, Supply and
Substitutes. USA, Colorado: International research Center for Energy and Economic
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Speight, James G. (2002) Handbook of Petroleum Product Analysis. USA, New Jersey:
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24
Chapter 3: Fuel Cells: An Overview
3.1 Introduction
From Chapter 2 we concluded that there are some predicted challenges to face the oil
industry. We have also briefly described them, amongst of which is the renewable energy
sources and the emerging of new technologies such as fuel cell (FC).
In this chapter we understand the FC technology, starting with a definition of the
technology, a brief history on FC, types, applications, benefits and challenges facing FC.
Afterwards, we look at the current activities done by countries and companies; in particular,
we observe the automotive sector and the application of FC.
3.2 What is a FC?
A FC is an electrochemical device that converts chemical energy into electric energy;
it combines hydrogen fuel and oxygen from the air to produce electricity, heat and water.
FCs operate without combustion, so they are virtually pollution free. Since the fuel is
converted directly to electricity, a FC can operate at much higher efficiencies than internal
combustion engines, extracting more electricity from the same amount of fuel. The FC itself
has no moving parts - making it a quiet and reliable source of power. (UTC, 2004).TP
11PT
3.3 How FCs Work
Fuel Cells (FC) are essentially batteries powered by hydrogen or hydrogen rich gas
fuel as an external source. FC is about an electrochemical process which uses hydrogen and
oxygen to create electricity. A single FC consists of an electrolyte which is held between two
electrolytes (anode and cathode). This is the main principle that FC work on. The following
figures (1-3) present an explanation on how the most common and popular type works,
polymer electrolyte membrane FC (PEMFC).
TP
11PT For history on FC refer to Appendix B1
25
Figure 11 FC Operations (Source: USDoE, 2004)
A typical PEMFC uses hydrogen and oxygen as demonstrated in Figure 11, the byproduct
beside electricity is only water and heat.
Figure 12 FC Components (Source: USDoE, 2004)
A single FC produces little electricity for only small applications. Therefore,
individual FCs are usually combined in series into a FC stack as demonstrated in Figure 12.
A typical FC stack may consist of hundreds of FCs.
26
Figure 13 FC Chemical Process (Source: USDoE, 2004)
Hydrogen is fed to the anode where a catalyst splits hydrogen's electrons from
protons. At the cathode, oxygen combines with electrons resulting in water or hydroxide
ions. Protons move through the electrolyte to the cathode to combine with oxygen and
electrons, producing water and heat. Negative ions travel through the electrolyte to the anode
where they combine with hydrogen to generate water and electrons.
27
The electrons from the anode side of the cell cannot pass through the membrane to
the positively charged cathode; they must travel around it via an electrical circuit to reach the
other side of the cell. This movement of electrons is an electrical current.
The amount of power produced by a FC depends upon several factors, such as FC type, cell
size, the temperature at which it operates, and the pressure at which the gases are supplied to
the cell.
Hydrogen
Hydrogen is a fuel of great potential; however, it is not an energy source, but, an
energy carrier. It can be produced from a wide range of resources; it is most attractive for FC
especially in automotives. Hydrogen is best utilized when it comes from renewable sources
(FC, solar, wind, etc.), or if the engine running on hydrogen is efficient enough to at least
make up for the energy used in producing the hydrogen. Otherwise, it is more economic and
less polluting to just burn the hydrocarbon. In the medium-run, hydrogen would likely be
produced from fossil fuels (such as, petroleum feedstocks and natural gas); improving the
cost and efficiency of these conversion methods is a major current concern though. (USDoE,
2004)
Hydrogen offers the following benefits:
• No emissions of local air pollutants
• Zero COB2 B for wide range of uses (varies depending on the source of hydrogen)
• Leads to efficiency gains as it acts as a storage medium for electricity
• Reliable and maintainable (could be produced from many sources).
Figure 14 shows how the hydrogen FC works in an automotive vehicle.
28
Figure 14 Hydrogen FC Vehicle Operations (Source: Argonne National Laboratory, 2004)
3. 5 Types of FCs
There is a whole family of FCs that is mainly characterized by the electrolyte used.
Lower temperature technologies target transportation, portable power, lower-capacity
distributed power applications; whereas, higher temperature technologies focus on larger
stationary power application, niche stationary, distributed power and certain mobile
applications. The following table present basic information about these systems:
Type Mobile
ion Electrolyte Fuel Operating
Temperature (°C)
Power Range (W: Watt)
Applications
AFC OHP
-P Potassium
hydroxide Pure HB2B 50-90 < 5 kW Military, Space
vehicles PEMFC HP
+P Polymeric Pure HB2B
(tolerates COB2B)
50-125 5-250 kW Automotive and Portable CHP
PAFC HP
+P Orthophosphoric
acid Pure HB2B (tolerates COB2B 1% CO)
190-210 200 kW Large numbers of 200 kW CHP
MCFC COB3PB
2-P Lithium/potassiu
m carbonate HB2,B CO, CHB4B
530-650 200 kW - MW
Medium to large scale CHP systems, up to MW capacity
SOFC OP
2-P Stabilised
zirconia HB2,B CO, CHB4B
900-1000 2 kw-MW Suitable for all sizes of CHP systems, 2 kW to multi MW
Table 1: Types of FC technology their characteristics and applications (fuelling a greener economy, 2004) / (FC technology handbook, 2003) / (FC systems explained, 2000)
29
4.5.1. Alkaline FC (AFC) The AFC has one the longest history of FC. It was first developed by Bacon (1930) and later
used on the Apollo and Shuttle Orbiter craft. The main problem of AFC is its low electrolyte
conductivity, due to the electrolytes of (NaOH, KOH) adsorb COB2 B. Therefore, AFC is only
suitable for niche markets, such as space and military applications. AFC could only power
5kW (kilo watt) which is too little to be the main source of power. However, the big
advantage of AFC is that it could be produced rather cheaply. The electrodes can be made
from non-precious metal electrodes, and no particular exotic materials are needed. It is
attractive for uses such as airport carrier vehicles and possibly the mobile sector.
4.5.2. Proton Exchange Membrane FC (PEMFC) PEMFC is the best known of all FC types today. It was first developed by General Electric in
the USA (1960s) for use by NASA space vehicles; it developed onboard electrical power for
the vehicles. It is also known as solid polymer FC (SPFC), PEMFC takes its name from the
electrolyte it uses which is a special plastic membrane, solid polymer, in which protons are
mobile and can freely migrate across it. These cells run at quiet low temperatures, so the
problem of slow reaction rates is addressed by using sophisticated catalysts and electrodes.
Another problem is that it is easily polluted by impurities, such as sulphur or carbon
monoxide. However, using pure HB2 B can solve the problem. Otherwise, PEMFC has to first
reform the fuel to high degree to remove the containment, which adds complexity to its use.
(Wilder R, 2004)
Figure 15 Uses of Different FC types. (FC Today, 2003)
Figure 15 shows the dominant use of PEMFC type in most applications.
30
4.5.3. Phosphoric Acid FC (PAFC) PAFC was the first to be produced in commercial quantity and be employed in widespread
global use. In USA and Europe, as well as in Japan, application of this type through the many
200 kW systems manufactured by the international FC Corporation and other companies.
They use fairly high temperature with the use of electrodes that boost their reaction rate a
reasonable level. The hydrogen fuel problem is reforming natural gas to hydrogen and carbon
dioxide. However, there is an added cost for this operation which adds considerable
complexity and size of the FC. Nonetheless, they are extraordinarily reliable and inherent the
simplicity of a FC, it is also maintenance-free power system. They run continuously for over
a year without any shut-down requirement or human intervention.
4.5.4. Molten Carbonate FC (MCFC) The interesting feature of this fuel is that it needs carbon dioxide in the air to function. The
high temperature means a good reaction rate using a relatively inexpensive catalyst – nickel,
which forms the electrical basis of the electrode. This type can also use methane and coal gas
(HB2 B and CO) directly, without an external reformer.
4.5.5. Solid Oxide FC (SOFC) Operates on temperature range of 600 – 100, this means high reaction rates are achieved
without expensive catalysts. Natural gas and other gases could be used directly or ‘internally
formed’ within the FC due to this high temperature. This type addressed all problems and
takes full advantage of the simplicity. The only problem, though, is that the ceramic material
(which this type is made from) is difficult to handle, as they are expensive to manufacture, so
the start up of this type is complex. Despite their high temperature they always stay in the
solid state unlike MCFCs.
Table 2 summarizes the main advantages and uses of FC types. Typical applications
Portable electronics equipment Cars, boats and domestic CHP
Distributed power generation, CHP, buses
POWER in watts
1 10 100 1 k 10 k 100 k 1 m 10 m
Main advantages
Higher energy density than batteries, faster recharging
Potential for zero emissions, higher
efficiency
Higher efficiency less pollution quiet
AFC MCFC SOFC
PEMFC
applications of the different FC types PAFC Table 2 The Applications and Main Advantages of FC Different Types, and Different Applications. (Larminie, J. and Dicks, A. 2003)
31
3.6 FC Applications
There are many potential applications for FCs. They are very flexible and could be
applied to many industries regardless of their size and demand. The current FCs application
classifications are: transportation applications, stationary applications, and portable
applications.
3.6.1 Transportation In terms of financial value, size and environmental impact, the transportation market
is the biggest for FCs developers, since it is the most serious contenders to compete with the
Internal Combustion Engines (ICEs). They offer wide range of benefits; they are highly
efficient as they replace the thermal engines in ICE by electrochemical engines. Hence, they
reduce the consumption of primary energy and produce zero emissions of COB2 B. Competition
exists facing the new developers of FC vehicles, contenders such as improved internal
combustion engines and hybrid cars. (Hoogers G., 2003) This application is the focus of the
project
Figure 16 FC Demonstration Cars by Nissan, Toyota, Suzuki and Honda (Source: FCs Today, 2003)
3.6.2. Stationary Power Another leading market for FCs is the stationary power Combined Heat and Power
(CHP) generation. FCs are currently the only practical engines for CHP systems in the
domestic environment. The higher the investment for a CHP system would be offset against
saving in domestic energy supplies. (Hoogers G., 2003)
3.6.3. Portable Power Although the portable market is not yet well defined, however, the potential for FC
use in this area is quiet potential. This includes the grid-independent applications such as
camping, yachting, and traffic monitoring. The choice of fuel is the basis of its application.
(US DOE, 2004)
32
T3.7 Benefits T
FCs technology would lead the hydrogen future and revolutionize the ways we do things
through the benefits they would bring about to the world; the following explains three major
benefits:
3.7.1. Reduce Greenhouse Gas (GHG) Emissions The by-product of the FC reaction is pure water. This means that FC can be essentially ‘zero
emission’. The main advantage is for internal combustion engine vehicles as they are the
main target for emission reduction. However, we should be aware that COB2 B emissions are
almost always occurring with the production of hydrogen. The traditional transportation leads
to GHG gases generation. On the other hand, HFC significantly reduce the GHG emissions.
(USDoE, 2004)
3.7.2. Reduce Air Pollution The transportation vehicles, electric power plants and manufacturing plants are all
responsible for the combustion of fossil fuels which generate pollutant particles that are
released in air. FCs are powered by pure hydrogen that emits byproducts of water and heat
only. However, FCs that use a reformer to convert fuels like natural gas, methanol or
gasoline to hydrogen do emit pollutants of carbon monoxide (CO) but in very small amounts.
Compared with traditional combustion power plants, FC eliminates 40,000 pounds of acid
rain and pollutants yearly and reduces carbon dioxide emission by 3.5 million pounds per
year. (USDoE, 2004)
3.7.3. Improve Energy Efficiency FCs are generally more efficient than combustion engines. FC is considered more energy
efficient than combustion-based power generation technologies. A conventional combustion-
based power plant typically generates electricity at 33-35% efficient. Whereas the FCs plants
generate electricity at a higher rate of 60% and could reach up to 85% efficiency. Convert
40% of available fuel to electricity; compared with only 20% of the traditional combustion
power plants. It also reduces fuel costs and conserves natural resources. FCs can convert up
to 90% of the energy contained in its fuel into usable electric power and heat. For instance,
PAFC designs offer 42% electric conversion efficiency which is estimated to increase to 46%
in the near-term through already well known science and engineering. (Kordesch K. and
Simander G., 1996).
33
3.7.4. Other Benefits include: Simplicity
The essentials of FC are very simple, with none to few moving parts, which result in highly
reliable and long lasting systems. (Larminie J. and Dicks A., 2000)
Reliability
The power is available 99% of the time once connected to the power grid. As they contain
fewer moving parts, FC systems should have higher reliability than combustion turbine
systems of internal combustion engines (ICE). FC will not experience a breakdown, they
could only experience a gradual loss of efficiencies. (Kordesch K. and Simander G., 1996).
Oil-Independent
By moving towards a hydrogen and FC technology driven economy, hydrogen strengthens
the national energy security through diversification of resources. This effectively reduces the
dependency on oil. This reduces the risk of the problems tied with the oil industry.
(Politically, eliminating the possibilities of wars on oil in the future!) Hydrogen is the most
abundant gas floating in the air and could be derived domestically through primary sources
such as fossil fuels, renewables and nuclear power. (US DOE, 2004)
Well-To-Wheel Analysis
A number of studies have been taking place in the area of well-to-wheel. It considers the fuel,
accounting of energy consumption and GHG emissions over the entire fuel pathway, from
feedstock to fuel dispenser nozzle denotes the combination of the fuel and vehicle portions
and the vehicle, accounting of the energy consumption and GHG emission resulting from
moving the vehicle through its drive cycle. (GM, 2001).
The findings of this study is summarized in Figure 17 which shows that hydrogen FC
vehicle well-to-wheel analysis is the most effective in terms of elimination of GHG
emissions.
34
Figure 17 Well-to-Wheel Graphical Demonstration (source: GM, 2002)
‘Joint European Well-To-Wheel Study’ was conducted by the working group: BP, GM,
Shell, TotalFinaElf, Advanced Development Corp., Exxon Mobil, and LBST. It is a rigorous
examination of the entire process and using fuels to provide power to the wheels of a vehicle,
resulting in an assessment of requisite energy consumption and corresponding GHG
emissions (GM, 2001). Figure 18 shows the results of the study.
Figure 18 well-to-wheel analysis in terms of performance (source: GM, 2002)
35
3.8 Challenges
We now know the major benefits of FC, on the other hand, there are many limitations
obstructing its commercialization and competitive substitution for consumers. Three main
challenges are explained below: (EERE, 2004)
3.8.1. Cost An important disadvantage of all types of FCs today is the cost. FCs are expensive to develop
and adapt. It requires expensive precious-metal catalysts, costly materials that endure
extremely high temperatures. Estimates range between $2000 and $10,000/kW, a mature
technology such as a gas turbine costs about $400-600/kW, a car engine $50/kW.
3.8.2. Storage It is difficult to store hydrogen as their energy density is so low in terms of its volume.
Especially, considering hydrogen-powered vehicles that need the fuel to be stored in small
compact tanks. Researches are conducted to develop high-pressure storage tanks for
hydrogen and for other possibilities of storage technologies such as metal hydrides and
carbon nanostructures.
3.8.3. Infrastructure The development of a hydrogen infrastructure will face considerable physical and regulatory
challenges. The cost of establishing a large-scale hydrogen infrastructure in the United States
comparable to current gasoline networks is estimated at over $100 billion, and will require
significant collaboration between automotive and energy companies.
3.8.4. Other challenges: Durability and Dependability
The high temperature require for FCs to operate may lead to material break-down and/or
shortening of the operating lifetime. To be dependable and efficient, there needs to be an
effective water management system. FCs that are powered by hydrogen are faced with some
common challenges:
Production
The cost of production of hydrogen is very expensive in relation to the conventional fuels of
gasoline that emit GHG.
36
Safety
Handling the safety of hydrogen will be new. Developments are taking place to optimize the
safe daily use of fuel storage and delivery system. Also, consumers must start to become
familiar with hydrogen’s properties and risks.
Public Acceptance
The FC technology is new and must be accepted and embraced by consumers. There will be
a daily interaction with this technology especially in terms of automotive transportation.
“In 30 years, FC vehicles will be everywhere” Michioshy Hagino, Honda’s COO for
automobile operations. He states that the rate of FC adoption by the world will be mainly
determined by the social and environmental factors in terms of people attitude and the
environment. (US DoE, 2003)
3.6 Fuel Cells Today and Beyond
Many countries are rapidly increasing their national spending on this area. Annual
government spending in Japan, Germany and EU has today reached around £140 million,
£70 million, and £30 million respectively. (IOM, 2004)
Figure 19 Annual Government Expenditure in 2002
The Portfolio of intellectual property is around 5,000 patents specifically relating to
FCs granted worldwide. Of this number less than 80 belong to UK companies, compared to
almost 400 in Germany, and 1,900 in Japan.
USA USA is involved in fuel cell R&D since 1991, The US Department of Energy has
spent nearly $ 300 million on PAFC technology. They have demonstrations with many
37
joining private corporations. In 2000, Daimler-Chrysler Company developed its first FC
truck, Frieghtliner; they installed PEMFC in a heavy-duty truck engine to provide power to
run the truck. In addition, most recently the FreedomCAR (a government-industry R&D
promoting the development of HFCV, their main aim is to make the FCV available at an
affordable cost in a timeframe of 10-15 yrs) was developed through partnership between
DOE and USCAR (a pre-competitive research organization consisting of General Motors,
Ford and DaimlerChrysler). This reflects the increasing interest and commitment of US,
spending £55 million in 2003 and an estimated £120 in 2004. Moreover, Daimler Chrysler
spent £1,000 million on its new demonstration Necar FC vehicle program during 2001-2004.
Japan Japan has supported the development and commercialization of FCs since 1981. That
year, the Ministry of International Trade and Industry began a 17-year, $520 million effort to
support FC R&D in the Moonlight Project, a government program aimed at developing
energy efficient technologies. In 1991, Toshiba and the US-based international Fuel Cell Co.
(IFC) with its subsidiary, ONSI, manufactured and installed an 11 MW at the Tokyo Electric
Power Co. plan; the ONSI 200 kW size plants were later on ordered by 26 customers in 10
different countries. The Japanese government provides one third the cost of manufacturing to
the Japanese power Companies. In 2002, Japan nearly doubled its FC R&D budget to $220
million from $119 million.
Japan Electric Vehicle Association said the Japan Hydrogen and FC (JHFC)
demonstration project will be sponsored by Japan’s Ministry of Economy, Trade and
Industry and will examine the “effectiveness, environmental friendliness and safety of Fuel
Cell Vehicles.” In addition, the project will promote public awareness about FCs and the use
of hydrogen “as a safe and clean fuel”.
UK UK government spent in recent years around £1.5 million. The number of FC and
hydrogen groups and networks is also growing. 2002 saw the launch of the London
Hydrogen Partnership, which brings together industry, academia, and local and national
government to promote London as a centre for hydrogen and FCs. Meanwhile, 2003 will see
the foundation of a DTI-backed national body to foster the development of the UK FC
industry and its Low Carbon Innovation Programme, The Carbon Trust is investing around
£75 million in selected low carbon technologies over the next three years, some of which
could support FCs and hydrogen infrastructure. UK FC development has also been supported
by The Engineering and Physical Sciences Research Council (EPSRC).
Three FC buses are, which are part of the European Union backed CUTE project, begun
operation in London in January 2004.
Europe Commercialization opportunities
are seen in AFC system developed by
ELENCO N.V. in Belgium in 1995.
Some R&D efforts are spent at the
Royal Institute of Technology in
Stockholm in Sweden. In France, work
at the national IFP stopped in the 1980s. I
European Space Shuttles HERMES efforts w
PAFC large-scale development wor
the last 10 years there have been clear lice
Co., has developed a PAFC plan. Fuji-bui
Research Center in Rome. Asnaldo expan
developments. In Spain, new installations of
In 1994, SOFC development in Eur
Community Energy Commission which wa
efforts. The R&D work on PEMFCs has be
the demonstrations in Canada and the R&
signed a government contract to build FC
obtained from International FCs (IFC) in Ca
Figure 20 London Bus by Daimler Chrysler (Source:Daimler Chrysler, 200438
n Germany, Siemens AG in connection with the
ere discontinued by 1993.
k were never carried out in Europe. However, in
nsing and marketing efforts. Ansaldo, the Italian
lt PAFC units are to be operated at the ENEA
ded their interest to reach active MCFC system
MCFC are being planned by Ansaldo.
ope was accelerated and funded by the European
s competing in the fast of the US and Japanese
en at its peak, consequently due to the success of
D funds in USA. Siemens AG in Germany has
stacks for submarines. The license has been
nada. (Kordesch K. and Simander G., 1996)
39
Figure 21 The FC market share of coutnries, Automotive Compass 2002
According to a research carried out by Automotive Compass, 2002; the Figures 21 and 22
show the countries that are implementing FC and the percentage of market share by the
automotive companies incorporating FCs, respectively.
Figure 21 shows the dominance of North America (38%). On the other hand, Figure
22 shows the market share by automotive companies, the top competing GM (17%) and
Toyota (15%), then follows Honda (12%), Ford (11%), and DaimlerChrysler (10%). The
balance of the market will be held by Renault/Nissan (9%), Hyundai (7%), VW (6%), PSA
(5%), Fiat (3%), BMW (3%) and ROW (3%).
Figure 22 FC Market Share of Automotive Companies (Source: Automotive Compass 2002)
40
Figure 23 Management Quality Assessment: FC Technology (source: SAM & WRI, 2004)
FCs will require continued financial and R&D commitment. Importantly, the challenge is to
bring the technology to the market ahead of rivals in order to recoup development costs and
benefit from first-mover advantages. The key aspects of management quality on FCs are
strong institutional and human R&D capacity, resource allocation and the ability to work
through strategic partnerships. As a result of these challenges, relative strategic positioning
with respect to FCs is determined primarily by two main partnerships that have developed:
DC-Ford-Ballard and Toyota-GM. These tie-ups are designed to provide partners with a
head start as the market for FCVs emerges. (See Figure 24) Based on the competence
evaluation, the two dominant companies in this area are Toyota and DC. (source: SAM &
WRI, 2004)
41
Figure 24 FC Strategies for passenger car manufacturing (Source: ICIET, 2003)
Figure 24 gives us a sense of the global cooperation between the automotive companies for
fuel cell R&D and the development of hydrogen fuel cell vehicles.
Today, the FC community is striving to break its isolation to grab the attention of the
society and the business world. The commercialization of FC is the current issues coining in
most of energy conferences. In addition, projections have presented positive scenarios and
promising market positions.
3.7 Findings and Conclusion
FC vehicles are visualized as the way to meet the growing mobility requirements
worldwide, substituting the fossil fuels in the near future. However, the aligning competitor
is the hybrid vehicle, which also uses clean combustion engine and is a mature technology
with relatively small expected incremental improvements, though in this project we do not
focus on hybrid vehicles.
FCs represent the long-term goal for the automotive industry. The prospect of highly
efficient vehicles consuming hydrogen and emitting only water constitutes a major advance
in vehicle technology that could greatly disrupt the automotive markets.
On the other hand FC, as we have seen, has to overcome challenges to be
commercialized, the biggest one is cost; FC will have to fall from their current cost of $2,500
per kilowatt produced to $50 per kilowatt.45. Also, HFC infrastructure remains the most
42
challenging as the infrastructure of hydrogen fueling station will take a long time to be
readily and cost-effectively available in the world.
FC powered by hydrogen offer the promise of zero-carbon vehicles, if the hydrogen
can be produced from renewable sources of primary energy, such as solar or wind. Currently,
however, more than 90 percent of hydrogen is produced by industrial processing of natural
gas, a fossil fuel. FCs represent the long-term goal, but face formidable economic and
technological obstacles.
Having raised unrealistic market expectations in the late 1990s, automotive
companies are now understandably cautious about prospects for large-scale introduction of
FCs. However, they cannot afford to discount the possibility that such an important and
potentially disruptive technology will eventually enter the marketplace. Therefore,
establishing a strong position in FCs is a key strategic challenge for them today and one that
is expected to grow in importance through 2015. The potential to recoup development costs
sooner than competitors by setting industry standards has triggered a genuine race in the
automotive industry around FC technology. As a result, leadership in FC technology may be
central for long-term competitiveness in the industry.
From here, we move on to Chapter 4 where we examine the potential threat imposed
by the hydrogen fuel cell vehicles on the automotive sector, more specifically, the internal
combustion engine vehicles. This is done through examining the literature on ‘disruptive
technology’ and applying it to the problem at hand.
43
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46
Chapter 4: The Impact of Hydrogen Fuel Cells on the Automotive Industry: Technology Frameworks Perspective
4.1 Introduction
Chapters two and three provided an overview of the oil industry, and fuel cell (FC)
technology, respectively. This chapter focuses on the automotive sector, the light-weight
vehicles more specifically, which forms the link between the oil industry and FC technology.
Firstly, the energy economy will be explained in terms of technological and
economical links between FCs and the energy economy. Next, the automotive sector is
observed; focusing on the threat posed by hydrogen FCs vehicles (HFCV) to internal
combustion engine vehicles (ICEV). The part will provide a rigorous reexamination of the
concepts and theories developed in the area of disruptive innovation. Starting with Foster’s
S-curve model (1986), we will explain the theoretical literature on the attacker’s advantage;
then, we will apply Christensen‘s disruptive innovation framework (1997). Finally,
Utterback’s dynamics of innovation model (1994) will be utilized providing a well suited
understanding of the automotive sector, in parallel with the dominant design concept.
Finally, findings will take us to the next chapter. Measuring the outcome derived
from this chapter on the oil producing countries, a particular focus on Saudi Aramco.
4.2 The Energy Economy and the Automotive Sector
In Chapter 2 we examined the oil industry and illustrated the major trends, concluding
with critical remarks concerning the predicted challenges facing the industry in the medium-
long term. These major challenges where mainly environmental and technological factors
pressuring the energy economies to accelerate R&D on alternative sources of energy and
means of automotive transports. The focus was, renewable sources (hydrogen FC, the highly
efficient and clean fuel) discussed fully in Chapter 3.
Here, we explain the technological (4.2.1) and economical (4.2.2) links established
through the automotive sector; between the FC technology and the oil industry.
4.2.1 The Technological Links The ties between the oil and automotive sector are clear; the majority of oil industry supplies
go to the automotive fuel to power the automotive sector. As explained in Chapter 2,
Gasoline is the major petroleum product, currently a powerful fuel for ICEV that is the main
vehicles in the automotive sector today. Now, FC holds the potential to be commercialized in
the automotive sector with the introduction of HFCV. Figure 25 provides a schematic
diagram is provided to help comprehend the links in the chapters’ structure.
Chapter 2 Figure 25 Cl
Figure 26 reflects these
relationship is shown in
manufactured to provide
petroleum products pres
important fuel powering
almost 47% of the petrole
in the automotive sector, s
w
p
c
c
o
H
d
f
v
h
automotive sector, hence,
will decide what will h
demonstrate the ‘economi
Automotive Sector ICEV vs. HFCV
Fuel
Cells
Oil Industry
(g
47%
asoline)
Chapter 4arifying Structure of Chapters 2, 3, a
links; Starting with the oil
details. The crude oil extrac
a various array of products (s
ented (jet fuel, diesel fuel, w
the global automotive sector t
um products. Hence, as found in
pecifically, gasoline ICEV.
On the other hand, the e
ays in the automotive sector
roducing HFCV to test its
ommercialization (see Chapter
onventional ICEV. Parallel to g
f Figure 26 illustrates a sketch o
FCV. Hydrogen could be d
iscussed earlier in Chapter 3),
uel for HFCV. The two par
ehicles, ICEV and HFCV, and
ydrogen. This suggests that the
the demand, trends, and domi
appen to the sources of energ
cal links’ on the same scenario p
Yr 2010
47
Chapter 3 nd 4 (Source: Author)
industry, the oil-gasoline-ICEV
ted from wells are refined then
ee Chapter 2). Out of the many
axes, oil…etc) we get the most
oday, gasoline. This accounts for
Chapter 2 the end-users of oil are
mergence of FC technology finds
, and automotive companies are
application to accelerate the
3). This could pose threats on
asoline generation, the upper part
f generating hydrogen fuel used in
erived from various sources (as
it is then liquefied to be used as a
allel diagrams compare the two
their source of fueling, oil and
tie between the two sources is the
nance of technology in this sector
y (oil and hydrogen). Next, we
resented here.
48
Figure 26 The Energy Economy: Technological Links (Source: Author, incorporated from Britannica Encyclopedia Refinery Flow Chart and General Motors Well-To-Wheel Analysis Diagram)
49
4.2.2 The Economical Links We have understood the technological links underlying the technology and industries. Here,
we focus on the economic impact in the energy economy, specifically, automotive sector,
namely, HFCV. We summarize various studies showing competing technologies in the
automotive market. At this stage, it is important to identify technology classification to
comprehend the status of HFCV amongst the competing technologies.
Emerging Technology Is a technology that is not widely known and is in its early research stage or emerging in other industries, the competitive impacts are unknown but are promising.
Pacing Technology Has the potential to change the entire basis of competition, but has not yet been embodied in a product or process. Under experimentation by some competitors and the competitive impact are likely to be high.
Key Technology Is currently yielding competitive advantage. Well embodied in products/processes and has a high competitive impact.
Base Technology Is although necessary and essential to practice, offer little competitive advantage. Essential to be in the business, widely exploited by competitors, little competitive impact. (Source: Arthur D. Little cited in Floyd, 1997)
In a study carried out by Automotive CompassTP
12PT, the risk of key factors of HFC
technology for the automotive sector was assessed; the outcome is summarized in Table 3.
First, the constraints, were restricted to: the hydrogen infrastructure, the product performance
and durability, the relative costs, the product pricing and the investment requirements. Next,
the drivers, were also examined and were pointed out to be: global regulations, incentives,
and volume and market share growth. The constraints and drivers are both pulling the
technology to inverse directions, however, the overall enablers, proved to stabilize the
technology if successfully brought to commerce, they include: the hydrogen infrastructure,
the technology itself, the product performance and durability, the codes and standards, the
customer acceptance, the incentives and the volume and market share growth.
Their findings were that the combined factors will eventually be adopted by leading
automotive companies and thoroughly studied, hence, bringing about the commercialization
TP
12PT The Growth & Supply-Chain Dynamics of the Global Automotive FC Market (the most comprehensive
research study conducted on this complex market), 2002.
50
of HFC. Moreover, they predict that the continuous R&D in FCs will mean that it could
emerge as a key technology in the medium-long term. However, constraints will have to be
reduced and eliminated to maintain this vision, first starting with the biggest concern, which
is cost effectiveness.
Market Factors & Risks Drivers Enablers Constrains
Global Regulations ●
Hydrogen Infrastructure ● ●
Technology ●
Product Performance and durability ● ●
Codes and Standards ●
Relative Costs ●
Product Pricing ●
Consumer Acceptance ● ●
Incentives ● ●
Investment Requirements ●
Volume and Market Share Growth ● ●
Table 3 The Automotive FC Market: Drivers, Enablers and Drivers, Enablers and Constraints (Source: Automotive Compass, 2002)
In the medium-long term, engineering analysis and the modularity of the technology
both suggest they have the required characteristics for rapidly declining cost or ‘learning
curves’ as the volume of applications expands and as research, investment and operating
experience accumulates. This proposes that with further development and once in mass
production it is estimated that they could cost as little as $30/kW for transport and $300/kW
for stationary power. (ICCEPT, 2002). This concept was previously examined by Rosenberg
as ‘learning by doing’.
According to a research carried out by Imperial College Centre for Energy Policy and
Technology (ICCEPT), a report on the assessment of technological options to address
climate change in 2002; Figure 27 is the chart developed reflecting the product lifecycle of
the important technologies in the area of climate change. It covers the main options in terms
of where they broadly fit on a spectrum of technological maturity starting from the
‘conceptual’ options, which reflect technologies still at the basic research stage, then moves
on to the ‘emerging’ options, this means technologies are proven in terms of technological
viability and have some market exposure, but which still require development and market
51
growth to realize cost reductions widespread utilization, and finally the ‘mature’ options,
which embrace the technologies that are at an advanced level of technological development
and commercial viability (though may not yet have achieved widespread utilization).
Conceptual Emerging Mature
Figure 27 Technology Maturity (source: author using data from ICCEPT, 2002)
On the basis of the technology maturity in Figure 27, ICCEPT also developed
which provides an overview of the timeframe in which each technology, if succ
developed, could be widely adopted. We can spot the position of HFCV in th
According to the estimates, HFCV will be dominant starting in 2020. Now 2020 2050
Primary sources coal, oil, gas, nuclear gas, hydro, biomass
Gas, oil, high efficiency coal, wind, solar, biofuels, geothermal, CO2 sequestration
Solar, offshoresolar thermal, wtidal, new nuclsequestration fu
Transmission, storage and transport
of energy
Electricity (central) gas pipelines, oil tankers, little electric storage
HB2B (local production) HB2B (short term storage) New storage options Electricity (decentralized) Superconductors
HB2 B (pipelines) HB2 B (long term sSuperconductoNew storage op
Efficiency devices Large/medium ; CHP; Improved appliances; Heat pumps; Low energy buildings
Hybrid car – biofuels; Hybrid car-oil Micro-CHP ; HB2B FCs (vehicles) ; FCs (vehicles); Advanced metering and controls; Improved appliances; Very low energy buildings
HB2 B FCs (vehicl‘smart’ applian‘zero energy’ b
CO2 reduction 10% 25% 60%Table 4 Examples of Possibly Dominant Technologies (source: author using data from ICCEPT, 2002
Technology
Fusion Advanced fission Photosynthetic hydrogen
FCs for vehicles Offshore wind Various energy storage technologies Biomass (gasification) Carbon separation and storage Nuclear power (next generation reactors)
Phase
Advanced PV Wave and tidal stream Hydrogen storages for vehicles Biomass (hydrolysis) Geothermal (hot dry rocks)
Onshore wind FCs for stationary FCs for CHP PV for buildings Biomass (combustion) Hybrid Vehicles LED lighting Biofuels Micro-CHP Ad d i d
aNGLhBT
Numerous end use efficiency options in ppliances and buildings uclear power eothermal (hydrothermal)arge and small ydroelectricity iomass (cofiring) idal barrages
52
Table 4
essfully
e table.
wind,
ave, ear, CO2 sion
torage) rs tions
es) ces uildings
)
53
In addition, The Automotive Compass study constructed Figure 28 a graph showing
the expected accelerated demand on HFCV over medium-run. It shows an expected modest
of 320 units by 2005, reflecting early prototype FCs technology for vehicles. By 2020, the
market potential is expected to reach 1.2 m units, at this level it is expected to demand
necessary investment to sustain product development and maintain steady profits.
Figure 28 Automotive FC Vehicles Market Growth, (Automotive Compass, 2002)
A survey conducted by Fuel Cell Today in 2003 reviewing the worldwide activity and
development done in FC market arrived at optimism in FC markets clearly presented in
figures 29-32:
Figure 29 Cumulative Global FC Applications and Systems Built (Source: Fuel Cell Today, 2003)
The cumulative global participation reflects growing number of FC product launches in the
world, and the figures are increasing. The proportion of FC type is shown in Figure 30. This
suggests the exceptional dominance of PEMFC especially in the automotive market.
54
Figure 30 Percentage of FC types in all activities done globally (Source: Fuel Cell Today, 2003)
Figure 31 Share of FC market by countries (Source: Fuel Cell Today, 2003)
In Figure 31, we can see how North America is dominating the FC market reflecting massive
R&D spending in the area of FC, Europe follows competing with Japan. The peak by N.
America is due to the participation of its government through supporting FC spendings in
private companies; showed in Figure 32.
Figure 32 Worldwide Government Support in $ US Million (Source: Fuel Cell Today, 2003)
55
Figure 33 Global Growth of FC Patent (Source: Fuel Cell Today, 2004)
Companies are competing to establish their market positions; in Figure 33, Japan
leads the patents on FC vehicles, follows, USA then Germany and the others. The patent
process is playing a critical role today in the emerging FC market, the participation is rapidly
increasing; this suggests the importance of being a leader in this industry.
Scientific American Incorporation which is heavily involved in FC technology
predicts that HFCV will revolutionize the automotive sector considering the way it operates.
(Scientific American, 2002)
56
Furthermore, Figure 34 shows the major player of automotive companies and their
positioning in renewable energy; carbon constrains are emerging in the major automotive
markets due to the concerns about climate change (SAM & WRI, 2004).
Figure 34 Quantification of the risks (Value Exposure) and opportunities (Management Quality) of Carbon Constraints (source: SAM & WRI, 2004)
The automotive sector participation in fuel cell market is increasing, lead by Toyota,
and followed by many leading automotive companies.
57
Moreover, Figure 35 shows an estimation of the light-weight vehicle market share
until year 2050. The graph suggests that HFCV are currently emerging, eventually estimated
to be pacing around 2010 to 2020, and potentially a key technology as it incrementally grows
between 2020 and 2040, then possibly mature and sets as a base technology by 2050.
Furthermore, A European study carried out by the High Level Group (HLG) on hydrogen
energy and fuel cell is summarized in Figure 36. The study has concluded that the emergence
of HFCV by 2020 as a dominant and key technology in the automotive sector. (HLG, 2003)
Experts Opinion…
• “FC applications are likely to disrupt existing industry structures and interests and to require new forms of organization and behavior”. (ESRC, 2004)
• “Although we managed to solve the principal problems associated with the FC drive a couple of years ago, we reckoned it would be well after 2020 before these vehicles would be hitting the road. However, given the present state of the technology it might now be as early as 2010, if not a lot sooner”. (In: Koppel 1999; p.218 cited in Hoed, 2003)
• “The Department believes that successful development efforts can lead to a commercialization decision in 2015, and fuel cell vehicles could hit the showrooms by 2020”. (USDoE, 2003)
• “the market is expected to have 5 million fuel cell vehicles by 2020” (FC UK, 2003)
Light-Weight vehicle Market Share
0
20
40
60
80
100
2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 Year
Market
Share
(%)
ICEVconven.
ICEV improve.
Hybrid VFCV gasoline
HFCV
Figure 35 Vehicles Market Share. (source: Institute of Transportation Studies, 2000)
58
Figure 36 European Hydrogen Vision (Source: HLG, 2003)
59
4.2.3. Findings From the studies of major institutes and companies that we have presented, we arrive
at a set of findings. Currently, FC as a technology for automotive sector is between emerging
and pacing technology position. Clearly, by 2020 we found that HFCV will be a leading and
Key Technology with a potential to become ‘disruptive’ or ‘transforming’ to the existing
conventional markets (ICEV). By 2050, it is estimated that HFCV will be the base
technology; to summarize the findings, we have:
• 2010-2020: emerging and pacing technology
• 2020-2040: key and leading technology
• 2040-2050: base technology
Since, HFCV imposes a critical threat on the automotive sector; we need to understand this
problem thoroughly. This is done in the following section through examining the literature on
‘disruptive innovation’ and applying it to the problem at hand.
4.3 Technology Strategy: Theories and frameworks
Amongst the first theorists on ‘technology innovation’ and the substitute products
examined in this part, Foster; Because HFV holds the potential of substituting ICEV, we start
with his S-curve model and apply it to the current situation.
4.3.1 Foster’s S-curve Model (1986) The S-curve below represents the relationship between the ‘efforts’ put in improving
the product/process, be it R&D or funds such as technology costs, and the ‘performance’
which reflects the results of the efforts invested. The name indicates that the curve appears in
the shape of the letter S when the results are plotted. This shape reflects the stages: infancy,
rapid growth, and then gradual maturation of technological process. (Foster, 1986)
Performance
Figure 37 S-Curve (Foster, 1986)
Effort
The graph in Figure 37 suggests that as more R&D efforts are put into developing a
new product/process, progress is initially slow. Eventually, the performance increases at an
increasing rate until it reaches a point where it is difficult to maintain the same speed of
technical progress. Thus, arriving at the flat construction of the graph at the end of the S-
curve just as it started, this is referred to in Economics as the law of ‘diminishing returns’.
The S-curve almost always comes in pairs; the new comers or ‘attackers’ as he calls
them and the existing one or ‘defenders’. The attacker is the new products/processes which
takes over or substitutes the older one, the defenders tries to defend itself by improving the
existing performance but usually it is too late to react. (Foster, 1986)
Performance
Figure 38
The period of change from o
Foster as Technological Disco
entirely new knowledge base.
another. The competing techn
number of firms who offer the
the new S-curve. (Foster, 1986
Discontinuity
S-Curve Defender and Attack
ne group of products/pro
ntinuities. As shown in F
The Discontinuity phase i
ologies represent the S-C
same technology, a new
)
Attacker
Defender
60
Effort
er (Foster, 1986)
cesses to another is referred to by
igure 38, the new S-curve forms an
s where the new technology replaces
urves. A single S-curve represent a
technological change would result in
61
If we apply this framework to the automotive sector; we have to identify the
‘performance’ dimension and ‘effort’ in which the two products will compete. Hence, the
performance used here in which ICEV and HFCV are judged by customers is the Fuel
Economy, measured by miles per gallon (mpg). On the other hand, the ‘effort’ reflects the
cost of the technology, which is measured in $ 000’s.
The performance dimension used throughout the theories employed is the fuel
economy (mpg). Fuel economy reflects how ‘efficient’ is the fuel used in the vehicle.
Throughout the years, fuel economy, has been top priority for customer buying preferences
for average cars. (USDoE, 2004)
The data used throughout the application of theories and frameworks is taken from three
governmental sources in the USA,
1. US Department of Transportation (2003)
2. TA Engineering (2002) US Department of Energy
3. EPA (2004) US Environmental Protection Agency
S-curve gives the rate of performance improvement, it identifies the inflection point where
performance slows, and initiate next generation at the inflection point. Next generation takes
over when performances crosses, firms that delay the next generation risk their survival. In
Figure 39 and 40 we provide the S-curve for each product, ICEV and HFCV on the
performance and effort dimensions chosen.
62
S-Curve for ICEV
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
23 23 23 23.1
23.1
23.2
23.2
23.2
23.2
23.1
23.1
23.1 23 23 23 23
Effort (Technology Cost)
Per
form
ance
(Fue
l Eco
nom
y)
ICEV
Figure 39 S-curve of ICEV fuel economy improvements from technology cost efforts (Source: Author using data from TA Engineering, Inc, 2002 and EPA, 2004: see Appendices C1 & C2)
S-Curve for HFCV
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
26.4
26.4
26.4
26.4
32.6
33.1 30 30
.330
.627
.527
.627
.626
.626
.626
.626
.6
Effort (Technology Cost)
Per
form
ance
(Fue
l Eco
nom
y)
HFCV
Figure 40 S-curve of ICEV fuel economy improvements from technology cost efforts (Source: Author using data from TA Engineering, Inc, 2002 and EPA, 2004: see Appendices C1 & C2)
63
Figure 39 and 40 show the S-curve of ICEV and HFCV, we can see how HFCV
showed higher performance and higher cost relative to ICEV. For simplicity, Figure 41 is
constructed merging the two outcomes of the products.
Performance (Fuel Economy) 90 80 70 60 50 40 30 20 10 Effort (Technology Cost) 0 … 20 21 22 23 24 25 26 27 Figure 41 S-curves of ICEV vs. HFCV (source: derived from Foster, 1986)
Findings and Limitations of Foster’s Model:
We found that ICEV is the existing technology that is threatened by HFCV which
offers better performance in the dimension of fuel economy. Though, HFCV technology cost
is much higher. We have also found that before the HFCV will be introduced, we will go
through a discontinuity phase where the conventional technology of ICEV will be replaced
by HFCV. According to our findings from 4.2 we know that the timeframe is 2040-2050.
However, we cannot test this here as this model does not allow us to measure the timeframe.
Another limitation is that this model does not show the market and how it behaves. It
does not take into account the performance in relation to the market and the customers’
feedback. Hence, it does not show what the basis of competition is and how will that meet
the changes in customers needs. Hence, we further study the scenario by applying
Christensen’s Disruptive Technology Framework in the next section.
HFCVs
ICEV
4.3.2 Christensen’s Disruptive Technology Framework (1997) Christensen developed Foster’s S-curve model and arrived at his framework. His key
contribution is the link and integration of technology to markets. This framework could be
applied to any market at any point in time, so long as the attributes to be measured qualify for
the characteristics presented in his framework.
Christensen starts by asking the question: Why do large su
explains how new technologies cause great firms to fail. C
tend to improve it, often incrementally (mainly by listen
often focus on existing top-end customers – not on creati
the same function in a new market niche which seeks high
While focusing on customers at the top end of the market,
until a potentially disruptive innovation emerges in low-
low-value tier of the market. Eventually, the new marke
existing technologies, business models and companies
However, they are not seen as winners in the early stages.
At any industry in any point in time, the market is divid
represents the main customers who buy the product. T
customers who are least to buy the product.
Performance: The main criterion by which customers buy
Sustaining innovation/technology (ST): Also referred to as
either incremental or radical innovation that improves p
customers (the upper market). Focus is on incremental
products along proven dimensions of customer satisfac
eFigure 42 Christensen's Disruptive Technology Framework, 199
B
A
C
Perf
orm
ance
Upper Market
Lower Market
Sustaining Technology (ST)
A: premium price
B: performance oversupply C: too late for ST to react
Tim
64
ccessful firms fail? In his book, he
ompanies with the best technology
ing to customers). Market leaders
ng something entirely new serving
margins.
the lower end remains unserved –
margin market niches serving this
t begins to grow. DTs can render
obsolete after gaining footing.
ed into ‘tiers’, the Upper Market,
he Lower Market, represents the
the product.
Main innovator’s path, it could be
roduct performance for the main
performance gain for established
tion. Sustaining technologies are
7
65
innovations that make a product/service perform better in ways that customers in the
mainstream market already value.
Disruptive Technology (DT): is the technology that enters at the lower tier of the market;
implement striking functionality, reduced costs, attractive value in non-mainstream
application markets using a fundamentally new approach with high “leap frog” potential. It
has main characteristics versus the ST:
• Low margin market niches: brought to the market with the right technology
• It offers lower performance
• It targets a smaller market
• Tied with uncertainty
• No interest in these low-end niches by market leaders: focus on high end customers, thus,
rejected by the main customers (upper market)
• Introduced a new performance criterion in a new dimension
• It offers a new attribute of benefits that attracts the lower tier of the market
• Non-market leaders or new players introducing new products, services or business
models
• New entry-level product with attractive features and development potential – not viewed
as a winner
Moving back to the graph, we could observe the upward sloping curve of the main
innovator’s path which suggests performance improvement over time.
At (A): a premium price has to be charged
At (B): Performance is over supplied, due to the main innovator listening only to the high tier
of the market. Thus, the mainstream technology overshoots beyond point (B) exceeding the
customers’ demand. Meanwhile, the new technology enters the market targeting different
customers. Eventually, the DT develops overtime faster than the main technology.
At (C): overtime, the DT reached the upper customers who were the mainstream customers
of the main innovation, at this point; the main ST comes to an end. It is now too late for the
main innovator to react.
Here, it is important to make a clear distinction between the types of technology/innovation
development.
Incremental innovation
Occurs when small improvements are made to products/processes. These changes generally extend the competencies of the innovator and strengthens the firms competitive position and entrenches the nature of
66
the industry.
Radical innovation
Occurs when major improvements are made to a product. These changes often make the competencies involved in the old technologies obsolete sometimes require new marketing channels to be developed and puts firms out of business and changes the nature of the industry
Transformational innovation
Occurs when the innovation is of such a fundamental nature that it enables the development of many other innovations, it destroys whole industries and changes the nature of society.
(Source: A. D. Little, cited in Floyd, 1991)
In the long run, disruptive technologies cause “Paradigm shifting” which changes the basis of
competition- the competitive landscape of the market. Christensen suggests that industries
usually follow a certain sequence of performance change resulting in paradigm shifts.
Functionality Reliability Convenience Price
Figure 43 Paradigm Shifting (Source: Author derived from Kaounides, 2004)
As the ST improves along the dimension of functionality by following the
mainstream customers who mislead them, the DT emerges at the lower tier of the market, as
it improves along the existing dimension, it holds a newer performance dimension and
eventually changes the basis of competition from ‘functionality’ to ‘reliability’.
Consecutively, ‘convenience’ and ‘price’ comes after.
Now, we apply Christensen’s framework to the automotive sector by constructing an
analytical framework for the potential DT of HFCV to measure the threat it poses on ICEV.
The performance dimension is the fuel economy, as previously used in S-curves.
DT DT DT
67
Fuel Economy Trends for Transport Sector
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.019
75
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050
Year
Fuel
Eco
nom
y (m
pg)
ICEVHybridHFCV
Figure 44 shows the fuel economy trends in the automotive sector, examining three kinds of
vehicles: ICEV, Hybrid Vehicle (Hybrid), and HFCV. The graph is translated to Figure 45
incorporating DT framework.
Figure 44 Fuel Economy Trends for Transport Sector U(SourceU: Author from Data, see Appendices C1 & C2)
90 80 70 60 50 40 30 20 10 0 1975 1985 1995 2005 2015 2025 2035 2045 2055 Source: Author (DT framework application on data from Figure 44)
rFigure 45 Disruptive Technology Framework in the Automotive Sector
B
A
C
Fuel
Eco
nom
y (m
pg)
Upper Market Lower Market ICEV HFCV A B C
68
Yea
69
Analysis of Christensen’s framework in the automotive sector
Through observing the development of ICEV over time, we can agree that ICEV is the ST in
this framework. From point (A) in 1975 the ICEV fuel economy performance of is improving
over time until today (2004) meeting the needs of their mainstream customers, people who
are buying cars. The improvement of ICEV from (A) to (B) is incremental innovation;
improving to some extent from 15 mpg to 30 mpg over 30 yrs. In 2005 the ST i.e. ICEV will
reach point (B) and that is when the technology matures. Beyond this point, we can foresee
performance oversupply. ICEV is predicted to overshoot their main customers in the
performance of fuel economy around year 2005, at this stage; the market anticipates a strong
emergence of HFCV; it remains emerging for the first 10 yrs of its introductory phase where
it seeks commercialization. Meanwhile, ICEV steadily grow far from the customers demand,
eventually, loosing hold of its main market. In 2015, at (C) and with the commercialization
of HFCV the market is pushed to a higher performance of fuel economy. At that point and
beyond the technology of HFCV improves radically, bringing about the eventual phase-out
of ICEV and forcing it out of the market (refer to Figure 35). The radical improvement of
HFCV ‘creates’ the demand for customers and keeps pushing the performance radically up
along from around 58 mpg to 82 mpg in a timeframe of 20 years, afterwards, 2035 – 2055
performance will be sustained to its maximum.
70
Findings and Limitations of Christensen’s Framework:
After employing the framework of DT developed by Christensen we can conclude
that ICEV is ST developing incrementally and estimate to phase out of the market by 2050.
Meanwhile, HFCV holds its stand in the market, from its estimated introduction by 2015-20
until it becomes base technology reaching its utmost performance by 2045-50.
However, HFCV is not a ‘DT’ in the literal meaning of Christensen’s framework as it
does not initially targets the lower tier of the market. However, it is a radical innovation that
maybe transformational bringing about changes in the basis of competition. If we consider
another performance criterion we may examine the greenhouse gas (GHG) emissions
reduction. TP
13PT
-200
20406080
100
Gasoline Methanol Hydrogen
Fuel Economy Improvement
GHG Emissions ReductionBenefits
Figure 46 Fuel economy and GHG emissions of HFCV / ICEV (Source: MIT (Weiss et al, 2000))
Figure 47 Comparisons of emissions by vehicles (Source: California FC Partnership, 2001)
TP
13PT Further data on GHG emission criterion, refer to Appendix C3
71
Figure 46 and 47 shows the distinctive performance of HFCV as oppose to ICEV.
This suggests the clear incompetence of ICEV in the given criteria. Concisely, the
application of this framework is not accurate in the sense that ‘disruptive’ technology did not
target a lower tier of the market nor did it start at lower performance; this does not meet the
characteristics by Christensen. However, in economic terms, ST could be described as
complements and DT as substitutes. (Burgelman, Christensen and Wheelwright, 2004)
The way in which HFCV could become disruptive is that by time they become the
‘standard product’ used in the industry along the dimensions of performance. They possess
attributes that appeal to the new market segment. DT in the sense that it disrupts an
established trajectory of performance improvement (fuel economy or GHG emission
reduction) or redefines what performance means. They rarely could initially be employed in
established markets; this tendency consistently appears in a range of industries. (Rosenbloom
and Christensen, 1995)
Also, ICEV companies may phase out reacting to HFCV which its values, currently,
embrace small markets and their cost structures can accommodate low margins. HFCV could
change the basis of competition from Fuel Economy to GHG emission reductions with the
increasing environmental pressures.
Although, HFCV did not target a lower value market, it holds the potential to be
transformational. For a better understanding and stemming from the assumption that HFCV
creates the demand, shapes the market and is a potential standard product, we move on to
examine Utterback’s dynamics of innovation model; in parallel with the concept of
‘dominant design’ more specifically; exploited in the next section to the same scenario.
T4.3.3 Utterback’s Dynamics of Innovation Model (1994) This part uses the model developed by Utterback in 1994; it starts by identifying the
three phases that firms in an industry go through in terms of the rate for their product and
process innovation over time. Afterwards, it measures the firms performance overtime
explaining the standard trend followed in the industry and describes how the invasion of new
comers in the market can lead to the overtake of existing firms; through recognizing the
importance of ‘dominant design’. The model is then incorporated by ICEV and HFCV of the
automotive industry to generate better understanding of the problem at hand.
72
The Dynamics of Innovation Model
Fluid Phase Transitional Phase Specific Phase Figure 48 The Dynamics of Innovation (Source: Utterback, 1994)
Product innovation results in new or improved products. E.g. the gradual improvements of
ICEV fuel economy over time (for instance, in Figure 45, ST improvement from (A) to (B)).
Process innovation occurs when the manufacturing processes are improved to make the
production of existing products cheaper, or when new processes are developed specifically
for making a new or improved product. E.g. the gradual reduced incremental technological
cost of HFCV fuel economy improvements in Figure 40.
Dominant Design appearance ushers in a period where the product innovation rate decrease
and the process innovation rate increase. Utterback describes it as:
“…the one that wins the allegiance of the marketplace, the one that
competitors and innovators must adhere to if they hope to command
significant market following…” Utterback, 1994
Utterback summarizes his model by linking the interdependent rates of process and
product innovation over time, to the important transformations in the characteristics of
product, process, competition and organization.
The model reflects the dynamic processes that take place in an industry and within the
firms in the industry. It shows two dimensions: (1) The product innovation, process
innovation, competitive environment, and organizations. (2) The industry lifecycle which is
described in the phases: fluid, transitional and specific.
Rat
e of
maj
or in
nova
tion
Product innovation
Process innovation
Dominant Design
emerges
73
This shows how product innovation enables process innovation and the coexistent
changes that occur in industries and firms within. These innovation leads to the emergence of
dominant design. Thus, could monopolize the market, at least during its emergence phase, as
it decides how the products are supposed to look and operate in the mind of the user and
producer. (Utterback, 1994)
This could also link to the Attacker’s Advantage (Foster, 1986) explaining the power
that new comers possess in controlling the market they create. Once the product becomes the
dominant design it has the power to amend the performance requirements by the customers,
or rather, ‘create’ customer demand and shape the market. Thus, characteristics that once
were requirements could now be implicit in the design itself that the market expects.
Furthermore, with the application of these concepts into the automotive industry we arrive at
a potential dominant design created by HFCV emergence.
Figure 49 shows the trend of performance existing in the market. It shows the
performance superiority of the established technology that may prevail for sometime. When
the new technology enters, it eventually typically improves rapidly– just as the established
technology enters a stage of slow innovative improvements. Ultimately, the newcomer
improves its performance characteristics to the point where they match those of the
established technology (T2) and surpasses it, still in the midst of a period of rapid
improvement. Established technologies usually respond to this invasion of new product with
redoubled creative effort often leads to substantial improvement where it encounters brief
improvement, but, by time (T3) the persistent pace of improvement in the new product
technology allows the challenger to equal, and then surpass, the established product.
(Utterback, 1994)
T1 T2 T3 Time Figure 49 Performance of an established and an invading product contrasted along one performance
dimension (Source: Utterback, 1994)
Prod
uct P
erfo
rman
ce
Invading products Established products
Burst of improvement in
established technology Dominant Design emergence?
74
Incorporating Utterback’s Model into the Automobile Industry
Using the data in Figure 44 we can incorporate Utterback’s model (Figure 49) to the
automotive sector; arriving at a slightly resembled model in Figure 49.
80 60 40 20
1975 2005 2020 2035 Year Figure 50 Performance of ICEV and HFCV contrasted along Fuel Economy Dimension (Source: Author - incorporating figure 44 and 49)
Figure 50 shows the automotive industry utilizing the current model. If we presume
ICEV is the ‘established product’ then HFCV would be the ‘invading product’. The Hybrid
vehicles falls in between in terms of fuel economy performance, this suggests a ‘burst of
improvement in the established technology’ simply because in this model it is improving in
the same dimension - the performance of fuel economy. Some might question that HFCV is
also an improvement along the same dimension. However, as mentioned previously, HFCV
proved best relative to competing fuels with highest performance along the performance
dimension of GHG emissions reduction. Thus, considered an invading product that exerts
power of ‘dominant design’.
Moving back to Figure 48, dimension of the y-axis is the rate of innovation, this
graph helps us identify the timeframe within which the dominant design emerges. To do this,
we take the percentage of improvement over time. Also, we need to identify the process and
product curves, in the case of HFCV, we take incremental fuel economy improvement as the
process innovation, and incremental technology cost as the product innovation.
Fuel
Eco
nom
y (m
pg)
HFCV
ICEV
Hybrid Vehicle
75
HFCV Cost / Performance Relationship
0
20
40
60
80
100
120
140
2005
2008
2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050
Years
Perc
enta
ge (%
)
incremental technology costincremental fuel economy improvement
Figure 51 HFCV Cost / Performance Relationship - Dominant Design Emergence (Source: Author - incorporating Utterback’s Dominant Design model to HFCV)
The term dominant design is broader than the technology itself; it brings the
competition to become process-based rather than product-based. This could be portrayed in
Figure 51. In addition, the rate changes from radical to incremental and the industry changes
from product to process. Additional factors (other than technology) determining the dominant
design of HFCV are:
Collateral assets - market channels, brand image, and customer switching costs – advantages
of HFCV over ICEV in terms of enforcing its product as the dominant design starting with
leading brands in the automotive industry such as Toyota (see Figure 34)
Industry regulation and government intervention - impose the standard and thus define a
dominant design. Such as the government support for HFCV R&D (see Figure 32)
Strategic maneuvering by individual firms - the leaders in the market define the dominant
design, Automobile companies with massive R&D spending such as GM, Toyota, Honda and
Ford, and Daimler Chrysler.
Communication between producers and users - market learning, closely observing the
customers to reduce the gap between product capabilities and user requirements. Conversely,
Christensen showed that customers for sustaining products can influence a firm not to change
when change is called for, increasing their resistance and vulnerability to technological
progress.
Dominant Design emergence
76
An invading technology, in this case HFCV, has the potential to deliver better product
performance or lower production costs, or both. Figure 51 shows that with the appearance of
a dominant design product performance, fuel economy, accelerates. As the period of slower
incremental improvement comes in (2035) much infrequent changes and reduced cost sets in,
as indicated by the graph, eventually, phasing out of ICEV.
Findings of Utterback’s Model:
After we have examined the model, we applied it to the automotive sector by constructing the
performance criteria overtime. More specifically, to understand the dominant design concept
we had to translate the model using data from the HFCV product. Hence, we chose:
Rate of innovation = percentage
Process innovation = incremental fuel economy improvement
Product innovation = incremental technology cost
Therefore, we found that HFCV is estimated to become a dominant design by 2016. Beyond
this point, the competence became process-based rather than product-based, and the
improvement became radical rather than incremental.
4.4 Findings and Conclusion From the many studies we have discussed in the first part, we arrive at a set of findings that
Hydrogen Fuel Cell Technology in the automotive sector is estimated to be, by:
• 2010-2020: emerging and pacing technology
• 2020-2040: key and leading technology
• 2040-2050: base technology
Out of the theories employed in the scenario of the automotive industry, the first two theories
encountered some limitations that obstructed our findings; however, Utterback’s dynamics of
innovation model is the most suited for the problem at hand. The second finding is:
• 2016: HFCV is dominant design
If not reacted in a coherent manner, these findings impose a threat on the automotive and the
oil industries. From the links we have comprehended in this chapter’s first section, we know
that the oil industry will be greatly affected.
In the next chapter, we use Saudi Aramco as a case study to develop a technology
strategy to react to the current threat imposed by HFCV.
77
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80
Chapter 5: The Impact of HFCV on the Oil Industry: A Case Study of Saudi Aramco
5.1 Introduction
In Chapter 2 we analyzed the oil industry and concluded with potential challenges
obstructing the oil industry in the medium-long term, due to environmental, technological,
geological and social pressures, which raises the need for renewable energy. From there we
moved to Chapter 3, describing FC technology as a renewable source of energy and its
potential emergence in the automotive sector. In Chapter 4, we explained the technological
and economical links, and applied the theories of disruptive innovation to the problem at
hand, arriving at a set of findings that suggested the possible emergence of HFCV as a
dominant design by 2016. Also, FC technology is estimated to become key technology by
2020, and base technology by 2040.
In this chapter we focus on the state-owned oil company, Saudi Aramco, which owns,
produces and distributes the world’s largest oil reserve. If our findings were true, and if HFC
is to dominate the energy consumption pattern of the automotive sector, then, this may have a
major impact on Saudi Aramco and consequently the whole oil-based Saudi Arabian
economy.
Therefore, we examine the strategic options for Saudi Aramco using the tools of
technology strategy, and broadly identify the issues facing the company if it were to respond
to the challenges faced with the emerging technology of FC.
81
5.2 Saudi Aramco: A Technology Strategy Perspective
5.2.1 Brief History of Saudi Aramco The history of Saudi Aramco dates back to 1933 when the original concession to
explore, drill and recover oil was signed between Saudi Arabian Government and Standard
Oil of California. Oil was discovered in commercial quantities in Dammam at well # 7 in
1938. Afterwards, it was formed in 1944. In 1945, when the Saudi huge oil reserve was
apparent, Standard Oil of California was joined by Exxon Mobil and Texaco.
Saudi Aramco is state-owned and is the world's number one oil producer, supplying
11% of the world’s oil demand. The company controls proved oil reserves of about 264.2
billion barrels, which is more than 25% of the world’s total. It extracts 8 million barrels a
day, operates refineries, markets oil internationally, and distributes it domestically.
Saudi Aramco also owns outright all the domestic refineries that produce oil products
for the local market and one export refinery; it has two refining joint ventures, with Shell at
Jubail and ExxonMobil at Yanbu, that export all their output. TP
14PT
5.2.2 Saudi Aramco TodayTP
15PT
Saudi Aramco operates the Kingdom’s oil and gas exploration, production, and
distribution, the internal and external marketing of almost all products, and most refineries.
Saudi Aramco is the world’s largest oil company and the sixth largest refiner. It is
responsible for about 100 oil and gas fields (and over 1,000 wells).
Global Outlook:
World energy demand is expected to increase at an annual rate of 1% to 2% over the next
15 years, reaching an annual demand of 107 million barrels per day by 2020, partly as an
anticipated consequence of growth in China, India and other South East Asian economies.
Worldwide oil reserves at year-end 2002 stand at 1050 billion barrels, of which 65% is in
the Middle East, with Saudi Arabia being the principal player. The Middle East contributes
TP
14PT According to the Former Saudi Petroleum Minister, Sheikh Ahmad Zaki Yamani, 2004 (see interview in
appendix D1) TP
15PT Summary extracted from presentations by: Mahmoud Abdul-Baqi (Saudi Aramco, Vice President) and
Nansen Saleri's (Saudi Aramco, Reservoir Management, Manager) – The CSIS in Washington on February 24, 2004
82
about a third of total world production, has a reserves-to-production life of 92 years and is
expected to play a superior role in the global energy market.
Reserves and Future Potential:
Saudi Aramco's oil and gas reserves conform to industry standards. Reserves attributable
to enhanced oil recovery (EOR) processes are excluded, underscoring the conservative nature
of the Company's reserves. Year-end 2003 proved oil reserves totaled 260 billion barrels.
Incremental possible reserves are estimated to be 103 billion barrels. Exploration, delineation
and development efforts have increased Saudi Aramco's oil initially in place from 600 to 700
billion barrels during the past 20 years. Vast unexplored acreage exists in various regions
within the country; US Geological Survey 2000 projections point to additional recoverable
oil resources ranging from 29 to 161 billion barrels to be discovered in Saudi Arabia by
2025. The Company projects its oil initially in place volume to reach 900 billion barrels by
the same date.
Reservoir Development and Management Practices:
The Company develops and manages its rich range of hydrocarbon reserves,
employing modern technological resources, best-in-class reservoir management practices and
a world-class professional workforce. The emphasis is on long-term production sustainability
and maximum recovery.
5.2.3 Assessing Saudi Aramco Technology Position This part provides an overview of the current technology position of Saudi Aramco. We
cover two main areas: (I) deciding which technologies Saudi Aramco needs and (II)
determining competitive strengths and weaknesses.
I. Deciding which technologies Saudi Aramco needs
In order to decide which technologies Saudi Aramco needs, we should (1) identify the
current and future product / market segment, (2) identify basis of competition, (3) assess the
implied key factors of success, (4) identify relevant technologies, and (5) select the
strategically important technologies.
1) (a) Identify current product / market segments
This is basically judged by how critical are the market features perceived by Saudi Aramco.
We need to know ‘where’ and ‘when’ to compete in the market, starting by defining the
customer base.
83
Customer base
Saudi Aramco is a global seller of crude oil and domestic producer of petroleum
products, especially of the transportation fuels, for consumer consumption. Therefore, there
are customers in the kingdom as well this include all Saudi gas stations throughout the
kingdom and the Saudi petrochemical company, SABIC, which is a buyer of petrochemical
feedstock and global refiners.TP
16PT
Saudi Aramco has bilateral contracts with international customers. Its crude oil is not
generally openly traded. Due to shareholdings in Petron (Phillipines, S Oil (S Korea), Motor
Hellas (Greece) and Motiva (USA) these are principle oil outlets. Crude oil is also sold to
major refiners globally, through the refining join ventures, Shell and ExxonMobil, whom in
turn export all their petroleum products. The automotive fuels account for 55% of the
petroleum products, including gasoline. Thus, Saudi Aramco’s major end-consumers really
are the automotive sector; crude oil is refined to fuels empowering the automotive sector -
amongst which is ICEV.
In the short-term, the products are ‘crude oil’ and ‘petroleum products’, gasoline, and
the market segment would remain the importing countries and the end-consumer remains the
‘automotive sector’, ICEV. Figure 52 shows the technical competencies of crude oil refinery,
which is Saudi Aramco’s current and short-term business.
According to a personal interview done with Saudi Aramco, June 2004, they do not
see any threat imposed from hydrogen fuel cell technology on their oil business. In fact, they
perceive it as an opportunity and are working on developing oil-based fuels to word fuel cell
vehicles. This puts them in a safe position, however, continuous R&D needs to be maintained
and initiatives on ‘hydrogen fuel cell’ development and ‘fuel cell’ participation must be
considered in the medium-long term.
TP
16PT For further details about SABIC refer to Appendix D4
84
Figure 52 Current Technical Competence of Oil Refinery (Source: www.osha.slc.gov)
85
Moreover, in the long-term Saudi Aramco might consider reacting to foreseen threats
or new opportunities available in the market as a result of a ‘technology push’, this could
direct the new strategy of the business.
1) (b) Identify future product / market segments
From Chapter 4 we know that, fuel cell technology (HFCV) is predicted to become a
dominant design by 2016. If we assume Saudi Aramco is to participate in the FC market in
the medium-long term, then we need to identify the product and market segment. Figure 53
shows a comparison between the two end-products, HFCV and ICEV. The market segment
would be the users within the automotive sector. This is mainly owned by USA, Europe and
Japan. The shift that Saudi Aramco will do is embracing HFCV as the end-product. The
technical competence will also be broaden to include that of the automotive sector, the
technological differences between the two products is illustrated in Figure 53 and described
in the footnote.
Figure 53 Comparison HFCTP
17PT and ICETP
18PT (Source: Scientific American, 2002)
TP
17 PTAfter hydrogen enters (1), the anode catalyst splits it into electrons and protons (2). The electrons travel off to
power a drive motor (3), while the protons migrate through the membrane (4) to the cathode. Its catalyst combines the protons with returning electrons and oxygen from the air to form water (5) Cells can be stacked to provide higher voltages (6). (Scientific American, 2002)TP
86
2) Identify the bases of competition
This reflects the criteria in which energy sources are demanded, with a particular
focus on the automotive sector who are the target customers, considering the restricting legal,
environmental and economical limits. The bases of competition would normally be:
a) Product Performance
b) Quality and reliability
c) Price
d) Distribution Channel
e) Compliance with International Standards
f) Customer Acceptance
These bases of competition could evolve as the market matures, these would normally follow
a certain trend, see Figure 43 – Paradigm shifting.
3) Assess the implied key factors of success
These are the factors that enable Saudi Aramco to maintain its competitiveness and
effectiveness in the market on the basis of competition mentioned in (2). In other words, how
can Saudi Aramco satisfy their target customers’ needs.
a) Fuel economy
b) Reduced GHG emissions
c) Manufacturing and assembly
d) Technology options readily available
e) Performing within the international standards limits
f) Reliability and maintainability
P
18 PThe piston, which travels up and down when the crankshaft rotates, starts at the top of the cylinder. The intake
valve opens and the piston drops, allowing the fuel/air mixture to enter the cylinder. The piston moves back up, compressing the gasoline and air. The spark plug fires, igniting the fuel droplets. The compressed charge explodes, driving the piston down. The exhaust valve opens, allowing the combustion products to exit the cylinder. (Scientific American, 2002)P
87
Key Success Factors
BoC/KSF GHG emission reduction
Fuel Economy Manufacturing and assembly
Technology Options
Brand Awareness
Performance ● ● Quality and Reliability ● ● ●
Price ● ● ● Distribution
Channel ● ● ●
Int’l Standard ● ● ●
Basis of C
ompetition Customer
Acceptance ● ● ● ●
Table 5 Basis of Competition and Key Success Factors (Source: A. D. Little cited in Floyd, 1997)
We need to understand the key factors of success of Saudi Aramco and the factors which
underpin them to gain maximum strategic value from the technology.
4) Identify relevant technologies
This is done by observing the key factor for success in turn and assessing which
technologies could be relevant. Thus, we need to ensure that the technologies we choose are
exhaustive in a form of grid (Table 6).
KSF 1 KSF 2 KSF 3 KSF 4 Technology/KSF GHG emission
reduction Fuel Economy
Manufacturing and Assembly
Reliability and Maintainability
T 1 Gasoline ● ● ● T 2 Naptha FC ● ● ● T 3 Methane FC ● ● ● T 4 HFC ● ● ● ● T 5 Gasoline FC ● ● ● T 6 Hydrogen ● ● ● ●
Table 6 Identification of technologies underpinning key factors of success (source: Authur using Arthur D. Little framewrok)
a) Competencies used in today’s core product (ICEV)
The current automotive sector is mainly driven by fossil fuels, namely gasoline which is
supplied by the oil sector. Thus, Saudi Aramco is a leader in today’s market.
b) Competences that provide unique, significant and durable competitive advantage
In the automotive sector, particularly, the lightweight vehicles, we predict a gradual
transform in the basis of competition. This suggests the incorporation of FC technology, a
current emerging technology and a potential dominant design, which will reshape the market
in the medium-long term.
88
c) new competencies to build
Hydrogen FC is a new competent technology that must be built and incorporated by Saudi
Aramco; for, it promises the company to gain competitive advantage in the medium-long
term as it makes the products highly differentiated, gives extensive value for the company,
and offer great advantages of being amongst the leaders in the market. This is referred to as
the attacker’s advantage (Foster, 1986).
5) Select strategically important technologies
At this stage, we need to determine the level of strategic importance of technologies to Saudi
Aramco; these are divided into four categories: base, key, pacing and emerging technologies
see Chapter 4, (4.2.2).
a) Technologies used in the industry today
(i) Saudi Aramco
Crude oil and petroleum products are the enabling technologies for Saudi Aramco
today to maintain its position in the world energy market. However, with the increasing
trends foreseen by FC technology, Saudi Aramco has actually started R&D on oil-based fuel
cell, Naphtha-based fuels, have been found to be useful as a fuel source for vehicular fuel
cells, in which they acquired a patent on from the US Patent Office.TP
19PT
(ii) Competitors
As Saudi Aramco is principally a crude oil supplier, then main competitors are natural
gas, coal and other primary energy suppliers including renewable sources (FC). For oil
generally the largest reserve portfolios are held by national oil companies and these might be
construed as being competitors. However, given that oil is in high demand then the risk of
substitution for non petroleum fuel derivatives is really the competitor.
The competitors for Saudi Aramco could expand to include a number of oil companies in
different countries. The main ones are: BP, Shell, and Exxon Mobil. These companies
compete with Saudi Aramco in terms of exporting oil to the world. However, Shell and
Exxon Mobile are also refinery join ventures with Saudi Aramco as mentioned previously.
The obvious and immediate actions that Saudi Aramco might want to consider is to look
at the R&D spending of it competitors, how much are they spending and where are they
spending it on.
P
19P For further details on Naptha-based fuels, refer to Appendix D5
89
Table 7 shows the participation of the oil companies, who are the competitors for Saudi
Aramco, and their participation in the fuel cell market. Oil Company Start date Alliance with automotive
companies Participation in fuel cell
market Shell - Shell Hydrogen
1999 Vistorka H F DaimlerChrysler Norske Hydro Seimens Westinghouse Power Corporation
Hydrogen HFC Hydrogen carrier SOFC
BP -BP Solarex
1999 Solarex General Motors Ford Motor Company Princeton University DaimlerChrysler
Hydrogen Gasoline FCV CO B2B management Vehicle efficiency Methanol FC, Citaro bus
Exxon Mobil 1998 General Motors Gasoline FCV processor Saudi Aramco 2003 none Naptha-based fuel for FC
on-board reformers Table 7 Oil Companies Participation in the Fuel Cell market (Source: Authur)
Therefore, we can note how Shell, BP and Exxon Mobile are becoming major participants in
the fuel cell market.TP
20PTNevertheless, they have established links with automotive companies to
enable them compete in the new areas of R&D such as fuel cell.
II. Determining Saudi Aramco Competitive Strengths and Weaknesses
Now, that we have comprehended the important technologies to Saudi Aramco, and know the
ranking in terns if strategic importance, we can assess how well the business is at each of
these technologies. First, the definitions of the technology competence must be clear
(provided by Arthur D. Little cited in Floyd, 1997):
Clear Leader Sets the pace and direction of the technological development Strong Able to express independent technical actions and set new directions. Favorable Able to sustain technological competitiveness in general and / or
leadership in technical niches. Tenable Unable to set independent course. Continually in catch-up mode. Weak Unable to sustain quality of technical outputs versus competitors. Short-
term fire-fighting focus.
P
20P For briefs about the competing oil companies and their participation in the fuel cell market, refer to Appendix
D6
90
Table 4 shows the understanding of competitive position and strategic importance, the
technologies could be mapped into the matrix, afterwards, broad judgments on the strategic
implications for Saudi Aramco could be drawn.
Technologies positioned at the lower right of the grid, i.e. weak to tenable and are
currently emerging to pacing suggest that they are of future great potential, to these
technologies of T3: Methane FC, T4: hydrogen FC, T5: Gasoline FC, and T6: Hydrogen;
Saudi Aramco must invest ‘selectively’.
Technologies positioned at the top left of the grid, i.e. clear leader to strong and are
currently base to key, suggest that the company must ‘maintain’ its position in the technology
of T1: gasoline. However, it also suggests that any further spending may critically be waste
of resources, since it is a mature technology.
For the technology of T2: Naptha FC, it is also an emerging technology, Saudi
Aramco has obtained patent in this technology and need not to invest any further.
By using this grid continuously with the changing positions of the technology, Saudi Aramco
will be able to measure its activities and listen to the alerts provided by the grid. This will
help it well-allocate its two most important resources, money and time.
91
Industry Average
Alarm signal for Future
Invest
Selectively
Competitive Position
CP / CI Clear leader Strong Favorable Tenable Weak
Base T1 Key Pacing T5 T6
Com
petitive Impact
Emerging T2 T3 T4 Competitive Position
CP / CI Clear leader Strong Favorable Tenable Weak
Base TT11 Key Pacing T5 T6
Com
petitive Impact
Emerging T2 T3 T4 Table 8 Strategic Implications of Competence Levels and The Generic Strategies for Technology Development
(Source: Author using Arthur D. Little framework) Above we presented an overview of the current technology position for Saudi
Aramco. We know that HFCV is predicted to become a dominant technology in the
automotive sector by 2016. Meanwhile we have shown that major energy companies such as
Shell and BP are moving into FC. The question remains what might be the response of Saudi
Aramco if it wants to be a major player in the energy and automotive markets?
Below we assume that Saudi Aramco’s business strategy is to become a major
participant in FC in the energy and automotive sector. How can it develop an appropriate
strategy to achieve this, building technologies and competencies from what it possesses now
to what it needs to be in the market for oil-based FC and /or HFC? Below we outline a step
by step approach for Saudi Aramco to develop and implement a technology strategy
integrated with its business strategy in FC.
Alarm signal for
SurvivalAlarm signal for
Present
Alarm signal for waste of resources
Opportunities for present competitive advantage
Opportunities for future
competitive advantage
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5.2.4 Saudi Aramco: Building a Technology Strategy for Leadership in Fuel Cells for the Automotive Sector After having assessed the current technology position of Saudi Aramco, we continue
in this part with the assumption of Saudi Aramco participation in fuel cell market. This
provides an outline for Saudi Aramco to develop a technology and business strategy to
enable it to be prepared for any emerging and invading technologies, such as FC. This is
important to decide what to invest in and how much you need to spend; these important
decisions have to be based on judgments and on fit with business objectives.
Figure 54 Structured Approach to Business and Technology Strategy (source: Arthur D. Little)
Initially, Figure 54 needs to be incorporated in the company; it is a guide that helps to
develop a technology strategy for Saudi Aramco and follow-up studies to monitor additional
facilities, modifications and operation changes that should be carried out in order to enhance
the performance of existing business.
The objective of Saudi Aramco has to be determined; this acts as a framework in
which all processes work within. The business and technology strategy need to be integrated
throughout the development of the strategy.
Saudi Aramco operates within the framework of sustainable development. The
company stresses the application of internal controls aimed at protection and conservation of
the environment. Saudi Aramco’s plan for the conservation of the environment states that the
Objectives Business and Technology Strategy
Core Technology
Competences
What Technology Strategy should
we follow?
What Strategy?
Where do we want to compete?
What must we do to meet customer requirements?
What technologies do we need?
How do we compare to competitors?
93
company guarantees that its operations will not cause unnecessary hazards which damage the
environment. TP
21PT This is suggested by the international agreements on the environment which
were signed by Saudi Arabia and are effective since 2001.TP
22PT
Figure 54 allows Saudi Aramco to decide its position in the midst of all the
threatening emerging competing technologies and the legal and environmental restrictions
that it is tied with it. For instance, the core technology competences must be redefined as not
only focusing on the conventional ‘crude oil refinery’ yet, broaden the objective to fit
‘renewable energy’, more specifically, ‘fuel cells’. This will enable the company to start
investing in sources of energy other than oil. Meanwhile, keeping the existing business
strategy, Saudi Aramco will become a major player in the global energy market.
Figure 55 presents a diagram that shows the interrelationships affecting a technology
strategy. The diagram suggests that the direct determinants of the strategy are: strategic
action, organizational context, technology evolution, and industry context. The strategy
should work within the framework that is defined by: internal environment, integrative
mechanisms, external environment, and generative mechanisms. These are not examined in
this project due to lack of technical details involved. However, the diagram gives an
indication to Saudi Aramco of what should they be considering when developing their
technology and business strategy.
P
21P Saudi Arabia Country Profile, UN, Johannesburg Summit 2002
P
22P Refer to Appendix D2
94
The key issue: How can Saudi Aramco build a strategy which takes into account the threats
we identified. If it successfully develops the strategy, these threats could become
opportunities for Saudi Aramco.
Internal Environment
Generative Integrative Mechanisms Mechanisms
External Environment
Figure 55 Determinants of Technology Strategy (Source: Burgelman, R., Christensen C., Wheelwright S., 2004)
The company possible three scenarios for 2020:
1. Develop oil-based fuel cell
2. Develop hydrogen fuel cell
3. Participate in fuel cell products
Corporate technology priorities and strategic improvements
Essentially any corporation could develop an aspect of its business to become
sustainable source of its competitive advantage. Some technologies must be developed as a
core competence for a company in order for it to compete effectively based on the current
basis of competition in the market and must be reinforced in the business at a corporate level.
For the reason that R&D investment is only decided by the top management, thus,
technology cost needs to be communicated at all levels of the business.
Saudi Aramco must decide on strategic improvements to strengthen the firm’s
position. From Table 8 we comprehended the technology positions in the market and in
Saudi Aramco, the framework suggested strategic actions to be taken. Such as, to ‘invest
selectively’ in technologies T5, T6, T3, and T4: gasoline FC, hydrogen, methane FC, and
HFC respectively. Also, it suggested that Saudi Aramco should maintain its position in T1,
Strategic
Action
Organizational
Context
Industry
context
Technology
Evolution
Technology
Strategy
95
the oil market (supplying gasoline) to conserve its leading role in this base technology of
today’s energy economy.
Competitive Position
CP / CI Clear
Leader Strong Favorable Tenable Weak
Base
Key
Pacing
Com
petitive Impact Emerging
Table 9 Strategy Translation into Specific Technology Objectives (source: Author using Richard Granger, 2004)
According to Figure 35 the conventional ICEV will eventually diminish by 2012, and
the improved ICEV will diminish by 2027. Table 9 is presenting the scenario suggested for
Saudi Aramco positions in regard to the technologies competence in the market. In order to
provide these competencies for the company, there are many ways to source the technology.
Such as:
In-house R&D must be directed to the right technologies in Saudi Aramco, this is what
shapes their competence.
Outsource could be very beneficial and effective. For instance, if Saudi Aramco decides to
produce fuel cell product, it could outsource the technology itself to leaders in the market,
such as Ballard Power Systems, who is the world leader in FC technology (PEM) producing
FC engines for the HFCV.TP
23PT
Partnership and alliance could be developed with its competing oil companies if it wishes
to pursue in the area of fuel cells. Moreover, it already has joint ventures for refinery with
ExxonMobile and Shell, this makes it easier to pursue other areas as well. Hence, FC
technology would offer great opportunity for Saudi Aramco to be turned into hydrogen as a
new fuel outlet in the long-term.
P
23P For further information on Ballard refer to Appendix D7
+ 8
T1
+ 14
T5 T6
T4T3 T2
+ 5
+ 7
+ 20+ 4
+ 5
+ 7
96
Moreover, Links must be established between Saudi Aramco and automotive
companies as well. As we have seen before, oil competing companies (such as BP,
ExxonMobil…etc) have established link with automotive companies (see Chapter 4), this is
important to reach collective efforts and R&D in the area of alternative energy sources,
hydrogen fuel cell. Other means to participate in the market could include: Customers and
Suppliers relationships, licenses and company acquisitions, and contract and academic R&D.
Saudi Aramco, the wholly-state-owned oil company, represents the oil industry of
Saudi Arabia. The following section provides a brief on Saudi Arabia showing the major
dependency on its oil industry.
5.3 Economic Impacts on Saudi Arabia
5.3.1 Importance of Saudi Arabia Saudi Arabia is a major player in the oil market. Its significant importance stems from
the fact that it has the largest reserve of oil in the world. At the end of 2003, the Saudi reserve
for oil barrels accounted for 22.9% of the total share of the global oil market; Iran and Iraq
accounted for 11.4% and 10% successively the second and third largest oil production in the
world. (BP, 2004)
5.3.2 Economical Overview The Saudi economy is dominated by the oil sector, which accounts for 75% of
government budget revenues, 39% of GDP, and over 90% of export earnings. The Saudi
capability of ‘swing’ capacity gives it power to play a leading role in OPEC where it
disciplines the cartel by increasing production if other members are m on their quotas. (EIU,
2004).
The dependence on oil has nailed the economic development of the Saudi economy to
oil prices fluctuations. Despite the major efforts by the Government to ensure that oil
supplies flow smoothly to consumers worldwide to meet their demand, and to eliminate
unnecessary price fluctuations in world markets; in many cases the Saudi government was
unable to protect its economy from such fluctuations.
This is a serious problem in the Saudi Economy, generally, a drop in oil prices and
revenues reflected negatively on the economy as a whole. It led to a drop in GDP growth,
widened budget deficit and delayed the implementation of several development projects. The
heavy dependency on the oil sector exposed the economy to external economic shocks and
97
hence led to a fluctuation in economic growth, depending on the conditions in the
international oil markets. (ESCWA, 2000)
5.3.3 International legal participation The Kingdom has signed and/or ratified many international and regional conventions
and protocols that are relevant to protection of environment. In addition, it has signed a
number of regional and international agreements, protocols and conventions dealing with
various aspects of sustainable development.TP
24PT Therefore, Saudi Arabia endures legal
pressures that force it to exert an effort and react to these challenging limitations.
From the findings in this section, the apparent dependency of Saudi Arabia on the oil
sector indicates urgency of the matter to Saudi Arabia. Any disruption to the oil sector means
disruption to the economy of Saudi Arabia. In addition, the ratified conventions and
protocols make the situation even worse in the sense that Saudi Aramco needs to meet its
targets and limitations.
Given the timeframe from the previous findings in Chapter 4, Saudi Aramco must
react to these foreseen threats immediately, otherwise, Saudi Arabia will be in serious trouble
if not in the medium-term then, surely, in the long-term.
5.4 Findings and Conclusion
Technology innovation and fierce competition taking place in the markets are forcing
companies out of business; new technologies are exerting power to shape the market and
change the basis of competition. Thus, it is important for companies to consider continuous
assessment of technology positions in the industry and the firms within. The threat is on
companies in the automotive sector but eventually to those who are in the petroleum business
that are not recognizing the importance of FC.
Saudi Aramco, the Saudi state-owned oil company, is threatened by such emerging
technologies; which oblige the company to react to these foreseen challenges. Moreover, by
understanding the medium-long term potential trends in the energy economy Saudi Aramco
can seize the opportunities and employ the promising strategic technologies to gain
competitive advantage.
P
24P Refer to Appendix D2
98
The development of such a strategy is necessary to maintain the current position of
Saudi Aramco in the energy economy as well as guarantee the existence of business in the
medium-long term. Certain technologies were addressed specifically within a specified
timeframe. To secure the wellbeing of Saudi Aramco, continuous R&D and assessment of
technology position is of strategic importance.
Decisions taken by Saudi Aramco, regarding the energy market in particular, directly
influence the economy of Saudi Arabia. Therefore, the threats faced by Saudi Aramco itself
endanger the country’s economical well-being. Unless responded to wisely and selectively,
Saudi Arabia will encounter fierce competition in the medium-long term that may result in
serious impacts on its economy.
References
Floyd, Chris (1997) Managing Technology for Corporate Success, Gower, England.
Burgleman, Robert; Christensen, Clayton and Wheelwright, Steven (2004). Strategic
Management of Technology and Innovation, Irwin
Saudi Aramco (2004), Dr. Mohammad Al-Ansari, Mr. Bashir Dabbousi, and Mr. Horner,
Personal Interview.
Courtesey of OSHA (1994), Crude Oil Refinery, Available from: <URL:
www.osha.slc.gov>
Economic Intelligence Unit (2004), Saudi Arabia Country Profile. Available from: <URL:
www.eiu.com>
99
Chapter 6: Discussion and Conclusion
6.1 Introduction
This project argued that fuel cell is a potential disruptive innovation to the oil
industry. We started with this hypothesis and planned to use Saudi Aramco, the Saudi oil
company, as a case study to arrive at critical analysis and recommendations to the company.
This project started with a question: is fuel cell a disruptive innovation to the oil
industry? To answer this question we had to identify the areas of research and test our
hypothesis. First, we examined the oil industry and arrived at findings, next, we
comprehended the technology of fuel cell concluding with another set of findings.
Afterwards, we linked the technology (FC) to the industry (oil) through the automotive
sector. We measured the impact of the technology on the automotive industry through
studying the outcome of various researches reaching critical conclusions. By studying the
literature on disruptive technology, we applied the theories to the problem at hand to further
understand the situation. Using the findings from the theories we moved on to address the
threats imposed on the oil industry, with particular focus on Saudi Arabia, the case study of
Saudi Aramco. Reacting to the foreseen threats, we asses their current technology position
and developed a new technology strategy for the company to secure its position in the energy
market.
In this chapter, we provide a brief summary of the general topic and the aspects
addressed in this project. Then, we recap the issues and problems encountered, and list our
major findings, we discuss all the issues and analyze it briefly. Finally, we provide
concluding remarks and recommendation.
100
6.2 Theoretical Findings
6.2.1 The oil industry First, we examined the oil industry in Chapter 2; explained the oil refinery process,
and clarified the overlapping industries. We found that the oil industry supplies the crude oil
to the petroleum refinery, which in turns refines it to petroleum products; we have also found
that the major product amongst these is gasoline, which accounts for 47% of petroleum
products.
Through Porter’s Five Forces analysis we have found that the power of substitutes
may render the current shape of the oil market in the medium-long term with the introduction
of alternative sources of energy, such as: biomass, wind power, solar energy, and renewable
energy (fuel cells). Moreover, we found that Saudi Arabia exerts the power of supplier as it
owns the crude oil market being the world’s largest oil reserve and enjoys the least costly
production per barrel. This is all controlled by the stat-owned company, Saudi Aramco. The
power of buyers is reflected through the automotive fuels which are used by the end-
consumers automotive sector.
In addition, we have found some predicted future trends in the oil industry, which is,
the eventual decline of the use of oil. This could bring about the end of the oil age, some
reasons argued in the chapter include: (1) environmental and legal pressures: the creation of
the Kyoto Protocol; which has established new emission targets for each member nation,
relative to their 1990 emissions, levels which have to be achieved over the period of 2008 –
2012; (2) new technology: technology innovation which offers superior quality, even if
costly, can dramatically change energy use. For instance, hydrogen fuel cell, is potentially a
disruptive energy technology; (3) energy source scarcity: The global oil production peak is
likely to occur between 2003 and 2012 and scarcity could occur as early as 2025, or well
after 2050, though, it remains arguable.
6.2.2 Fuel Cell Technology From the oil industry and the critical findings of the foreseen threats, we moved to
Fuel Cell Technology in Chapter 3. We understood the technology and how it works, and
hydrogen as a source fuel, then we differentiated between the types of fuel cells and their
uses, we found that the transport application is mainly using Proton Exchange Membrane FC,
101
and it is the most popular type. Then we found current applications of fuel cell: stationary
power, portable power and transportation (the focus of this project).
The benefits of fuel cell are tremendous, we found that they are basically cleaner,
quieter; offer zero emissions if hydrogen is used as a fuel, reduce greenhouse gas (GHG)
emissions, and finally highly efficient fuels. However, the biggest barrier remains its high
cost, the storage of hydrogen on-board, and the infrastructure in terms of fueling station and
distribution channels.
Moreover, we found that a lot of research has been done by countries and companies.
The major participating countries are: North America, then West Europe, then Japan, and
then South Korea. We found that the governments of these countries are spending massive
amounts of money on fuel cell research. We have also found that the main participating
companies are: Toyota, Daimler-Chrysler, and General Motors. The rest are also increasing
their efforts: Ford, BMW, Honda, Renault-Nissan, and Volkswagen. FC market is primarily
determined by two main partnerships that have developed: DC-Ford-Ballard and Toyota-
GM. We found that these companies are already producing hydrogen fuel cell vehicles
(HFCV) to put test until it is commercialized.
These were our theoretical findings that guided us to measure the impact of fuel cell
technology on the oil industry through examining the automotive sector in Chapter 4.
6.3 Empirical Findings
6.3.1 The Energy Economy and the Automotive Sector We understood the energy economy and the established technological and economical
links between fuel cell technology and the oil industry (see figure 25 pg.58). We found that
the oil industry is greatly linked to the automotive industry, as 47% of its petroleum products
(Gasoline) find its way in the automotive market (internal combustion engine vehicles –
ICEV).
Moreover, through the various studies conducted by practitioners in the area of fuel
cell, we found that by:
• 2010-2020: emerging and pacing technology
• 2020-2040: key and leading technology
• 2040-2050: base technology
The finding result is constructed in the graph in Figure 56.
102
Technology position Fuel Cell Technology
Emerging Pacing Key Base
2010 2020 2040 2050 Figure 56 Fuel Cell Technology Position Based on Findings (Source: Author)
6.3.2 The impact of hydrogen fuel cell on the automotive sector The automotive sector was examined with particular interest on the impact of
hydrogen fuel cell vehicles (HFCV) on the existing internal combustion engine vehicles
(ICEV). This was tackled using the literature on disruptive technology, specifically, Foster’s
S-curve model, Christensen’s Disruptive Technology framework, and Utterback’s Dynamics
of Innovation model.
Our findings from Applying Foster’s S-curve model was the following graph: Performance (Fuel Economy, mpg) 90 80 70 60 50 40 30 20 10 Effort (Technology Cost, $ 000) 0 … 20 21 22 23 24 25 26 27
Timeframe
HFCV
ICEV
103
We found that HFCV has higher performance and technologically cost more.
However, this is not a comprehensive reflection as it did not link it to the market and did not
show the timeframe. Hence, after examining Christensen’s disruptive technology framework
we applied it to the problem at hand, the finding is summarized in the graph below:
90 80 70 60 50 40 30 20 10 0 1975 1985 1995 2005 2015 2025 2035 2045 2055
Upper Market Lower Market ICEV HFCV A B C
Year
B
A
C
104
We found that HFCV is not a disruptive technology to the ICEV as it does not qualify
for the characteristics in the context of Christensen’s framework. However, this was the only
characteristic that HFCV did not qualify; we found that HFCV hold the potential to
transform the current market, change the basis of competition, and substitute the ICEV in the
medium-long term. For a better understanding and stemming from the findings that HFCV
may create the demand, shape the market and is a potentially standard product, we examined
Utterback’s dynamics of innovation model, arriving at the following finding:
80 60 40 20
1975 2005 2020 2035 Year In the context of this model, we found that ICEV is the established product, Hybrid vehicle is
an improvement of the established product along the same performance dimension, and that
HFCV could be the invading product. Next, we applied the dynamics of innovation model,
which measures the major innovation rate in terms of process innovation and product
innovation; we arrived at the following diagram:
Fuel
Eco
nom
y (m
pg)
HFCV
ICEV
Hybrid Vehicle
105
HFCV Cost / Performance Relationship
0
20
40
60
80
100
120
140
2005
2008
2011
2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050
Years
Perc
enta
ge (%
)
incremental technology costincremental fuel economy improvement
We found that the process innovation could be reflected in our incremental fuel
economy improvement, and that product innovation could be reflected in our incremental
technology cost. We found that the HFCV will emerge around 2016 as a dominant design.
In addition, our finding was also supported by other factors that signified the
emergence of HFCV as a dominant design, some were:
Collateral assets of current market channels currently taking place in FC market, as well as
the strong brand images of the leading automotive companies as mentioned earlier.
Industry regulation and government intervention this is reflected by initiatives by the
governments of developed countries mentioned earlier; and also found through legal
environmental legislations imposed by Kyoto Protocol.
Strategic maneuvering by individual firms activities done by leading automotive
companies such as Toyota, GM, DC…etc; these are competing to position themselves in the
market.
Therefore, we found that HFCV is estimated to become a dominant design by 2016.
Beyond this point, the competence became process-based rather than product-based, and the
improvement became radical rather than incremental.
Based on these critical findings we have examined Saudi Aramco as a case study; we
have assessed the current technology of Saudi Aramco and identified the areas in which it
Dominant Design emergence
106
Industry Average
Alarm signal for Future
Invest
Selectively
has to participate based on the future expectation of the energy market. We arrived at the
major key success factors (KSF) and relevant technologies. KSF 1 KSF 2 KSF 3 KSF 4
Technology/KSF GHG emission
reduction
Fuel
Economy
Manufacturing
and Assembly
Reliability and
Maintainability
T 1 Gasoline ● ● ●
T 2 Naptha FC ● ● ●
T 3 Methane FC ● ● ●
T 4 HFC ● ● ● ●
T 5 Gasoline FC ● ● ●
T 6 Hydrogen ● ● ● ●
Afterwards, we found the technology position by Saudi Aramco, and in turn, what
actions it has to take in order to maintain its position in the oil business and participate in the
FC market.
Competitive Position CP / CI Clear leader Strong Favorable Tenable Weak
Base T1 Key Pacing T5 T6
Com
petitive Impact
Emerging T2 T3 T4
Competitive Position CP / CI Clear leader Strong Favorable Tenable Weak
Base TT11 Key Pacing T5 T6
Com
petitive Impact
Emerging T2 T3 T4
Alarm signal for
SurvivalAlarm signal for
Present
Alarm signal for waste of resources
Opportunities for present competitive advantage
Opportunities for future
competitive advantage
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We then presented three scenarios for Saudi Aramco to become a participant in FC:
1) Develop oil-based fuel cell
2) Develop hydrogen fuel cell
3) Participate in fuel cell products
We arrived at the following technology strategy for Saudi Aramco:
Competitive Position
CP / CI Clear
Leader Strong Favorable Tenable Weak
Base
Key
Pacing
Com
petitive Impact Emerging
We concluded that such technology strategy should be continuously updated by Saudi
Aramco to continually measure its technology position and arrive at critical proceedings
taking into consideration the energy market, competing efforts and basis of competition.
Moreover, we have found how critical the situation is for Saudi Arabia; as the Saudi
economy is dominated by the oil sector, we found that it accounts for 75% of government
budget revenues, 39% of GDP, and over 90% of export earnings!
According to our findings throughout the chapters, FC technology will become the
dominant design in the automotive sector by 2016. Also, FC will be the key technology by
2020-2040, and base technology by 2040-2050.
This indicates urgency of the matter to Saudi Arabia. Thus, if Saudi Aramco does not
react to these foreseen threats, then, Saudi Arabia will be in serious trouble if not in the
medium-term then, surely, in the long-term.
+ 8
T1
+ 14
T5 T6
T4T3 T2
+ 5
+ 7
+ 20+ 4
+ 5
+ 7
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6.4 Further Discussion and Conclusion
The energy economy is enduring a transition phase which implies serious threats to
the oil industry as we concluded above. The following diagram presents the future scenario:
The Sustainability Triangle (Source: Campbell, 2002)
Another area that should be tackled is the collective effort that should be done in the
energy market. This involves: fuel providers, automakers, government, and relevant
industries. Diagram below shows a similar approach.
Possible Scenario for Energy Markets (Source: Author - derived from California Fuel Cell Partnership, 2001)
These areas need follow-up research to give a holistic approach to the energy
economy. The sustainability triangle suggests apparent transformation to the existing energy
market and the possible scenario presented allows the involvement of important participants.
Future Energy
Systems
Economic Competitiveness
Security of Energy Supply
Environmental Integrity
Automaker / Fuel Provider Government / Industry
Leaders First automaker adopts fuel and enters market with fuel partners.
Entry Agreement by other automakers / fuel partners
Exploration Coordination
109
Schematic summary of the project (Source: Author)
Fuel Cell Today: emerging 2016: dominant design 2020: key technology 2040: base technology
Automotive Industry Today: ICEV use ‘gasoline’ –derived from oil Tomorrow: HFCV use ‘hydrogen fuel’
Oil Industry Today: gasoline Main consumers: Automotive Sector
Technology Push
Dependency 47% petroleum products
Energy Market
Hydrogen The new source of energy/fuel provider Fuel Supply
Substitution
SAUDI ARAMCO Must participate in FC market, through: 1. Develop oil-based FC 2. Develop Hydrogen FC 3. Product FC product (e.g. engines), through:
a. Establish strategic alliance with automotive companies (Daimler-Chrysler)
b. Outsource FC technology to leaders in the field (Ballard)
c. Licensing, patent…etc
SAUDI ARABIA Dependency 90% GDP
- 1 -
References:
California Fuel Cell Partnership (2004) ‘Fuel Cell’. Available from: <URL:
https://www.cfu.com>/
Campbell, Colin (2002) Forecasting Global Oil Supply 2000-2050. Hubbert Centre, USA,
Colorado.
- 2 -
Appendices
- 3 -
Appendix A
Chapter two
Appendix A1: Brief History and Definitions Brief History of the Oil Industry In 1859, the discovery of the first well by Edwin Drake took place in Pennsylvania in USA, subsequently, petroleum was commercialized commencing with the Pennsylvanian oil boom. Russian oil exports begin early 1880s, and Sumatra follows with its first production in 1890. In the 1900s the discovery of Spindletop in Texas in USA. During the outburst of World War I in 1914, the two major petroleum producers were the super powers United States and USSR (Russia). Little production was occurring in Indonesia, Mexico and Rumania. In 1920, USA fears shortage of oil. During the 1920s and 1930s, more areas in the world were explored such as the Middle East; significant growth of Venezuelan production. Discoveries in USA of East Texas field and African and European Countries, then, were not considered major oil-producing areas. After World War II era of 1945, with post-war reconstruction in 1947, significant discoveries were made in Europe, Africa and Canada, with Canada being a recognized petroleum producer. The Middle East has grown to be of major importance in terms of oil production due to the new discovery of oil reserves. Although the USA was a major oil producer, yet, it was a major consumer too; which did not make it as a recognized oil exporter. (Speight J. and Ozüm B., 2002) In 1950s, slight fluctuations of oil prices due to loss of Iranian supplies followed by the Suez crises in Egypt. In 1970s, the events of Yom Kuppur war and the Iranian revolution massively increasing the prices of oil which forced the introduction of netback pricing in early 1980s. In 1990s, the gulf war considerably affects the oil prices afterwards the Asian financial crisis pushes prices down. Today, prices increase again due to the U.S. invasion of Iraq. (BP Statistical Review of World Energy, 2004) Definitions I will start with making a clear distinction between the overlapping terms in the oil and petrochemical industries. According to a dictionary for the petroleum industry, 1999 Oil is a simple or complex liquid mixture of hydrocarbons that can be refined to yield gasoline, kerosene, diesel fuel and various other products Crude Oil unrefined liquid petroleum. It ranges in gravity from 9° API to 55° API and in color from yellow to black, and may have paraffin, asphalt, or mixed base. If a crude oil, or crude, contains a sizable amount of sulfur or sulfur compounds, it is called a sour crude; if it has little or no sulfur, it is called a sweet crude. In addition, crude oils may be referred to as heavy or light according to API gravity, the lighter oils having the higher gravities. Petroleum is a Latin word (petra and oleum) which literally means ‘rock oil,’ it refers to a massive amount of hydrocarbon-rich fluids that have accumulated in subterranean reservoirs. (Speight J., 2002); it is a substance occurring naturally in the earth in solid, liquid, or gaseous
- 4 -
state and composed mainly of mixtures of chemical compounds of carbon and hydrogen, with or without other nonmetallic elements such as sulfur, oxygen, and nitrogen. In some cases, especially in the measurement of oil and gas, or gas liquids such as propane and butane. The API Measurement Coordination Department prefers that petroleum means crude oil and not natural gas or gas liquid. Natural Gas is the gaseous mixture associated with petroleum reservoirs and is predominantly methane but does contain other combustible hydrocarbon compounds as well as non-hydrocarbon compounds. (Speight, 1999) Natural Gas and Oil form the basis of all oil-related production and products, they act as the ‘feedstock’ for all further processes. Hence, the fundamental industry is the Oil and Gas Industry. Petrochemical is a chemical manufactured from petroleum and natural gas or from raw materials derived from petroleum and natural gas. The petrochemical industry uses its feedstock from the oil and gas industry and the petroleum and refinery industry to produce its diverse arrange of products which are not relevant to this project.
Appendix A2: Petroleum Products Petroleum Products Yielded from One Barrel of Crude, 2000 Product Gallons Finished Motor Gasoline 19.40 Distillate Fuel Oil 9.70 Kero-Type Jet Fuel 4.33 Residual Fuel Oil 1.89 Still Gas 1.76 Petroleum Coke 1.97 Liquefied Refinery Gas 1.89 Asphalt and Road Oil 1.43 Naptha for Feedstocks 0.55 Other Oils for Feedstocks 0.55 Lubricants 0.50 Special Naphthas 0.17 Kerosene 0.17 Miscellaneous Products 0.17 Finished Aviation Gasoline 0.04 Waxes 0.04 Total 44.56 Table 10-6 U.S. Department of Energy, Energy Information Administration, International Energy Group, January 1998.
Crude oil is refined into products such as gasoline, asphalt, and waxes by a process called fractional distillation. During the process, the parts, or fractions, of crude oil are divided out successively by their increasing molecular weight. For instance, gasoline has a low molecular weight and vaporizes at a fairly low temperature. This means that at the appropriate temperature, while all of the rest of the oil is still in liquid form, gasoline may be separated out. The remaining oil goes through the same process at a slightly higher temperature, and jet fuel is divided out. Repeating the distillation process several times will separate out several constituents of crude oil, which are then processed and put to a wide range of uses. © Microsoft Corporation. All Rights Reserved.
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Appendix A3: Oil Distillation Process Distillate fraction Boiling point (ºC) Carbon atoms per
molecule Gases Below 30 1-4 Gasoline 30-210 5-12 Naptha 100-200 8-12 Kerosene and jet fuel 150-250 11-13 Diesel and fuel oil 160-400 13-17 Atmospheric gas oil 220-345 Heavy fuel oil 315-540 20-45 Atmospheric residue Over 450 Over 30 Vacuum residue Over 615 Over 60
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Appendix A4: Oil-related groups OPEC OPEC stands for Organization of Petroleum Exporting Countries; it is an organization of the oil-producing countries that include: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, The United Arab Emirates, and Venezuela. Gabon was a member from 1975 – 1995 and Ecuador was also a full member in 1973 but has its membership suspended in 1992. The main purpose of this organization is to regulate the oil prices and oil supply. (OPEC, 2004) It was formed in 1960 when five founder members, Iran, Kuwait, Saudi Arabia, Venezuela and the hosting country Iraq, met in Baghdad to announce the foundation. The OPEC formation came after two significant reductions of the oil posted prices which used to be controlled solely by the Seven Sisters; which refers to the seven major oil companies in the world that controlled the world oil industry until the early 1970s. They are also known as the International Petroleum Cartel and they include: British Petroleum (BP), Mobil, Socal, Jersey (Exxon), Shell, Gulf, CFP: Compagnie Française de Pétrole (Total). Hence, the immediate objective of OPEC was to safeguard its members’ oil revenue from such erosion. OPEC wider objective was to unify the oil policies of member countries in order to safeguard their interests individually and collectively. Shortly, the expansions of OPEC membership strengthened its negotiation power in terms of oil companies. (CGES, 2002 and OPEC, 2004) OECD stands for Organization for Economic Cooperation and Development. Current member countries are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Republic of Korea, Luxemburg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States of America. OECD is the largest crude importing region, with USA being the largest importing country, then follows, Japan, Korea, Germany, France and Monaco, Italy and San Marino, China, Spain, UK and Netherlands. (OECD Europe refers to the members in Europe) CIS stands for Commonwealth of Independent States. Current member countries are Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. CIS could also be referred to FSU- Former Soviet Union
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Appendix A5: Oil Reserves
Source: BP World Statistical Review, 2004
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Appendix A6: Oil Production
Source: BP World Statistical Review, 2004
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Appendix A7: Chemical Releases from Petroleum Refineries
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Appendix B Chapter 3
Appendix B1: History of FC The history of FCs dates back to 1839 when the gaseous voltaic cell was invented by Sir William Grove He based his experiment on the fact that sending an electric current through water would split the water into its component parts - hydrogen and oxygen. Thus, he concluded that FCs operate on many different reactants such as ethylene and carbon monoxide, as well as hydrogen. Sir William made the first initiative to appreciate the law of the conservation of energy. Grove tried reversing the reaction - combining hydrogen and oxygen to produce electricity and water. This is the basis of a simple FC. (Appleby A. J., 1990) The technical innovation by Sir William Grove
The first working FC ever was published by Sir Grove in 1839. This illustrates the mechanism of a single FC, consisting of hydrogen and oxygen in the presence of an electrolyte in contact with two plantinized platinum electrodes, to produce electricity and water. In that paper, he alluded to the possibility of combining several of these in series to form a gaseous voltaic battery, which he described for the first time in 1842. (Appleby A. J., 1990) Grove’s words in his 1842 paper are worth quoting again:
“as the chemical or catalytic action.. could only be supposed to take place, with ordinary platina foil, at the line or water-mark where the liquid, gas and platina met, the chief difficulty was to obtain anything like a notable surface of action. I determined to try the platina platinized…. It is obvious that, by allowing the platina to touch the liquid the latter would spread over its surface by capillary action and expose an extended superficies to the gaseous atmosphere.” The expression in italics, taken together, constitute the leitmotif of the development
of today’s FC electrodes. (A. J. Appleby, 1990) As he stated himself, Grove’s series of FCs were hardly practical devices for power
production from hydrogen and oxygen, certainly, they were more than capable of prior demonstrations. Their capabilities for delivering current were strictly limited by the small effective area of each electrode. However, as the above quotation states, he did realize the need for the highest area of contact between the electrolyte, the gaseous reagent and the electrocatalytic conductor, i.e., the ‘notable surface of action’. Trying to acquire this optimized reaction surface has remained the challenge basis of FC research and development ever sine. Because of this realization, Grove can be truly said to be the inventor of the FC. (Appleby A. J., 1990). The invention, which later became known as a ‘FC’, did not produce enough electricity to be useful.
In 1839 Grove described experiments in which electricity was generated by supplying hydrogen and oxygen to two separate electrodes immersed in sulphuric acid. We now know that in this cell hydrogen was ionized at one electrode releasing electrons to the external circuit. The positively charged hydrogen ions were effectively transported through the sulphuric acid electrolyte to the oxygen electrode. There they reacted with negative hydroxyl ions formed by a reaction between oxygen, water and electrons. Electrons in traveling the external circuit gave rise to an electric current. Thus, this early device incorporated the essential features of what are now called FCs. Despite the time which has elapsed since the
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principle was established no commercially exploited FC has yet emerged. From this observation it may be inferred, rightly, that the problems to be solved are difficult ones.
The term “FC” was coined later in 1889 by Ludwig Mond and Charles Langer, who attempted to build the first practical device using air and industrial coal gas. However, the platinum electrodes used were too expensive. Another source states that it was William White Jaques who first coined the term "FC." Jaques was also the first researcher to use phosphoric acid in the electrolyte bath.
In the 1920s, FC research in Germany participated in the development of the carbonate cycle and solid oxide FCs of today. A. Schmid was the pioneer in building the first platinum-catalyzed porous carbon-hydrogen electrodes in tubular form. The gas-diffusion electrode was recognized as the key for the success of low temperature operation. (Kordesch K. and Simader G., 1996)
In 1932, engineer Francis T. Bacon carried out research into fuels cells. Earlier porous platinum electrodes and sulfuric acid were used as the electrolyte bath. Using platinum was expansive and using sulfuric acid was corrosive. Bacon decided that the hydrogen-oxygen system showed the most promise. He improved on the expensive platinum catalysts with a hydrogen and oxygen cell using a less corrosive alkaline electrolyte and inexpensive nickel electrodes. Since the time of Mond an Langer the metallurgical industries has made considerable progress and many new metals and alloys, which could be obtained at reasonable prices, provided alternatives for the electrode material. Bacon continued his R&D until 1959 to perfect his design, when he demonstrated a five-kilowatt FC that could power a welding machine. Francis T. Bacon, named his famous FC design the "Bacon Cell." (A. P. Paton, 1990)
During the early 1960s, General Electric produced the fuel-cell-based electrical power system for NASA's Gemini and Apollo space capsules. General Electric used the principles found in the "Bacon Cell" as the basis of its design. Today, the Space Shuttle's electricity is provided by FCs, and the same FCs provide drinking water for the crew. NASA decided that using nuclear reactors was too risky, and using batteries or solar power was too bulky to be used in space vehicles. NASA has funded more than 200 research contracts exploring fuel-cell technology, bringing the technology to a level now viable for the private sector.
In 1970 K. Kordesch built a hydrogen FC/battery hybrid 4 passengers vehicle which was operating for 3 years in the city. In the mid-1970s, the direction of FC use was changed. The alkaline system which was the choice for space programs was replaced by the phosphoric-acid systems; it served of better use for stationary power plants. This trend was popular in Japan after it has a loss of interest in USA. Later, the development of molten carbonate FC systems in the 1980s and solid oxide FCs in the 1990s was accelerated. Also, in 1990 the development of membrane FC system appeared to be the most attractive object for development. Improving the operating life expectancy and high power densities were the major benefits, however, the drawback was the high expense of membranes and auxiliary systems. (Kordesch K. and Simader G., 1996)
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Appendix C For chapter 4
Appendix C1: Fuel Economy Trends for Light-duty Vehicle Cars Year/vehicle ICEV Hybrid HFCV
1975 13.5 1976 14.9 1977 15.6 1978 15.9 1979 17.2 1980 20.0 1981 21.4 1982 22.2 1983 22.1 1984 22.4 1985 23.0 1986 23.8 1987 24.0 1988 24.4 1989 24.0 1990 23.7 1991 23.9 1992 23.6 1993 24.1 1994 24.0 1995 24.2 1996 24.2 1997 24.3 1998 24.4 1999 24.1 2000 24.1 2001 24.3 2002 24.5 2003 24.7 2004 24.6 2005 28.5 38.48 55.8 2006 28.6 39.05 55.8 2007 28.7 39.62 55.8 2008 28.8 40.19 55.8 2009 28.9 40.76 55.8 2010 29.0 41.33 55.8 2011 29.4 42.36 55.8 2012 29.8 43.4 55.8 2013 30.2 44.43 55.8 2014 30.6 45.47 55.8 2015 31.0 46.5 55.8 2016 31.4 48.05 57.2 2017 31.8 49.6 58.6 2018 32.2 51.15 59.9
2019 32.6 52.7 61.3 2020 33.0 54.25 62.7 2021 33.3 54.1 64.0 2022 33.6 53.94 65.2 2023 33.9 53.79 66.5 2024 34.2 53.63 67.7 2025 34.5 53.48 69.0 2026 34.7 53.79 70.1 2027 34.9 54.1 71.2 2028 35.1 54.41 72.3 2029 35.3 54.72 73.4 2030 35.5 55.03 74.6 2031 35.7 55.34 75.7 2032 35.9 55.65 76.9 2033 36.1 55.96 78.0 2034 36.3 56.27 79.2 2035 36.5 56.58 80.3 2036 36.5 56.58 80.3 2037 36.5 56.58 80.3 2038 36.5 56.58 80.3 2039 36.5 56.58 80.3 2040 36.5 56.58 80.3 2041 36.5 56.58 80.3 2042 36.5 56.58 80.3 2043 36.5 56.58 80.3 2044 36.5 56.58 80.3 2045 36.5 56.58 80.3 2046 36.5 56.58 80.3 2047 36.5 56.58 80.3 2048 36.5 56.58 80.3 2049 36.5 56.58 80.3 2050 36.5 56.58 80.3
Table 11 Fuel Economy Trends Data for Light-duty Vehicle Cars (ICEV, hybrid and HFCV) (Source: Data obtained from the US Department of Energy, 2050 study on Technology and Fuel, and from EPA Light-duty vehicle technology and fuel trends, 2004.)
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Average Car Characteristics for Customers Buying Preferences (Automobile Fuel Economy, US DoE, 2003) Figure above shows the position of ‘fuel economy’ as a customer buying preference in the an average car (light-weight vehicle). Following the fuel economy (mpg) trend in the graph we can note an increasing importance of fuel economy.
Fuel economy is not a fixed figure as it varies from model to another and
it will change over time. Many factors can affect the vehicle’s fuel economy, such as, manufacturing, speed, breaking, traffic, weather, load and others. However, ‘fuel economy’ is continuously used as a measure for fuel efficiency and usually the average mpg is taken as a standard to measure against it. Thus, customers bare in mind this characteristic when buying their car. Choosing the most fuel efficient vehicle in a particular class could save customers $300 - $500 in fuel costs. fuel efficiency can bring major benefits to the energy economy such as the protection of the environment by reducing the GHG emissions. Because vehicles with lower ‘fuel economy’ burn more fuel, creating more carbon dioxide – 20 pounds of carbon dioxide per gallon of gasoline. (US DoE, 2003).
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Appendix C2: Data on Fuel Economy for ICEV, Hybrid V, and HFCV
Vehicle Technology Cost Projections (Source: TAEngineering, Inc.-2050 Study on Transportation Technology and Fuels, Go your own way scenario, Sep 2002)
15
Vehicle Technology Cost Projections (UsourceU: TAEngineering, Inc. 2050 Study on Transportation Technology and Fuels, Go your own way scenario, Sep 2002)
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Fuel Economy 1975 – 2004 (Source: EPA, April 2004)
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Automotive Fuel Economy Program (source: US DoE, 2003)
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Appendix C3: GHG emission Performance Data GHG Emissions comparisons of hydrogen, methanol, and gasoline FCVs
Source of Estimates GHG Emissions DTI Pembina MIT
Full Fuel Cycle, g/km Hydrogen FCV 157 80 125 Methanol FCV 198 182 139 Gasoline FCV 241 193 180 Gasoline ICEV 258 248 154 * Change relative to gasoline ICEV Hydrogen FCV -39% -68% -19% Methanol FCV -23% -27% -10% Gasoline FCV -7% -22% +17%
* this gasoline ICEV is MIT’s advanced case, sharing the same advanced low-mass platform assumptions as its FCVs. MIT estimated 172 g/km for an evolved baseline gasoline ICEV. Sources: DTI (Thomas et al. 2000), figure 11, probable cases); Pembine (2000, p. 2); MIT (Weiss et al, 2000, Table 1.14) all cases assume natural gas feedstock for methanol and hydrogen, with the hydrogen produced by decentralized steam reformers supplied by existing natural gas pipeline infrastructure.
Vehicle Energy Efficiency and Specific COB2 B Emission. Comparison for defined average feet vehicle of type ICE, BEV and HFC. Power supply according to energy 21. The plan scenario Type of vehicle size: average fleet
1997 / 2000 2005 / 2010 2025 / 2030
ICEV reference kWh(gasoline)/km gCOP
2P/km
0.66 176
0.55 150
0.55 150
ICEV kWh (gasoline) gCO2/km
- -
0.27 72
0.27 72
BEV kWh (electricity) gCOP
2P/km
0.24 156
0.13 63
0.10 19
HFCV kWh hydrogen gCOP
2P/km
- -
0.32 181
0.24 53
Average HFCV = 120.67 ICEV = 220
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Appendix D For Chapter 5
Appendix D1: Sheikh Yamany Interview Interview Sheikh Ahmad Zaki Yamany Chairman of the Centre for Global Energy Studies
Former Saudi Minister of Petroleum
July 18, 2004 Question 1: Who owns the oil and petroleum industry in Saudi Arabia? In terms of 1. Oil production 2. Oil reserves 3. Petrochemicals capacity Saudi oil reserves and production are owned and controlled by the government via Saudi Aramco, the state oil company. Saudi Aramco also owns outright all the domestic refineries that produce oil products for the local market and one export refinery; it has two refining joint ventures (with Shell at Jubail and ExxonMobil at Yanbu) that export all their output. Petrochemicals are produced by SABIC, a wholly state owned company and the largest non-oil industrial company in the Middle East, having a market capitalisation of $12 billion and employing 16,000 people. SABIC owns 18 petrochemical complexes, of which two are joint ventures with private companies. Question 2: How dependent is the Saudi economy on oil exports and petrochemical output? The oil sector is very important to the Saudi economy, accounting for 35-40% of GDP. The petrochemical industry, along with refining, dominates the manufacturing sector, which accounts for 10% of GDP. The government relies on oil for 75%, on average, of its revenues, which are used to pay for wages, salaries and services, but also for capital investments (government buildings, roads, factories, ports, airports, etc…). The foreign currency earned from exporting oil and natural gas liquids (around $77 billion in 2003) enables Saudi Arabia to import a variety of consumer and investment goods and pay for many services from abroad; this inflow of currency also helps to support the external value of the Saudi Riyal. Question 3: What are the challenges, weaknesses and threats the Saudi oil industry faces in the short, medium and long run? What about the Kyoto Treaty, energy saving technologies and renewable energy sources? OPEC poses the main short-term challenge, specifically the tendency of many OPEC member-countries to over-produce against their quotas, leaving Saudi Arabia to shoulder the burden of price stabilisation. The resurgence of Iraq as an oil producer is the greatest medium-term threat, along with sluggish growth in oil demand due to high oil prices and the Kyoto Treaty. In the longer term, the main threat to Saudi Arabian oil is the prospect of much of it being left in the ground because of a lack of demand. Full implementation of the Kyoto Treaty would curtail oil demand drastically, leading to 10 mbpd less oil demand in the OECD in 2010 than the level of oil consumption observed in 1997, the year the Treaty was signed in Kyoto. Moreover, there is always the possibility of a scientific breakthrough that reduces the need for oil, as the discovery of oil itself reduced the need for coal. Finally, pursuit of a high-oil-price policy would also hold dangers for future oil demand. Question 4: The Stone Age-Oil Age quote. What did you mean? The Stone Age did not come to an end because the stone-age people ran out of stones, but because they discovered metals. Likewise, the oil industry might fade away not because the world will run out of oil, but because people will not have a need for oil in the presence of cheaper and cleaner substitutes. Question 5: What could put the oil-based Saudi economy at risk? Those who are familiar with the oil installations and operations in Saudi Arabia know that any terrorist activity
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is a remote possibility. If, and this is a big if, any damage was inflicted by terrorists on the sensitive areas, then the world economy would suffer greatly, as well as Saudi Arabia, depending on the size of the Saudi oil export absent from the market. Question 6: Hydrogen fuel cells, bioethanol and renewables are at last becoming a viable alternative. Hydrogen fuel cells present two major difficulties: they are expensive to manufacture and they need a source of hydrogen to produce electricity. On the other hand, they are highly efficient in converting chemical energy to electricity (60%) and they do not produce noxious emissions. So far, there has been no breakthrough in the manufacturing process that will reduce costs significantly. Furthermore, obtaining hydrogen is expensive, leaving natural gas as the best source of hydrogen (via methanol). I do not think that these fuel cells will have a noticeable impact on the world’s energy system before 2025. Wind farms and solar energy remain expensive and need subsidies to make them viable on a large-scale basis. Wind farms suffer from a further drawback in that they require back-up systems for the periods when the wind strength is insufficient, which increases considerably the cost. Bioethanol and biodiesel are already used on a small scale, but the inherent difficulties in building up a substantial manufacturing capability without subsidy are daunting. Saudi Arabia should not invest in these alternative sources of energy until it has exhausted most of its hydrocarbons, which are still immensely valuable and will continue to be so for the foreseeable future. On the other hand, the Saudi economy’s heavy dependence on the oil sector makes it vulnerable to swings in the oil price and any serious oil output disruption. Saudi dependence on oil can and should be reduced by diversifying the economy into light manufacturing and services.
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Appendix D2: Legal Restrictions on Saudi Arabia (Saudi Aramco) The international and regional conventions and protocols that are relevant to protection of environment • Basel Convention on Transboundary Movement of Hazardous Waste; Kuwait Regional Agreement for Cooperation on Protection of Marine • Environment from Pollution and the regional cooperation protocols for combating marine pollution by oil and other harmful substances in emergencies; • The Regional Agreement for Protection of the Red Sea and Gulf of Aden and its complimentary Protocol on Regional Cooperation for Combating Pollution by Oil and other Harmful Substances in Emergency Situation; • The Protocol on Marine Pollution due to Exploration and Exploitation of the Continental Shelf in the Arabian Gulf sea area; • Protocol on Protection of Marine Environment from Land-based Sources (Arabian Gulf); • Agreement on Conservation of Immigratory Wildlife; • Vienna Convention (and its protocol) on Protection of Ozone Layer. In addition to these, Saudi Arabia contributes to many regional and international organizations that are concerned with the protection of environment and conservation of natural resources, such as the • United Nations Environment Programme, • the Regional Organization for Protection of Marine Environment, Programme of the Environment of the Red Sea and Gulf of Aden (PERSGA), The relevant organizations working under the Arab League and the Gulf Cooperation Council as well as the Gulf Area Oil Companies Mutual Aid Organization (GAOCMAO). Saudi Arabia is a party to the following international and regional conventions (as on January 2001): • International Convention for the Prevention of Pollution of the Sea by oil, London, 1954 (as amended in 1962 and 1969); • Amendment to the International Convention for Prevention of Pollution of the Sea by Oil (1954), • Concerning Tank Arrangements and Limitation of Tank Size (1971); • Amendment to the International Convention for Prevention of Pollution of the Sea by Oil (1954), • concerning the protection of the Great Barrier Reef, London, 1971; • International Convention on Civil Liability for Oil Pollution Damage, Brussels, 1969 and Rome, 1976 Protocol; • Protocol Concerning Regional Cooperation in Combating Pollution by Oil and Other Harmful Substances in Cases of Emergenc y, Kuwait, 191978; • Protocol Concerning Regional Cooperation In Combating Pollution By Oil and Other Harmful Substances In Cases Of Emergency, Jeddah, 1982; Air Quality Restrictions for Saudi Aramco This includes upper limits for sulfur dioxide and particulates that may be inhaled, photochemical oxidants, nitrogen oxides, carbon monoxide, and hydrogen sulfide; and specifications for emission sources from seven industrial categories including (gas) flaring, petroleum and petrochemical facilities. Construction of the main gas network for collection,
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refining and utilization of associated gas has led to the establishment of a facility capable of extracting more than 3,500 tons of elemental sulfur per day, or more than 90 percent of the sulfur associated with crude oil. Naturally, this has contributed to improving the quality of air, particularly in the Eastern Province of the Kingdom. A second activity is the Program for the study of emissions and their impact on ambient air. This program has been prepared according to engineering specifications applied in the company with the aim of assessing adherence of new projects and enhanced facilities to standards applied in the Kingdom with respect to the quality of ambient air. Projections of the potential impact on the quality of ambient air in a particular area of Saudi Aramco projects are made within the framework of this program, and the results are used as needed in taking measures that ensure reduction of such impact.
Appendix D4: SABIC The Saudi Petrochemical industry - SABIC Saudi Arabia has the world largest oil reserve; its natural gas fields are also abundant. The kingdom uses both its crude oil and natural gas to form the basis of a petrochemical industry. In 1960, Negotiations took place between Saudi Arabia and foreign oil companies concerning the development of a petrochemical industry. As a result, The General Petroleum and Mineral Organization (Petromin) was established in 1962. The main mission of this organization was to undertake hydrocarbon projects which were not attractive to private investors. In 1964, King Faisal Al-Saud ascended the throne and increased the state support for industrialization. The government thrust to bring forward the industrialization was underlined in 1976 with the establishment of Saudi Arabian Basic Industries Corporation (SABIC).
Appendix D5: Naptha-based fuel Naptha-based fuel have less than 1 ppm of sulfur and in excess of 15%, by weight, of hydrogen and an aromatics content of less than 1%, by weight. A process for providing a hydrogen rich fuel to power a vehicle having an electric motor, which comprises the steps of: a) feeding a naphtha-based fuel to a reformer on-board said vehicle, said naphtha-based fuel having a hydrogen content of at least about 15%, by weight, a sulfur content of less than 1 ppm, an aromatics content of about 0% to about 1%, by weight, and a paraffin content of about 30% to about 80%, by weight; b) converting the naphtha to syngas in said reformer and extracting hydrogen from the other constituents; and c) passing the hydrogen into a fuel cell on board said vehicle to produce an electric current to energize the electric motor and power the vehicle.
Appendix D6: Saudi Aramco Competitors participation in FC market Shell Shell Hydrogen was set up in 1999 to pursue and develop business opportunities related to hydrogen and fuel cells. Shell Hydrogen hopes to provide energy solutions by bringing fuel cells to market and promoting a hydrogen-reliant fuel economy. They predict that, as the internal combustion engine led to the oil age, the fuel cell has the potential to lead to the hydrogen age. In this light, Shell Hydrogen is currently working to find a solution enabling fuel cell vehicles to become commercially available and viable in the coming decade.
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In April 1999, a joint venture involving Vistorka H.F. (an Icelandic consortium), DaimlerChrysler, Norske Hydro, and Shell Hydrogen was set up in Iceland. The Icelandic New Energy Ltd. will investigate the possibility of replacing fossil fuels with hydrogen and creating the world’s first hydrogen economy. The joint venture will test various applications for the capacity to utilize hydrogen fuel cells or a hydrogen carrier. One of the first applications to be analyzed is a hydrogen/fuel cell-powered bus service in Reykjavik. In addition to its fuel cell activities for transport applications, Shell Hydrogen is cooperating with Siemens Westinghouse Power Corporation to develop and bring to market a unique power generation technology fueled by natural gas, which would aim to eliminate the release of greenhouse gases to the atmosphere. These advanced Solid Oxide Fuel Cell (SOFC) power plants would produce only water and carbon dioxide as by-products. British Petroleum (BP) To promote involvement in hydrogen as it becomes accepted in the long-term energy future, BP appointed a business development manager for hydrogen in 1999 who is specifically looking at a number of possible small ventures that BP might be involved with in the future. BP is working on several projects that involve converting natural gas and other hydrocarbons into efficient sources of hydrogen (and sequestering the carbon dioxide produced in the process). BP is also beginning to think about more efficient ways of producing hydrogen from water. To do this, improving the efficiency of solar power is probably the best short-term option, which BP’s solar company, BP Solarex, has as one of its main objectives. BP is in cooperation with several organizations that center on specifically defined programs with individual companies. First off, they have a package of environmentally driven cooperative activities with General Motors. This includes jointly developing a fuel processor and fuel quality requirements for a gasoline fuel cell vehicle, expanding the UK LPG vehicle/cleaner fuel market, fueling a low emission diesel-electric hybrid bus in New York City, developing novel clean diesel fuels, and funding some innovative in-vehicle and community outreach ventures. With Ford Motor Company, BP has announced joint project funding for a major novel carbon dioxide management research project at Princeton University, and they are actively studying options for joint activity in improved vehicle efficiency and developing world initiatives. BP also has two key fuel cell development activities with DaimlerChrysler. The first is a joint study of the potential for using methanol as a clean retail fuel for fuel cell vehicles. The second is their involvement in DaimlerChrysler’s Citaro fuel cell bus program in Europe and Australia, in which they will provide clean hydrogen as the fuel at six of the proposed bus company sites. Exxon Mobil GM and ExxonMobil have signed an agreement in 1998 to conduct research on hardware and fuel options for next generation vehicles. This collaboration leads to the development of a highly-efficient gasoline processor for fuel cell vehicles. The companies said that the processor is a major breakthrough that will lead to greatly reduced emissions and improved fuel economy. GM plans a vehicle demonstration using this technology within 18 months from its development in Aug. 2000. The processor uses gasoline as a fuel to create a high-quality stream of hydrogen that powers a fuel cell. For consumers this means they will be able to fuel these new vehicles the same way they fuel their present cars. GM researchers and engineers believe that the gasoline processor is a key to fuel cell production this decade. The gasoline processor exceeds 80% efficiency with the fuel cell stacks producing 25 kW. Other breakthroughs developed include: a unique transient reactor unit which allows testing of gasoline processors from zero to full power and test the quality of the generated hydrogen fuel.
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Appendix D7: Ballard Power Systems, Inc. Ballard Ballard Power Systems, Inc. was founded in 1979 under the name Ballard Research Inc. to conduct research and development in high-energy lithium batteries. In 1983, Ballard began developing proton exchange membrane (PEM) fuel cells. Proof-of-concept fuel cells followed beginning in 1989 and from 1992 to 1994 sub-scale and full-scale prototype systems were developed to demonstrate the technology. Ballard Power Systems is recognized as a world leader in developing, manufacturing, and marketing zero-emission PEM fuel cells for use in transportation, electricity generation, and portable power products. Ballard Power Systems’ proprietary fuel cell technology is enabling automobile, electrical equipment, and portable power product manufacturers to develop environmentally clean products for sale. Today, their systems have evolved into pre-commercial prototypes proving the practicality of the Ballard® fuel cell. Ballard’s focus is now on working with its strategic partners to develop competitive products for mass markets by reducing costs and implementing high volume manufacturing processes. Ballard is partnering with strong, world-leading companies, including DaimlerChrysler, Ford, GPU International, ALSTOM, and EBARA, to commercialize Ballard fuel cells. Ballard has also supplied fuel cells to Honda, Nissan, Volkswagen, Yamaha, Cinergy, Coleman Powermate, and Matsushita Electric Works, among others. For example, XCELLSIS Fuel Cell Engines, a venture between DaimlerChrysler, Ballard Power Systems, and Ford, is focused on developing, manufacturing, and commercializing fuel cell engines for buses, cars, and trucks.
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Appendix D8: Interview with Saudi Aramco
Saudi Aramco Interview
Dr. Mohammad Al-Ansari, Intellectual Assets Management, Saudi Aramco Research and Technology
Mr. Bashir Dabbousi, Sr. Research Scientist, Saudi Aramco Research and Technology
June 29, 2004
Mr. Richard Horner (emails during July 2004)
“Some of her questions revolved around whether, Saudi Aramco, perceived fuel cells as a
threat to the oil industry and what is it doing to combat this threat. We highlighted that Saudi
Aramco views fuel cells as an opportunity not a threat and the fact that we are conducting
cutting edge research & technology development both in-house and in collaboration with
various research centers in-Kingdom and out-of-Kingdom to ensure that oil based fuels will
be used with fuel cells or to produce hydrogen and other alternative fuels.
We asked that she consider revising the title of her thesis to address “how fuel cells present
an opportunity for Saudi Arabia to promote oil based fuels in alternative clean transportation
technologies and to recapture premium power applications”.
Overall Ms. Mansouri was satisfied with the information we provided as well as the
background web sites and public domain information about Saudi Aramco and the R&D
Center. We informed her that we will be available to revisit and review the information that
she plans to incorporate in her case study before she publishes her work.”
Bashir Dabbousi
