ENERGY MATTERS © VOL. 31
an opinion editorial written exclusively for ANZMEX
14 June 2021
By Chris Sladen
Energy matters – Blow the whistle, we have reached half-time
Are you worried about your mid-year performance review? Probably you have not seen your boss face-to-face for over a year, you have been working off the kitchen table, and somehow you must present a convincing story that things are going better than ever! But what to say? It is always a tricky conversation, you must show you know what has been going on, that you are on top of the energy situation, and there is something better just around the corner. How to fill that awkward silence? Here is my 3-topic crib sheet of mid-year energy conversation fillers; please pick and mix as may be helpful:
- Hydrocarbons are not going away anytime soon
A year ago, the mantra was ‘build back better, build back greener’. The global economic outlook was in disarray and demand for hydrocarbons, particularly liquid fuels, had collapsed; it was a great opportunity to increase the pace of the energy transition. Since then, demand is coming back, some energy-intensive industries are now above pre-pandemic levels, and the global population continues to grow. Although it is a very patchy picture globally, and the pandemic is far from defeated, hydrocarbons are back in demand.
When combined with voluntary production cuts orchestrated by OPEC+, hydrocarbon prices have surged in 2021. Compared to a year ago, oil prices have doubled and have now pushed over $70/barrel, natural gas prices are up 50% around $3/mmBTU. Coal too is double, up from around $55/T to $110/T. Prices are currently underpinned by continued global economic recovery. Of course, we saw various mergers and acquisitions when prices and demand plummeted; maximising economic recovery is essential in commercially challenged times with an unclear outlook.
Rigs working onshore US – always a barometer of industry sentiment – have doubled in the last 9 months. Exploration, albeit subdued, has continued to turn up significant recent new finds – oil & gas in Guyana, Suriname, Mexico & the US Gulf of Mexico, and natural gas in Turkey, Pakistan, Malaysia & Australia. Many oil & gas companies financial results looked awful a year ago, but by-and-large most are now back in the black… even if the future is green.
ESG investing (environmental, social, and governance ) is now a topic for all hydrocarbon producers. Just 18 months ago this was barely an emerging theme. Today, plans for minimising the impacts of a development, and carbon accounting, are essential and a key part of gaining investor support. Activist shareholder groups too have achieved a much louder voice, achieving major changes in recent months both on the Boards of leading petroleum producers such as Exxon and Chevron, and in the case of Shell creating legal obligations to accelerate emissions reductions. Courtroom battles are likely to increase. ESG will take many twists and turns – many big oil companies will simply shed highly polluting assets to reduce emissions and meet their new targets, for example, by sale of ageing refineries. But this does not solve the underlying problem because it simply pushes the assets into the hands of companies less inclined to address the emissions and environmental issues and more focused on near-term profitability.
- There are clear pathways to reduce carbon
As demand for hydrocarbons creeps back up, so too do carbon emissions. The air quality of our big cities and industrial zones had seen significant improvements during lockdowns, but this is now being undone as economies stutter into life again.
There is no shortage of oil & gas fields in the queue for development sanctioning, plus many LNG developments too. And there are plans for hundreds more coal-fired power plants. At the start of 2021, some 350 coal-fired power plants were under construction, mostly in China, India, Japan & South Korea, and also the Philippines, Vietnam, Turkey, Indonesia & Bangladesh. The total far exceeds planned plant closures.
Gas flaring is going back up and traffic, shipping and air travel is gradually resuming; the invisible contamination of our air supply is again gathering pace. The leading gas flaring countries are Russia, Iraq, Iran, USA, Algeria, Venezuela, Nigeria, and Mexico, and globally the industry needlessly burns off ~5 trillion cubic feet of natural gas each year.
The biggest short-term ‘quick wins’ in emissions reduction appear to be from the better use of energy (energy efficiency), stopping flaring, and the use of electric vehicles (EVs) for short-distance transport. In the mid-term, carbon capture and underground storage (CCUS) of CO2 emissions offers great potential and is essential to meeting Net Zero by 2050. The focus is currently on CO2 capture at giant industrial hubs then underground storage. In recent months, CCUS projects for oil & gas have taken big steps forward in the UK, USA, Saudi Arabia, Norway whilst Australia is pursuing CCUS from thermal coal. What is needed are projects that can prove the large scale viability, and a focus on the most polluting activities. It needs projects with investors, not just another plan or roadmap. Yes, subsidies, tax relief and economic recovery packages can help accelerate the upscaling of the technology and develop commercial solutions. These solutions will be a vital stepping-stone in the energy transition to a world using hydrogen, and a world of electrification. Anything that can be electrified will be electrified with more and more power supplied from ‘green’ sources – solar, wind, geothermal, nuclear, hydro, and hydrogen. Hydrogen will also be key in decarbonising heavy industries and transport.
The energy transition is happening; the pace and geographic focus will vary and there will be many issues around energy access, energy poverty and energy security. There are still almost 1 billion people without access to electricity. A new aspect – energy justice – has appeared, in which a poor country or remote communities may see hydrocarbons as the cheapest option for energy supply, yet wealthier countries have embarked on a transition to decarbonize energy and create a world using less petroleum. The arguments about fossil fuel usage look set to continue for decades.
- Scale of non-petroleum investments required is gigantic
Global energy investment at $~2 trillion is back at pre-pandemic levels, with the focus on the power sector, particularly renewables. Even so, this is not on track to deliver Net Zero any time soon. The amounts of investment are probably only a third of the $5-6 trillion per year calculated to be required for 2050 energy transition targets. Those oil companies that are leading their own conversion from oil to energy companies are getting back on track – with the higher oil prices underpinning their financials and enabling them to shift more investment towards renewables. It is a slow process but one that has clearly started with the likes of Equinor, Shell, ENI, TotalEnergies, Repsol and bp beginning to compete with traditional power suppliers and win large projects particularly in solar and offshore wind. Growth in these sectors is phenomenal and new partnerships or acquisitions are announced almost every day; albeit there are still issues of supply intermittency, power storage, the large project footprints, and their environmental consequences to be solved.
The pace of energy transition is problematic too for the upstream energy industry because pace impacts capital allocation. Focus shifts to phased incremental developments with rapid paybacks to offset increased risk. Get things wrong and there will be either too much supply or too much demand, and the potential for wild price swings in a world that has fewer petroleum producers. And as various producers shift focus away from oil to natural gas, the remaining large oil producer countries gain in geopolitical power. Consolidation in the oil sector is inevitable as those left standing search for cost efficiencies; the behaviours of National Oil Companies, who already control most of global oil supply and reserves, will be critical.
The reappearance of hydro and nuclear as investment options for creating diverse, emissions-free, secure power is notable. Modifying refineries to process biofuels is growing too. Many sea trials of prototypes that harness wave and tidal power have recently begun. Elsewhere, the development of geothermal projects and refocussing of oil & gas skills onto geothermal heat extraction is gathering pace with recent recognition that many hundreds of thousands of existing oil & gas wells in the USA (and millions globally) might be attractive candidates for conversion to extract heat and baseload power, 24/7. With so much investment already ploughed into drilling these wells, the opportunity to prolong their life as producers of clean heat has to be attractive.
To summarise: the long-term outlook is one of a far more diversified energy sector; it will be hard to keep abreast of all the different options, technologies, geopolitics, national and local issues. Renewables are rising fast in a world eventually using less hydrocarbons. What was a focus on energy poverty & energy access, that then became a focus on energy security, is now about energy justice & ESG too. It seems inescapable that we must rethink and completely redesign the entire energy sector over the next 20 years.
About the author:
Chris Sladen runs an advisory service offering insights to inform, shape a decision, policy & regulation, and guide the next steps for energy ventures, acquisitions & divestments, energy transition and climate strategies. Chris has a unique global experience having worked in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, Europe and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris has published extensively over five decades. Chris’ articles for Energy Matters reflect his experience and enthusiasm and are not paid for in any way.
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