ENERGY MATTERS © VOL. 33
an opinion editorial written exclusively for ANZMEX
11 October 2021
By Chris Sladen
Energy matters – Another fine mess
Perhaps the greatest ever catchphrase in the movies belongs to the actors Laurel & Hardy with the unforgettable: “Well, here’s another nice mess you’ve gotten me into “. This catchphrase featured in 17 of their movies, often as the closing line to the movie. One of their earliest movies also took ‘Another fine mess’ as its title. If there is a phrase that sums up the current state of the energy industry it has to be ‘here’s another nice mess’. Within a few short weeks during late September and early October, the world of energy has evolved into energy chaos. A post-pandemic economic recovery has collided with the Energy Transition.
During the previous 18 months, politicians, intellectuals and decarbonisation advocates have thrown comments around freely, such as ‘building back better’, ‘a green new deal’, ‘a resilient recovery’, ‘the great reset’, ‘a green industrial revolution’ and ‘a just transition’. These phrases have been flung around so often that many assumed it was all happening, everything was OK and would be OK, and there would be no negative consequences. Switching from fossil fuels to renewables would power the post-pandemic economic recovery aided by enlightened public policy and more debt. A jobs-rich economic boom time was assured. This mantra now coincides with a severe shortage of energy, with below-average inventories and surging prices for coal, natural gas and oil in all major consuming regions. Many believed the new mantra completely and ignored the reality that the world of energy is a complex mix of supply and demand, energy politics, and requires massive sustained investments.
With emerging proof that vaccines can subdue the spread of the pandemic, countries have come to terms with co-existing with the virus. The concept of having zero covid no longer exists and in recent months economies have rushed to re-open. This has created a rapid economic rebound, albeit not uniform, while for many activities industrial production and trade volumes are on track to soon surpass pre-pandemic trends. And those economies all need energy. One of the consequences, a surge in energy demand, comes at a time when energy supplies had dwindled, investments and maintenance were on-hold, and hydrocarbon companies in particular had become unpopular to many.
With recent surging prices, energy poverty is growing. Many consumers are simply unable to afford electricity, for example in Europe this now costs five times what it did a few months ago. Oil is at its highest prices in over 5 years at $80 per barrel or more; natural gas prices are often more than double or triple what they were a few months ago, and coal prices are at an all-time high. Record energy prices do not just increase energy poverty, they break supply chains including in manufacturing and agriculture. As panic buying grows, shortages quickly become crises. When the food supply chain is broken, or power stations can no longer function, it is not another nice mess, as Laurel & Hardy would say, it is a disaster. Heads of governments are now heard pleading for increased hydrocarbon production so that industries are not forced to shut down. In some countries, extra subsidies are handed out, for example to petrochemical plants and steel plants to keep production going. Reducing emissions is suddenly thrown out the window.
Despite all this mess, the direction is clearly set – an energy transition is underway – it is not a case of turning back; the issue is how quickly does this transition proceed, and which fuels and technologies are the winners? There is a growing realisation that becoming over-reliant on intermittent weather-dependant renewables exposes a national security problem. Recently we have had the wind not blowing at North Sea wind farms, lower rainfall in Brazil not filling hydropower reservoirs, and severe cold collapsing parts of the US power grid. What is missing is sufficient investment across many different parts of the energy value chain to create resilience, add technology and have back-ups. Beginning in late 2014, and over the next 6 years, international oil companies slashed workforces and budgets as supply flooded global markets, and supply outstripped demand. US shale production was a key part of this oversupply. Much of this had been funded by loans that could not be repaid once oil prices collapsed to low levels. The pandemic brought this era to a dramatic close with undreamt of demand destruction.
In the face of unprecedented demand destruction, major oil-producing countries like Russia, Saudi Arabia and many others involved in OPEC+ had decided to each cut down on their oil & gas production to reduce supply and prop up prices. This worked. However, investment was cut – drilling budgets have been reduced to typically around half what they need to be to support pre-pandemic demand. The last few years have seen cuts to oil & natural gas investment of around $1 trillion.
The cumulative damage from a lengthy period of pandemic-induced underinvestment and longer term cuts is substantial, not only in energy. Global spare capacity is limited in merchandise-producing industries; these are far more energy-intensive than service sectors. Many energy consuming basic materials, such as cement and fertilisers, are scarce. Fragile just-in-time supply chains, including in energy, have become broken with many workers either sick or isolating, or preferring a work-from-home lifestyle. Hence there are struggles to distribute manufactured components and fuels. The impact is likely price rises and double-digit inflation.
Future oil & gas prices in the short term sit firmly under the control of OPEC+ and the Russians. Less than 10% of industry experts expect oil to be less than $70/barrel at year end. At the same time, many NGOs, governments, institutions and investors have advocated no new finance to go towards hydrocarbons projects. Yet everyone expects hydrocarbon companies to not only provide fuels on demand, finance an energy transition, come up with new low-carbon energy solutions and pay a hefty carbon tax. It is a tough spot to navigate. Note the recent uptick in sports-washing as energy companies (and countries) seek to polish their image by supporting high profile sporting events and, they hope, divert attention elsewhere. Despite this, significant oil spills and gas leaks in recent months have done little to enhance the reputation of energy companies, for example in California, Louisiana, Russia, the eastern Mediterranean and Mexico; these accidents simply galvanise public opposition.
Meanwhile, coal prices have surged to record levels of over $200 per ton. With China short of coal supplies to power its return to economic growth, Asian LNG prices have risen to the equivalent of more than $300 per barrel of oil! As access to capital becomes harder for oil, gas and coal companies, so it will be harder to meet demand. This supports a theme in which oil & gas prices remain moderate-high, and coal remains in widespread use for a long time unless there were a very rapid energy transition.
Clean energy transition ambitions are now on a collision path with consumer needs. It will take decades to sort out. It was naive to believe the lockdown mantras. Of course energy transitions are never simple and involve tremendous technological change and complex adaptation, for example the change from using wood to using coal and coal gas, or to using natural gas or nuclear. To partner weather dependant renewables, a low carbon base-load supply to accompany them seems essential. We should expect a bumpy transition – putting hydrogen into the natural gas mix, putting hydrogen into ships & planes, moving ammonia around the planet, coping with the intermittency of wind and solar, and changing baseload reliance to geothermal to enable zero emission base-load for power and heating, totally independent of weather. There are bound to be complications, it will not be perfect, time is in short supply and the changes needed are going to cost bucket-loads of money.
Let’s be clear on this. This mess is brought upon ourselves – its brought about by pushing too fast on an energy transition and selling people a vision of a new future for which consequences have not been thought through, and now the overlay of a pandemic. We have rushed into a transition having started too late. We hope to fix it just-in-time. When things go wrong we resort to archaic but proven technology of decades ago. There is a high chance that the mess gets worse as we talk ourselves into urgent actions and making commitments not fully understood. China’s announcement at the UN that it will no longer fund any new coal-fired power plants overseas may be seen as accelerating the energy transition but it does not eliminate coal plants in China, and does not solve what developing countries must now do to increase their baseload power generation.
If today’s prices get further out of hand, and supplies get further interrupted, or there are more extreme weather events, eventually governments will believe they have to intervene and try to take control of prices or cap them, rewrite regulations, even nationalise parts of the sector and expropriate resources. And that is bound to upset international relations and will put strain on trade agreements. We have seen the tension growing in many recent examples – gas supplies from Russia into Europe, cross-border flows of fuels and natural gas into Mexico from the USA, Lebanon running out of diesel for its power plants, and China demanding coal and LNG imports to keep its power and industry running. India too is staring at a coal supply crisis. When energy squabbles expand across borders, it becomes hard to predict what other issues will get drawn into the mix. Minerals required for the energy transition quickly comes to mind, and other possibilities such as food and water. It hints at how difficult the energy transition is going to be. The experience of recent months all points to a bumpy energy transition over many years, potentially bumpy for 30 years or more…
Now is a good time to reflect and learn from the last few months, rethink and build a smoother transition and a collaborative way forward. The transition from silent films to talking movies took place over five years between 1926 and 1930. It occurred through many small steps including both technology advancements and adjustments to audience demands. ‘Another fine mess’ in 1930 was Laurel & Hardy’s first venture into talking movies. It was a remake of one of their earlier silent movies based on ideas from Laurel’s father. It proved to be a successful transition to talking movies; they adapted, they rewrote their routines, they explored and embraced the new technology, and they went on to be the world’s top ranked and most admired double act. The movie itself tells a story of poverty, disorder, up-to-their-necks in trouble, wasted wealth, upheaval, reinvention, and the importance of building partnerships, relationships and collaboration. Parallels for today’s energy mess are unmistakeable.
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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