ENERGY MATTERS© VOL. 45
an opinion editorial written exclusively for ANZMEX
27 Nov 2023
By Chris Sladen
Energy matters – A Cold Shower
As we wrap up 2023 and prepare to send our reports and summaries to our bosses, Head Office, and fill out our performance appraisals, here are my four standout energy themes of this year, each shaping our energy future. Feel free to weave these into your reports.
1. Supply/demand predictions for oil & gas through to 2050 show little decline. Predictions for future oil & gas production are starting to converge around an outlook of flat production through 2050. With little growth, or fall, renewable energies fill growth in energy demand. Many of you might find this pretty painful but this looks to be where the world is landing. It’s realistic. The more extreme scenarios – either a rapid change to green energy, or only very slow change as renewables prove difficult to develop at scale – are fading. In other words, we are heading for a world of fossil fuels and renewables co-existing.
Demand for oil and natural gas remained very robust throughout 2023. Oil and natural gas consumption both increased as economies grew beyond pre-Covid levels. In the past, there were many who thought crude oil supply would peak because the world would run out of resources, and those who thought consumption would peak because the world would quickly shun fossil fuels in favour of cleaner fuels. You can still find columnists writing that peak consumption of oil has now arrived; it makes great headlines, we can all relax, but I just don’t see the proof.
Natural gas for power generation has been carefully repositioned as a ‘green transition fuel’ in many countries; look no further than Europe as an example. In 2023, Europe completed the reconfiguration of gas supplies to no longer be dependent on Russia. The global LNG market and other countries worked to overcome the supply interruption and prices fell back to more normal levels. Meanwhile Russia found new outlets for most of its oil exports, particularly markets in India, China, and Turkey, albeit often at knock-down prices of $60 per barrel. Crude cargoes are also finding their way into Pakistan. Russian coal exports mostly went to China, India, and South Korea. Russian LNG mostly went to the EU, China and Japan whilst most pipeline gas went to EU, Turkey and China. Most LPG went to Turkey and the EU. Even after the EU’s enormous fanfare around sanctions, bans and price caps on Russian fossil fuels, the EU remains Russia’s second-largest energy importer after China. Some EU countries continued to be exempt, as are certain products, for example LNG and LPG. Expansion of eastward-directed Russian gas pipeline networks to China, designed for an extra 50 bcm/year, took big steps forward in 2023; even-so these will take time to build.
Noticeable too in 2023 was how many large IOCs stepped back from their emissions reductions and reset their Net Zero commitments; it is strong signal that they see hydrocarbon demand staying strong and viable well into the future. They see it as their main source of profits for decades to come. The concept that if by staying in oil then a company could eventually become the ‘last one standing’ by around 2050 has disappeared. Yes, 2023 saw consolidation amongst oil companies (for example, Exxon buying Pioneer Natural Resources, Chevron buying Hess) but the value of deals in 2023 is not really much different to the last 3-4 years. 2023 has seen the continued overseas expansion of Middle East NOCs, such as QatarEnergy and ADNOC. It is reminiscent of the Chinese NOCs global expansion in the early 2000s. If not this year, soon I expect Middle Eastern NOCs to increase global reach by launching takeovers of European and Asian IOCs.
The world was not short of reserves in 2023. Deepwater E&P remained very popular, such as Namibia, Guyana, Suriname, Indonesia, Egypt, Brazil, US Gulf of Mexico – another clear indication of a belief that oil and gas demand will remain strong over the next 20-30 years. There were plenty of new oil & gas discoveries in 2023, including Namibia, Suriname, Egypt, Indonesia, Turkey, China, and Norway. Saudi Arabia began production from its unconventional tight gas resources bringing a whole new supergiant Middle East play onstream.
Oil majors in 2023 enjoyed another year of above average cash flows. Governments too were alert to the importance of taxes on oil and gas products being a major source of funding for their social programs. Finding a substitute to this massive tax income is very tricky; it’s not going to come from renewables any time soon. If tax collected on renewables is going to replace tax income on fossil fuels that are being phased out, then it is inevitable that renewables are going to become more expensive. Many countries in Europe for example have a tax take equivalent to US$ 100-150 per barrel on transport fuels. No surprise then to see Governments cutting back a little from ultra-aggressive transition targets, watering down political promises, whilst also wanting to keep windfall taxes.
2023 saw few NOCs showing much appetite for a large scale shift to become renewable energy producers. In the non-OPEC world, Brazil continues to show strong oil production growth, pushing past 3mm bopd in 2023, and on track to be the standout non-OPEC producer with 5mm bopd by 2030. Meanwhile, OPEC+ continued to do what OPEC+ does well – build more and more giant projects while trying to manipulate supply to keep prices high. Overall, though, there was lots of talk but little action; the oil price largely drifted around and was generally a little lower than 2022.
2. Carbon capture and storage really began to move. Blue hydrogen produced from hydrocarbons with carbon capture and underground storage (CCUS) started to look more-and-more essential; 2023 certainly showed a big change-up in pace by both the IOCs and NOCs. Although there are plans for green hydrogen using renewable energy, the big steps forward were giant blue hydrogen projects and hubs for CCUS. Projects to convert natural gas pipelines to carry hydrogen are underway in Europe. Hydrogen now has momentum with a focus on power generation, heavy industry, iron & steel, cement, and heavy transport. The concept of hydrogen to decarbonise heating in homes faded in 2023 as the complex challenges of supplying individual homes mounted.
CCUS projects are no longer just studies or theoretical concepts; they are real and happening. Large scale projects are now underway in USA, Brazil, UK, Denmark, Australia, Saudi Arabia, and Canada to mention a few. 2023 saw a very significant uptick in licensing rounds and permits being awarded for subsurface storage of CO2, both onshore and offshore, including depleted oil and gas fields and other geological structures. Big Oil always said it was part of the solution and with CCUS it appears partly so. In total, there are now over 250 projects in advanced and early development and many hundreds of wells are in the permit approval stage for use as storage wells.
Also, 2023 saw real progress in direct capture of CO2 from air; one oil company, Oxy, a leader in capture and underground storage, has floated the idea of licencing or franchising its direct air capture technology; this could be a game changer, conceivably making direct capture projects possible anywhere, with potential for 1,000s of capture and sequestration projects spread across the planet. It’s no surprise to see the likes of Amazon, Blackrock and Siemens linking up with Oxy.
Late in the year, there were unexpected deals with Middle East companies buying up vast forests across 5 countries in Africa to use the forests in carbon offset projects. The offsets are destined to help oil & gas companies continue production in the Middle East. The message is very clear: oil and gas producers are going to go to great lengths to preserve their industry and livelihood; 2023 was just the end of the beginning of a long journey towards Net Zero.
2023 saw significant interest in biofuels, particularly sustainable aviation fuel (SAF), biodiesel, and biomethane. The first ever transatlantic flight using 100% SAF with Virgin Atlantic flying London Heathrow to New York JFK using a Boeing 787 Dreamliner on 28 November is an energy transition milestone. SAF has much lower life cycle emissions and can be produced from waste vegetable oils, fats and greases and used as a drop-in fuel in existing engines. If it can scale-up quickly, this fuel will take off as a transition fuel. Biodiesel projects are proving attractive too; their challenge is to reduce costs so that biodiesel can be priced to sell at or below the price of diesel.
3. Strong growth in renewables but troubles are emerging. Financing of renewable energy in 2023 was not so simple. Overall, the renewables sector garnered around $1.7 trillion and oil & gas around $1 trillion capex. Solar & wind were the largest capacity additions for power. But stock prices of many renewables’ companies took a hammering and clean energy funds have slumped around 30% this year. Financing of projects often fell through at the letter of credit or bank guarantee stage due to the high cost of borrowing, high inflation and squeezed profit estimates. One reaction has been for renewables companies to demand more subsidies. Governments that had set aggressive decarbonisation targets are now under more-and-more pressure to raise their green subsidies and grants. It has become an awkward place both politically and economically.
With Big Oil getting deeply involved in giant wind and solar developments, 2023 saw the first signs of their very real problems with project economics; Big Oil will want to push the price of renewable power higher in the search for double-digit returns and rates of return closer to oil & gas projects. Big Oil has further upped the pressure by offering vast share buybacks and dividend increases, shunning the opportunity to go full throttle on reinvesting much of their oil & gas profits into renewables.
The wind industry was blown off course by a rising cost base, supply chain constraints and high inflation, plus an unhealthy dose of permitting red tape and grid connection challenges. Clean technologies are driving growth in energy sector jobs, but cost pressures are not helped by the salary structure of Big Oil. The oil & gas sector has salaries that are often 50% above those found in the pure-play renewables companies. For decades, oil & gas (and nuclear) jobs have sat above median annual salaries. Staff in Big Oil who are transitioning to roles in the renewables arm of their companies are not going to be encouraged to do so if it means big salary cuts. So, in 2023, there has been tension and pressure to raise salaries for staff whose entire careers have been in renewables companies. Big Oil always says they are part of the Net Zero solution, but at least in this aspect, it does not seem they are helping low cost green energy.
In 2023, there were plenty of examples that the energy transition continues. The final phaseout of coal for power generation in Britain was brought forward to late 2024. Since 2010, coal has gone from ~30% of power generation to less than 1% this year. At end October/early November, Portugal showed that their transition is advancing with 6 days straight using only renewable power, and excess power exported to Spain. This might sound like a small win, but this is how an orderly transition and energy security progresses. Note in 2010, Portugal had 80% dependency on fossil fuel imports. There were also technology breakthroughs. For example, the successful test by CeraPhi Energy of closed loop geothermal to produce heat using a pre-existing well drilled (but never used) for shale gas. No surprise this won an award for Most Innovative Business Idea of the Year. The vision of repurposing many millions of oil & gas wells to produce clean heat has taken a giant leap forward.
The challenges of electrifying everything was a real wake-up call in 2023. First, the reality of effectively doubling the entire global transmission and distribution network. Secondly, storage of power generated by intermittent renewables remains a problem, particularly around using large batteries. Thirdly, there is a mineral resources problem; the additional transmission lines and voltage transformers will require massive increases in copper, aluminium, special electrical steel, and rare earth minerals production. (Note in July, deep sea mining rules were delayed for another 2 years). And metal production consumes vast amounts of emissions intensive energy. Many transmission lines also need extensively insulating, usually with polyethylene and propylene polymers typically derived from fossil fuels…
In October, the International Energy Agency calculated that 80 million kilometres of transmission lines – enough to wrap around the planet 2,000 times – will have to be built or replaced by 2040, to meet the Net Zero ambition. We still have no solution to long distance transmission line losses. Many solar projects are not near population centres, whilst offshore wind farms need vast amounts of subsea cable to bring the power onshore, then onward to centres of demand. Last but not least, advanced economies need to replace aging equipment to prevent power outages and reduce safety hazards. Some estimates indicate about half of transmission and distribution equipment in USA are over 20 years old, and in need of replacement. Europe has similar problems.
Investment needed in building grid resilience is fast also becoming a key issue. If we electrify everything, then power cuts, blackouts and voltage fluctuations become wholly unacceptable. Grid investment is critical as the world deploys more electric vehicles, installs more heat pumps, and scales up hydrogen production using electrolysis. Grids need around $0.5 trillion per year to urgently fix the issue.
No surprise then that there are supply chain issues. And no wonder the financial markets have been rattled by the realities of renewable power projects in 2023.
4. Western hemisphere energy needs are detaching from the rest of world. In 2023, the USA accelerated disengagement from China with the USA opting instead for nearshoring and friend-shoring its supply chains and manufacturing bases. The increasing separation of the world’s two largest economies has enormous energy implications.
The net effect of nearshoring and friend-shoring is lots more intra-hemisphere energy trade in the Americas (including the Caribbean). Most noticeable are the benefits between US – Canada – Mexico. Each are big energy exporters, much of it to each other, and importers too.
A significant advantage for the Americas is the absence of wars, major territorial disputes, or military conflicts. Of course, there are squabbles and disagreements in the Americas, and security issues such as drug cartels and kidnap, but these are minor compared for example with the hotly disputed South China Sea, Taiwan, the Korean peninsula, and conflicts around the east Mediterranean and along the eastern borders of Europe. The absence of military conflicts in the Americas has to be a big plus for its energy security, energy consumers, producers & investors.
2023 also saw Venezuela edging towards being welcomed back by the US. This has already led to a restart of some foreign oil company investments and production, giving a welcome boost for Venezuela’s long-suffering economy. But it’s not just about oil, there was also progress with cross-border Venezuelan gas being piped into and sold through Trinidad’s infrastructure.
Brazil and Guyana went from strength to strength with deepwater offshore oil production in 2023. Positive appraisal results came from Suriname indicating it is poised to follow soon. Companies are already positioning for a change in energy policy in Mexico after next year’s Presidential election.
All-in-all the Americas is simply brimming with energy, be it oil, natural gas, onshore & offshore wind, solar, hydro, coal, uranium, lithium, green hydrogen and geothermal. For the long-term investor, the fundamentals of supply and demand have never looked better. OK, sometimes there are some weird & crazy politics, but with their economies trading more-and-more together, and significant population growth, the Americas undoubtedly has the energy resources to underpin its development. The picture is one of integration, not disengagement. The Americas can deliver a distinctive form of energy security that includes no fear of nearby invading armies that might target destruction of energy resources or infrastructure.
At the time of writing, COP28 is about to start in the UAE. I hope it will be real progress in cleaning up our planet; at recent events we have seen lots of announcements, grandiose claims, undelivered promises, greenwashing, selfie-taking, and twisted language about phase-down and phase-out. I hope that the private self-interest meetings are much fewer this year. Whatever gets agreed, it is unlikely to be enough; there will be much more to be done to create sustainable, secure, and affordable energy supply.
To summarise 2023 in energy, we still need everything. Life without oil and petroleum products, or natural gas and petrochemicals, is very challenging, perhaps unachievable. Can we solve all our energy problems, find better solutions, and improve standards of living? Yes of course we can. The solutions might not look quite like you envisioned last year. In many aspects, you could say 2023 was a bit like a cold shower. But 2023 was a year when the economic realities of an energy transition emerged front and centre stage. For many, dreams may have been shattered, but at least we are now much more focussed on the commercial and economic realities of delivering an energy transition.
Season’s greetings to all my readers. Hope to see you in 2024. Feliz navidad y próspero año nuevo, Chris
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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chris.sladen@reconnoitre.ltd