Economic Realities of Energy Transition
No one expected the transition to be without hiccups, and recently, those hiccups have been heard within and outside the oil and gas industry.
No one expected the energy transition to be without hiccups, and recently, those hiccups have been heard within and outside the oil and gas industry.
Daniel Yergin, vice chairman of S&P Global and author of several books, wrote how previous energy transitions evolved over the course of a century or more and did not “wholly displace the incumbent technologies.” Oil became the world’s No. 1 energy source in the 1960s, bumping coal from the top. “ … Yet we now use three times more coal than we did back then, with global consumption hitting a record high in 2022,” he noted.
He continued, “By contrast, today’s transition is intended to unfold in little more than a quarter century and not be additive.” Yergin cited a 2021 paper by Jean Pisani-Ferry, an economist at the Peterson Institute for International Economics, who wrote that moving too rapidly to net‑zero emissions could precipitate “an adverse supply shock—very much like the shocks of the1970s” and that it “is unlikely to be benign and policymakers should get ready for tough choices.”
The outcome of those tough choices is becoming evident, both in policy and companies’ actions.
For example, Equinor put an indefinite hold on its plans for a floating offshore wind farm, Trollvind. Initially planned to have an installed capacity of about 1 GW and annual production of 4.3 TWh, the electricity was to be used to run the Troll and Oseberg fields.
The operator cited “challenges facing the broader offshore wind industry,” including how rising costs changed its original view that Trollvind would not require any financial support. “It is no longer a commercially sustainable project,” Equinor said in a statement. It added that the unavailability of preferred technology made the concept less viable and that the proposed timeline was not achievable to the level required to go forward.
Shell recently pulled out of the Northern Endurance Partnership, Britain’s CCS project targeting industrial decarbonization. Another equity holder, National Grid, also withdrew from the project, dropping its plans to construct pipelines to transport the CO2 to the North Sea. The equity holdings were acquired by the remaining project partners, BP, Equinor, and TotalEnergies.
The need for return on investments (ROI) was highlighted in a survey of global energy and natural resource executives by Bain & Co. in May. The responses showed executives believe their companies are outperforming the rest of the world in reducing emissions but expect the rate of decarbonization to slow down over the next few years. The surveyed companies expect to deploy about a quarter of their capital on new growth businesses in 2023, many of these focusing on low‑carbon technologies.
The executives aren’t concerned about accessing capital for low-carbon businesses, but “need to ensure adequate returns on the investments.” Four out of five executives considered the ability to create acceptable returns on projects a main barrier to decarbonization. Customers demonstrate an unwillingness to pay—not universally, “but enough to make it hard to scale low-carbon businesses.” They look to government policy and regulatory support to help bridge the gap.
Complicating ROI is how it is perceived in the eye of the investor. What investors value is not limited to the dividends they may receive. Individual and institutional investors are increasingly paying attention to ESG (environmental, social, and governance) criteria.
Norway’s $1.4 trillion wealth fund, which invests Norwegian state revenues from oil and gas production, on 26 May said it would vote for shareholder proposals at Chevron and ExxonMobil to adopt a medium-term Scope 3 greenhouse gas (GHG) reduction target. Scope 3 refers to emissions not produced by the company itself or from its owned or controlled assets, but those it is indirectly responsible for, up and down its value chain.
Last year, the fund said it would push the companies it invests in to cut GHG emissions to net zero by 2050, in line with the Paris Agreement. It emphasized that it would not divest from big emitters to achieve these targets and would instead be an “active shareholder” to effect change. “The easy way to cut down emissions is to sell out,” fund CEO Nicolai Tangen said. “But someone needs to own these companies and it does not solve the problem, quite the contrary.”
When Shell CEO Wael Sawan discussed the company’s 2022 record profits of $39 billion, he said, “Profit without sustainability erodes our license to operate. Sustainability without profit erodes our shareholder support and financial capacity to play a meaningful part in the energy transition. We must continue to provide energy and do it with fewer emissions. We can only do this with the backing of our shareholders because it is their capital that enables us to invest in the energy transition.”