Upstream operators contend with risks in transition to lower-carbon energy
A new study by Wood Mackenzie lists three main risks for global oil majors as growth in renewable energy, intensifying carbon policy and increasing low-carbon competition. The study titled “Fossil fuels to low-carbon: The Majors’ energy transition” shows that the next global energy transition already under way, poses risks for some of the world’s largest energy companies.
According to the report, natural gas and zero-carbon fuels will satisfy at least 60 percent of the rise in global energy demand to 2035, and under some scenarios renewable energy could grow nearly 500 percent in the next 20 years. Coal and oil demand could peak well before 2035. As demand for oil slows and energy growth shifts to lower carbon fuels, renewables will grow rapidly across all regions.
The study investigates how the major oil companies are responding to growing pressure to move to a low carbon-energy environment.
Paul McConnell, research director of global trends for Wood Mackenzie, says: “As carbon policy intensifies, the oil and gas majors will face more regulatory burden and are likely to face increasing costs.
The effect of regulatory burden is being faced in countries like Nigeria and Ghana though the latter has made moves to streamline regulatory bottlenecks; Nigeria has yet to pass its petroleum industry bill.
Analysts say this realisation should be forcing African countries to straighten their fiscal and regulatory systems to harness investments in the sector bearing in mind that peak oil is less than two decades away.
“Everybody have the mind-set that oil is here forever, but analyses done by WEC has shown that the concept of stranded resources is real, peak oil is just 15 years away, that means even if you have the oil, there is not going to be market for it anymore,” said Timi Familusi, leader, sub-Saharan Africa at Accenture Strategy Energy in his presentation at the 34th edition of the Nigerian Association of Petroleum Explorationists (NAPE) held in Lagos recently
This situation according to him is driven by growth in renewable energy adoption and fall in infrastructure cost, electric vehicles, deeper awareness of climate change impact increased global commitment to cut carbon emissions and non-recovery of oil prices.
Familusi pointed out it is no longer about big oil, it is about fast oil. Investors would look to shale oil in US and other places because they come on stream faster than deep water or onshore exploration.
Experts say there is a growing shift from capital intensive projects with long delivery dates to faster cycle time projects as exemplified by the US shale oil production.
“Most of the investors are looking for small multi-billion dollars projects that would get up quickly rather than big projects that will take years to develop,” Familusi said.
African countries will have to rev up efforts to clear hurdles to investments in their oil and gas sector.
“What can help to attract investors is to provide them comfort regarding sanctity of contracts, ease of doing business, transparency and reduce risk of investing in the country,” said Olalekan Akinyanmi, CEO of Lekoil said in his presentation at the NAPE conference.
Cutting global emissions
Wood Mackenzie’s study shows that only 13 percent of global emissions are currently covered by a price on carbon. The vast majority of the oil majors’ upstream operations are not yet directly impacted, with most policies primarily focused on the power and industrial sectors.
“Green financing could also mean higher cost of capital for more carbon-intensive oil assets such as oil sands, as investors shift to alternative fuels and lower-carbon technologies,” said McConnell
Up to 50 percent of Majors’ production could be hit with carbon costs over the next decade – but only if the countries and regions that currently price carbon extend their policies to the extractives sectors. These are commonly outside the scope of emissions-limiting schemes.
“While all the major oil companies put a price on carbon in their long-term planning, the big question is how much risk each has taken into account,” says McConnell. Assumptions vary greatly by geography, timeline and on price from between $6 to $80 a tonne.
“As costs for renewables and energy storage continue to fall, ‘subscription’-type services could open up new low-carbon growth markets. For example, electric car sharing.”
According to the study the global major oil companies are under pressure to de-risk their existing business models and diversify into low-carbon energies. However, diversification into renewables will be challenging. It will be difficult to both justify allocating already scarce capital to low-returning projects and transform existing business models.
“The timing of a transition to low-carbon energy will be critical,” says McConnell. “Diversifying to renewable energy will be a balancing act. Moving too quickly could leave money on the table from the Majors’ fossil fuels business. But too slowly, and they could miss their window of opportunity. The biggest risk for oil and gas companies is to do nothing, and be left exposed to investors making their own minds up.
“There is notably an emergence of three different strategies by the major oil companies – decarbonise, capitalise or grow. The Majors are testing different strategies to decarbonise and mitigate risks, to capitalise by using existing capabilities to explore opportunities in renewables and to grow a profitable and substantial renewables business.”
“Regardless of the diverging strategies, the Majors are all increasing their share in gas while also aiming to push down the cost curve,” says McConnell.
“Global carbon risks could depress oil prices for the long term with slowing demand and an increase in costs, making it crucial for the Majors to push break-evens down further.
“To facilitate the move to low-carbon energy policies, new skills will be needed through joint ventures or acquisitions.”
While there is strong rhetoric on diversification into renewables, a much greater proportion of capital will be needed to deliver a material shift.
Current thinking in the sector agrees with the result of the research. Oil majors are pushing for deeper investments in gas as cleaner energy to reduce carbon emissions as an alternative energy source to address high cost of renewable energy infrastructure.
Royal Dutch Shell used the opportunity presented by the recently concluded Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC 2016) to urge Middle East and African countries to cut carbon emissions in their domain by increasing investments in gas as source for cleaner energy.
While renewable energy presents the best path towards cutting emissions but it will take a long time to reach the scale needed and it can only do so much, the company argues
“When burnt for power, natural gas produces less carbon dioxide and less local air pollution than other hydrocarbons,” said Ben van Beurden, chief executive of Royal Dutch Shell urging for more adoption of natural gas.
ISAAC ANYAOGU