The signs that we were heading towards $100 oil have been the worst kept secret in the energy sector since we began to see early signs of recovery from the pandemic and the resulting economic downturn a year ago. Investment experts and industry insiders in the latter part of 2020 largely agreed that years of reduced investment and the mass ‘greenwashing’ that was emerging would only result in constrained supply, and the eventual inability of OPEC+ to keep up with demand as the world began to recover.
There is a famous quote about the economics of commodity prices that “the cure for high prices, is high prices…” This may not actually be true this time around because of the countering forces resulting in the energy shortages we are now seeing rippling across the globe. We can all agree that moving towards a lower carbon future is a good thing, but thinking that we can greenwash our way out of oil and gas because it is the populist thing to do does not change that fact that the world will need abundant, affordable energy to be supplied from drilling and production for many years to come before renewable energy and other emerging technologies can take over.
The fact that the planet is currently burning more coal than ever and the oil and gas industry is being stifled by lack of investment only exposes the practical realities. Especially when we are lauding green efforts in the developed world, which in many cases have simply forced high-emissions industries to move to less developed countries. China is consuming more coal today than the rest of the world combined, and India has so many new coal power plant proposals being permitted that they will double their total power capacity by 2030. A few weeks ago, the UK even had to restart one of their coal fired power plants because the wind had not been blowing enough for the installed wind energy to provide the power that the country needed – the ramifications of that are an interesting talking point!
In the meantime, the investment community has been forced by political pressure to take a hard stance towards oil and gas, limiting access to capital or simply refusing to fund healthy businesses that are now cashflow positive. Admittedly, the limitations were made worse by years of poor returns and value destruction across the sector. Even when capital is available to energy companies, it has become expensive compared to the cost of capital for companies in the renewable energy sector, which in a sense could also be seen as a form of financial ‘greenwashing’. Some would argue that the investment community shares the responsibility to engage with the oil and gas industry to move the energy sector (yes, profitably) towards zero emissions production and consumption. While hydrogen has promising potential as a future fuel source, most of it will need to be produced by converting natural gas into hydrogen and storing the resultant carbon underground. That’s going to be a tough sell if it contributes to even higher energy prices.
As an industry, we have been doing a lot to ‘clean up our act’ over the years; and even though there is still a lot to be done, we have admittedly been doing a very poor job of advertising our efforts to the general public. Even those of us who are die-hard oil and gas fans believe that we must produce cleaner oil and gas and that the real goal must be to leave the planet in a better condition than we currently find it. Bridging this gap will require the support and the investment of time and effort by all involved.
Share prices and valuation multiples are clearly being determined by what is being done in energy transition versus what is being said. And Gen Z, to be quickly followed by Gen Alpha will certainly be using this as one of the criteria for deciding whether they want to come and work in an industry that is becoming ever desperate to replace some of the tens of thousands of skilled and well-educated workers that have left us in the last decade. A colleague at a large energy company that I recently spoke with told me that they have dozens of open positions that they have not been able to fill, and that in one recent case they had a candidate scheduled for a final interview that they had wanted to hire who didn’t show up but just called in and said ‘you know what, when I thought it over I decided that I don’t want to work in oil and gas’.
What will it really mean for an energy company to demonstrably commit to leaving the planet in a better condition than it is today in order to change this perception? A great step forward would be to effectively communicate their aspirations and be transparent about their current emissions, however they also need to have a clear strategy, take concrete action, and demonstrate measurable and meaningful results. Any realistic version of “net zero” will require more investment, continuing technology development, reduction of existing emissions wherever and however possible, and efforts to capture, store and offset CO2.
There is no one better placed or qualified than the energy sector to work out ways to remove large quantities of existing greenhouse gasses from the atmosphere and place them deep underground in reservoirs that these molecules came from in the first place. In the coming years we will see the growth of carbon capture and sequestration projects across the energy industry as a ‘new business using existing competencies’. It will not take long for exploration and production companies to be able to remove far more carbon from the environment than they produce by transporting and storing CO2 that comes from refineries and other industrial sectors. And while we continue to decarbonize existing production, there is also an increasing role for the oil and gas sector to play in renewables and hydrogen as these technologies move further offshore. Some energy companies are already involved in direct air capture and projects where CO2 will be pulled directly out of the atmosphere for storage using large reverse ‘air conditioners’.
There is a lot that is good about providing the planet with reliable, affordable energy, which has been made even more apparent during the energy crisis of recent months, and paraphrasing a famous Greek philosopher ‘you have to be in the game if you want to make a difference’.
Energy Transition: ‘Greenwashing’ Towards $100 Oil was written by Chris Chia, Managing Director. In the next few weeks, Chris will further explore the unique challenges and opportunities facing energy services companies.