Energy Transition

Managing a Disorderly Transition

Copyright © 2021 Energy Intelligence Group
Energy Transition Gas vs Renewables

The oil and gas industry largely accepts that the low-carbon transition is gaining momentum, but disagrees on how quickly it can advance, and faces a growing disconnect with governments and society over the pace of change required. There is also increased recognition that markets could become disorderly and volatile. These were our key takeaways from this week’s Energy Intelligence Forum.

  • Risks of underinvestment are rising. Forum participants offered widely varying views on how fast and far-reaching a transition was desirable or possible. We heard greater industry agreement on the need for ongoing oil and gas investment, especially if constrained spending sees energy supplies lag demand, sparking shortages and fueling volatility. Most argued that the current gas crisis had many causes, mostly pandemic-related supply constraints and rapidly rebounding demand. But rising prices have sharpened the focus on investment needs, both in oil and gas, where capital markets have curtailed funding, and in clean energy, where capital is less constrained yet the sums needed are huge.

  • IOCs are seeking a balance, but Western societies want faster action. Oil majors must weigh immediate market and financial needs against intensifying transition pressures. Even CEOs from transition-focused European majors stressed the need for continued near-term oil and gas spending, as did Exxon Mobil. All firms emphasized moves to prioritize advantaged assets, actively manage portfolios, and cut operational emissions. But the gap is growing between the industry’s view of a gradual, multi-decade transition, and society’s calls for urgent action. Investor concerns are clearest in the focus on product use (Scope 3) emissions, requiring a faster pivot to new energy technologies. European CEOs highlighted their renewable power investments, arguing they can leverage existing skills, scale up fast and deliver returns. CCS was widely cited, but with caveats on costs and policy support.

  • Key producing states are betting on resilient demand. Participants from Opec and major producing states rejected talk of oil demand peaking soon and declining sharply, as did top traders. CEO Amin Nasser said Saudi Aramco will boost capacity to 13 million b/d by 2027, while others from Adnoc to Equinor pointed to their low-carbon production. Even Iraq, a more vulnerable producer, confirmed its 2027 capacity goal of 8 million b/d. Asian NOC executives restated the role of gas and LNG as the region’s preferred transition fuels — to deliver coal-to-gas switching early in the transition — with plans for ongoing investment, even with high prices. Mideast and Asian speakers talked up hydrogen, but stressed that adoption would take time.

  • Efforts to accelerate the transition will focus more on demand. Many speakers urged policymakers to close the gap between net-zero ambitions and lagging implementation efforts at COP26 next month. IEA Executive Director Fatih Birol and others said more action is needed on demand for fossil fuel use to fall faster, as in 1.5°C scenarios. Some industry delegates voiced hopes that focusing on still-growing demand could ease limits on supply and slow the transition. But we believe it may intensify moves to cut oil and gas consumption sooner. Efforts could include: (1) stronger mandates, incentives and other measures; (2) initiatives targeting segments like road transport, aviation and industry; (3) increased focus on power market structures and demand management; and (4) caution on offsets, placing the onus on actual emissions cuts. Such moves, as with investor Scope 3 pressures, would require oil and gas firms to step up action along the value chain to shift usage patterns.

  • The industry must brace for more transition turbulence. The Forum echoed our view that current market upheavals offer a foretaste of a disorderly transition. All agreed this would benefit no one: Turbulent markets and spiraling prices serve neither advocates of continued oil and gas use over many decades, nor those pushing for rapid transformation. Yet with little clarity or consensus on the way ahead, we see some turmoil as inevitable, given the difficulties in managing market balance through a profound shift in the global energy system. Improved alignment among producers, consumers, investors and governments could soften and shorten the period of instability. For instance, the industry might commit to stronger efforts to address demand by 2030, in return for more leeway to meet nearer-term supply needs, a stance adopted by TotalEnergies. We will be watching COP26 for signs of compromise and cooperation from both sides.

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