Our Take: It's All About the Balance

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WEO ONLY -- How to Service the Transition

Energy Intelligence expects oil and gas producers to increasingly confine investments to short-cycle developments and emissions-minded longer-term projects to thread the needle between competing financial and societal pressures. Consumer calls for price relief and investor desires to capitalize on what could be the last bull run for oil sit on one side against stranded asset risk and long-term energy transition goals. Swinging too far in support of either one would heighten the risk exposure posed by the other.

  • This week’s World Economic Forum in Davos reinforced the recent easing of more mainstream calls to halt all fossil fuel investment as quickly as possible. Ahead of the Swiss summit, the heads of HSBC and BlackRock pledged to financially support oil companies to continue producing through the energy transition, warning that shutting the taps too soon would be treacherous for a global economy struggling with rampant inflation. Fatih Birol, executive director of the International Energy Agency, meanwhile backed quick-response shale in his calls for new oil and gas supplies to ease the global energy price “crisis.”

  • But in all cases, the support came with caveats. BlackRock’s Larry Fink cautioned companies at an investment event in London this week to not relive past sins of piling up massive build-outs that will take a decade or more to pay out. “The question is, are you going to need oil [in] 10 or 15 years? 20 years? 30 years?” he said. Birol asked the industry to turn to solutions like methane capture and to optimize existing infrastructure to eke out more supply, rather than pursue investments that will “lock in” fossil fuel use for “many years to come” via greenfield build-outs.

  • Most producers are heeding the message around cycle times when judging investability. Long gone are the days of greenfield projects like Kashagan, while deepwater investments have become increasingly more selective around cost, turnaround times and emissions intensity. But the commentary this week reminds that market flexibility is also increasingly attractive — and essential.

  • Modular design and smaller sizing can take deepwater and LNG project timelines down to five years or less. Floating solutions for LNG liquefaction and regasification can allow them to move when demand patterns change. Some infrastructure can be designed to play nicely with hydrogen, biofuels or carbon capture, extending its life well into the energy transition and mitigating stranded asset risk. Companies are also hinting at bringing forward “next generation” LNG designs that incorporate carbon capture, electrification and other emissions-saving tactics.

  • The expanding laundry list of investment criteria reflects the fact that climate hasn’t been dropped from the agenda despite more immediate energy security considerations. Any spending on higher oil and gas volumes today cannot be seen as coming at the expense of the wider energy transition trajectory — lest the window of support turn to backlash from a climate-concerned electorate, politicians and money managers.

Corporate Strategy , ESG, Upstream Projects, Capital Spending
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