Oil's Transition Path Transformed by Geopolitics

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Geopolitical turmoil this year has fundamentally altered the way oil companies are approaching the energy transition — creating new hesitations and setbacks, but also new motivations to decarbonize and build out technological solutions. That’s a prevailing theme from the Energy Intelligence Forum in London this week. Rather than setting one clear direction of travel, the Russia-Ukraine crisis — and the deeper questions it raises about energy security and affordability — has caused oil companies' strategies to teeter back and forth between ambition, reluctance, and healthy skepticism.

‘Wrong Direction’

In terms of setbacks for the transition, multiple oil and gas company executives expressed frustration that the Russia-Ukraine conflict has triggered an uptick in coal activity and usage — while talking up the need for gas as a transition fuel instead of coal.

Shell CEO Ben van Beurden lamented that China has “brought on more coal mining than the entire energy production of Shell” since the beginning of the war. “While you may say in the end it will be good, because you’re going to have this massive impetus to do something about energy security and the energy transition will accelerate, that may all be true, but what will happen in the meantime is you’re going to travel to the wrong direction,” he warned.

Oil and Gas Climate Initiative Chairman Bob Dudley agreed, saying the uptick in coal activity and usage underscores a need “to keep up the urgency” behind investments flowing into energy transition solutions.

Investments Flowing, Focus Different

That urgency is still strong in the oil sector, but with some renewed hesitations. Oil executives voiced a continued willingness to keep decarbonizing their business models, yet in a more nuanced way. In particular, there was less talk about diversifying into renewable power and more emphasis on lower-carbon barrels and hydrogen.

Van Beurden was among the most upbeat about staying on the low-carbon course: “Say I gave you an extra billion to play with, where would you be inclined to spend it? I’d be inclined to spend it in the energy system of the future. Because that, I think, is where most of the future value is going to be.”

In another example, Aramco CEO Amin Nasser spoke at length about the company’s blue hydrogen ambitions, but said a few kinks remain to be ironed out. He talked up blue hydrogen as a “growth market” — with the company currently identifying many customers in East Asia and elsewhere — but said long-term agreements are critical to building up the sector.

“Customers are looking for the prices to go down, and for the price of hydrogen to go down, you need to scale up,” he told the Forum. “But if you are going to develop it now, you need an offtake agreement for at least 15 to 20 years in order to develop all this blue hydrogen.”

At the same time, today’s geopolitical troubles seem to have bolstered the view of many oil companies that conventional energy should remain an investment priority. “Until plan B is ready — which is the alternatives, the renewables — we need to continue to invest in plan A, to make sure we don’t end up with a shortage of supply,” Nasser argued.

Low-Carbon Barrels

Occidental Petroleum, while investing heavily in direct air capture and traditional carbon capture, is among those touting the potential of low-carbon barrels. CEO Vicki Hollub told the Forum that these barrels “command a premium,” arguing that buyers are willing to pay more despite increasing cost inflation in the sector, with Oxy having already inked a handful of deals along these lines with customers. Hollub explained that the barrels become low-carbon because the company offsets the emissions either by purchasing certified credits or by the promise that emissions will be captured in the future, for example from its first direct air capture plant in the Permian slated to come on line in 2024.

South Korea's SK Group, which plans to purchase up to 200,000 barrels of net-zero oil from Oxy for five years to convert the volumes into net-zero products, is one company that has shown willingness to pay extra for low-emissions hydrocarbons. “Other companies are now expressing the same thing,” Hollub said. “So I do think that it will command a premium. And I think we'll be able to get that. I don't know how much, that's still open right now.”

In turn, Hollub said oil and gas companies should be prepared to pay a premium for low-carbon supplies like steel and cement. She pointed to Oxy’s participation in a partnership to decarbonize a cement factory in Colorado as an example. “That's where we have to get to,” she said. “There are some big companies that are starting to do things and operate in a way that will ultimately get them there … but we need to accelerate.”

Emerging Technologies, Hydrogen, CO2 Emissions, Low-Carbon Policy, Corporate Strategy , Policy and Regulation, ENERGY INTELLIGENCE FORUM 2022
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