PETROANALYSIS || ARTICLE
Dilemmas of an accelerated energy transition
The oil business carried out by countries or private companies could take a 180-degree turn if the scenarios that point to the occurrence of an energy transition based on de-carbonization are fulfilled ahead of schedule.
A trend based on non-linear factors associated with policy decisions and technological leaps that accelerate the production of renewable energy or a more rapid adoption of the electric vehicle is not an outlandish event that can be ruled out.
The Scottish oil research company Wood McKenzie (WM) probes a higher probability of occurrence given the technological trends of clean energy, policy orientation and economic feasibility. In this scenario, renewable energies could be expected to go from representing 7% of global energy to 40% by 2040, and oil demand would reach a ceiling in 2031.
In fact, the niche of the renewable energy business has exceeded fossil fuel energy in terms of generation capacity of new annual generation aggregated worldwide.
This decarbonized horizon threatens the economies of oil-producing countries from the moment that companies such as Shell see a peak in oil demand feasible even before WM and BP feels that she has underestimated the degree of penetration and extension of renewable energies.
Energy efficiency, electric vehicles and other technological changes raise questions about maximum demand. The same ambiguity leads to the regulation of the climate when aiming at the moderation of consumption and even change of habits.
On the supply side, the oil-producing countries that make up OPEC also face the threat of capture of their segment of their market by US shale producers. This could worsen if OPEC and its allies persist in the policy of restricting their supplies as a way to prevent the collapse of the oil price from jeopardizing their governments’ budget solvency.
The danger that hangs over the future mediated oil producers who have a heavy dependence on oil income in their economies was studied in 2018 by the IEA to assess the loss of relevance of oil to Iraq, Nigeria, Russia, Saudi Arabia, the United Arab Emirates and Venezuela.
For the IEA, the threats are not cyclical but structural and should be given a lot of attention, and that is why governments need to design a strategy to deal with it. The acute petro-dependence of these countries to finance their budgets is of great concern when we think that electric vehicles are starting to be an economic alternative in the space that until now has seen exclusively fossil fuel in the transport sector, and this can be accelerated by environmental restrictions that favor the electric car above the polluting vehicle based on internal combustion engines.
In the IEA chart that follows, the countries most vulnerable to this change in the oil business can be seen in the upper right quadrant, and therefore they must reinvent themselves and adopt measures that diversify the nature of their income.
An early warning of the change to come in the energy matrix can be seen in the preferences that have begun to show in the capital markets, which can suffocate fossil fuels by virtue of the “obstacle rates”, that are demanded from fossil energy projects by institutional investors, which are increasing and are now much higher than the rates of wind and solar energy, as reported by Carbon Blog Brief.
In developed markets, says this blog, a solar farm needs to reach 10%, while an offshore oil project in the United States requires 18%. This difference in expected returns raises the marginal long-term costs of oil projects from $40 per barrel to almost $80 per barrel.
To these considerations that happen in the field of financial investments must be added the questioning of the shareholders in the assemblies of the big oil companies regarding the sustainability of a business that looks very vulnerable in a world where an energy transition based in low CO2 emissions is accelerating.
The alerts that are heard in the corporate premises are not scarce, hence they ask if oil investments make sense in the long term, or what is the value of oil or gas reserves that may not be exploited in full.