Energy Investment – Present vs Future

The demands of the Paris climate agreement will see the world move towards a net zero economy in 2050. However, in the next 30 years and likely beyond, so called traditional oil and gas extraction and production will continue to play a vital role. Over the last 18 months or so we have seen a slump in the demand for oil and gas as a result of COVID-19 but as the world emerges from the pandemic, there is no doubting that demand is set to rise.

In a recent report, Wood Mackenzie forecasts that global oil consumption will increase by nearly seven million barrels per day by 2030. Demand for LNG grew in 2020 despite pandemic lockdowns and it is expected to nearly double to 700 million tonnes per year by 2040, according to Shell’s 2021 outlook. While these figures may surprise some, the issue that faces the energy industry, as it looks to transition from fossil fuels to sustainable energy production, is to ensure that there is the necessary and arguably critical investment in the oil and gas sector as that transition is delivered.

It is plainly evident that renewable energy projects have attracted significant investment. However, that investment needs to be matched in the traditional oil and gas sector if current and future demands are to be met. In recent months we have seen a $654 million investment in a new platform for the Al Shaheen field, offshore Qatar. Here is a field that is 34 years old and, arguably, with declining output, but it is testament to the ongoing use of oil and gas that such investment is continuing. Emerging nations in South America and Africa are also undertaking wide scale tender processes for access to ‘new’ oil and gas reserves and the plethora of stories and news reports across multiple media channels make it very clear that global energy firms and national oil companies are very keen to compete.

Given, therefore, that there is still a huge demand for oil and gas products, the industry needs not only to invest in access to ‘new’ reserves, but also in the infrastructure that will support the industry in the decades to come. An issue and potentially a cause for concern, can be highlighted by the fact that in the United States we have not seen a new refinery come online over the past four decades. Clearly, one of the world’s major energy markets is relying on increasingly aging infrastructure to refine its oil.

Governments and financial institutions are keen to see investment channelled into “green” energy projects but if you look at the aviation, maritime and heavy industry sectors they will all require refined and/or processed oil and gas for many years to come; quietly simply because demand will continue to vastly outstrip supply. Transport is a case in point. There is now an inexorable momentum to create electric vehicles to meet net zero targets. However, what people seem to conveniently forget is that these vehicles are made of steel, aluminium, and plastics, all of which require raw materials either derived from or aided by fossil fuels. Most of these vehicles are now powered by lithium batteries, yet lithium is mined in some of the world’s most inhospitable areas; extracted and transported by machinery that still relies on…yes, traditional fossil fuels. We must ask ourselves therefore, how many miles will an electric vehicle need to travel before it has offset the fossil fuels used in its manufacture? Zero emissions are an aspirational and necessary target to meet ambitious net zero targets, however, what really is the definition of a carbon neutral vehicle?

Reliance on oil and gas will continue for many years to come. It will require further investment, not least to ensure that the current global infrastructure is fit for purpose. However, there is a growing political and public pressure for energy investment to be channelled into the renewable/sustainable energy sectors, as governments and states are keen to ensure they can deliver their own commitments on emission reductions by 2050.

At GRS we are fully aware of these issues and the risks that the changing energy environment is creating. Margins are being squeezed across the board to ensure that firms can deliver a profit on a $50 barrel of oil as well as they could when oil was at $70 a barrel. Investors want a return and technology has delivered a range of efficiencies.

However, that investment must be balanced between the global drive for a cleaner, greener energy future and to ensure that the oil and gas that will be required to power the planet in the short to medium term is delivered safely and with the minimum of risk.

The pressure to divest investments and transition away from fossil fuel production may well increase. The energy mix is changing, of that there can be no doubt. Whilst new technologies in renewables and new sustainable solutions are essential, fossil fuels will continue to form the mainstay of the energy base.

It may be a fine one, but the investment balance has to be struck.