Decarbonisation appears to be a longer process than expected even a year ago, with major oil and gas producers sounding more confident about maintaining their core business in decades to come and more sceptical about the economics and technological progress required for energy transition.
But key challenges listed by legacy and new energy companies at this year's CERAWeek by S&P Global in Houston, Texas, sounded similar — figuring out the right mix of investment, government policies and consumer demand required to grow business. Investment by international and national oil companies is gearing more toward oil and gas. But capital continues to flow to underwrite a transformation of the power generation grid, manufacture electric vehicles (EVs) and batteries, and to mine the minerals required for them, as well as to test less mature technologies — hydrogen, carbon capture and geothermal. Supply chain issues are expected to plague both old and new energy markets.
On the policy side, the governments that are most active in advancing the transformation of the global energy sector to address climate change — most notably the US — are also most susceptible to electoral politics and hence, potentially drastic course correction. China's decade-long investment in the renewable and EV manufacturing base is transforming its energy sector, but that success cannot be transferred to the global market because of geopolitical differences between Beijing and the west. Fragmentation therefore will remain a key feature of future energy markets.
Oiling the transition engine
Society may want to see emissions reduced, but the challenge is that no one wants to pay for the energy transition, ExxonMobil chief executive Darren Woods said at CERAWeek — "If you don't pay for it, you can't engage the markets, you can't provide the incentives for what are very large capital investments." Woods' peers among the European majors sounded similar notes of caution. Transition strategies do not adequately address long-term supply needs, Shell chief executive Wael Sawan said. Stable oil production is needed to transition Shell's customers to lower-carbon solutions over the course of decades, he said. BP is taking a cautious approach to embracing technology and advancements in the energy transition amid changing political tastes, chief executive Murray Auchincloss said.
The possible change in political direction is primarily a reference to the unpredictable result of the US presidential election in November, where a return to office of former president Donald Trump could drastically re-orient Washington away from the decarbonisation agenda. The EU is offering a more predictable transition course, but its renewable industrial policy and dependence on actions by member states have to compete with measures already enacted by China and being implemented by the US' Inflation Reduction Act (IRA), Siemens Energy board member Anne-Laure de Chammard said. "The pace of the energy transition is unfolding at different paces in different countries," Auchincloss reminded delegates.
The IRA has spurred Europe into action, but implementation of some of the specific US measures, such as tax credits for hydrogen production, has hit a snag, de Chammard said. "There will always be complaints that what is done in the EU is more complex, but in reality, it's a little bit like that everywhere on that topic," she said. China may boast the largest number of electrolysers for producing renewable hydrogen, but the world's largest plant, stated-owned Sinopec's 260MW Kuqa plant in Xinjiang, operated at only 20pc capacity in its first six months.
Saudi Aramco is still keen to pursue hydrogen production agreements with partners in South Korea and Japan, but potential clients need government support because of high costs, chief executive Amin Nasser said. Aramco estimates the cost of producing hydrogen from natural gas with carbon capture at oil-equivalent $200/bl, while renewable hydrogen production costs are oil-equivalent $400/bl. Japan's power producer Jera likewise will depend on government support to underwrite investments in low-carbon ammonia production and marketing in the US and Germany, chief executive Yukio Kani said.
The IRA is a rare climate policy action by President Joe Biden's administration that has won grudging support from US majors. ExxonMobil supports the IRA's "technology-agnostic" approach and its focus on carbon intensity, Woods said. The US administration officials speaking at the conference tried to strike a balance between assuring the markets that the climate action subsidies enacted under Biden will survive his presidency and encouraging voters to turn up at the polls to ensure that climate action remains a national policy. "The election is consequential, but I think the IRA, and the investments that are spurred by the IRA are absolutely here to stay," White House climate adviser John Podesta said.
The sun also rises
Nasser captivated the CERAWeek audience of oil executives by decrying "the fantasy of phasing out oil and gas", but Aramco officials also highlighted the company's portfolio of investments in renewable technologies. Riyadh recently ordered Aramco to abandon plans to reach 13mn b/d of crude production capacity, but the company still warns of a lack of sufficient upstream investment globally to meet rising demand. Kuwait's state-owned KPC is sticking to its 4mn b/d crude capacity target for 2035 and to the "petroleum" in its name, chief executive Nawaf al-Sabah said. But KPC is also adding 1GW of solar generation to power its operations, mulling long-term plans to boost that up to 17GW and eyeing a stake in the renewable hydrogen industry if market conditions allow.
Such investments in renewable generation may be beyond the reach of cash-strapped emerging economies. "The future of energy transition in Indonesia is gas," Indonesian energy ministry oil and gas director general Tutuka Ariadji said. Brazil needs legislation to unlock investment in clean energy technologies, state-controlled Petrobras' chief executive Jean Paul Prates said. But only global governance that includes rules for financing and is inclusive of developing economies will help to achieve a just and equitable energy transition, Brazilian energy and mines minister Alexandre Silveira said. A new finance goal must be decided at the UN Cop 29 climate conference in Baku, Azerbaijan, in November.
Infrastructure permitting is as problematic for enabling energy transition as it is for the fossil fuel business. The White House pledges to fast-track federal approval of energy infrastructure, but is constrained by a lack of congressional action on permitting. Washington needs "to put more resources, make decisions quicker, co-ordinate with state governments" on new copper mine permits, mining company Freeport-McMoran chief executive Richard Adkerson says.
The mineral extraction business still expects a huge growth in investment opportunities as a result of energy transition. "You're going to have this need for electricity and you're going to try to generate it in new ways, and all that requires copper and I can't stop smiling," Adkerson says. But White House senior energy adviser Amos Hochstein warns that western governments and the energy sector have focused too much on the near-term challenges of recent repeated dislocation to oil and gas markets, at the expense of securing supply chains for critical minerals underlying the energy transition.
