While energy markets have their hands full coping with unparalleled demand destruction driven by our society’s response to the COVID-19 virus, Lars Eirik Nicolaisen, Senior Partner & Deputy CEO of Rystad Energy, picks up the thread of a more structural discussion – the energy transition.
The oil and gas industry has been through a lot of challenging times; many of these challenges were geopolitically driven like the turbulence in the oil markets during the late 70s and mid-80s. Some of these developments have been macro-related, such as the economic contraction of the early 2000s and the 2008 financial crisis, which also resulted in a temporary setback for the energy industry. An industrially driven trend that has been incredibly impactful is the economic exploitation of shale-resources. Arguably, this may be the most impactful trend witnessed to date and has had particularly dramatic consequences for the offshore industry as a competitor to shale. At the time of writing, we are also in a very challenging supply and demand imbalance driven by the COVID-19 virus and a market share war unfolding at the same time.
There is also an opportunity for GustoMSC to take part in increasing the competitiveness of offshore wind energy as a renewable power source
Traditionally, Europe has been the leader in embracing the energy transition challenge, whereas the US has been much more reluctant. Lots of communication by European oil companies have been regarded as ‘green rhetoric’ rather than an actionable strategy. However, the challenges of climate change have now elevated from the communications department to the executive board levels at all major oil producers. One key reason for this is that Wall Street has started to focus on the concept of climate risk and is challenging corporates on their strategy to address this. At the same time, in the East, China seems very committed to drive scale into the electrification agenda, partly due to the challenges that they are facing heavy pollution in urban areas.
The offshore industry will have a challenge in maintaining its license to operate within society. In light of the emerging consciousness of climate change, societal and political pressure will be on, and the industry has to demonstrate that it takes this seriously. This includes challenges such as access to talent and access to capital. There is also a rather substantial difference between the footprints of various offshore regions. The main differentiator is the practice of (gas) flaring. In certain regions, such practices are practically non-existent, such as in parts of the North Sea. In contrast to other regions, it is still common to flare gas that you cannot exploit given existing infrastructure.
Oil is very much about transportation; more than 60% of the current demand for oil is for the transportation of people and goods by road, sea and air. This is also one of the key sectors that is seeing competing substitutes winning their way into increased market share; electric vehicles (EVs) are penetrating the Light Duty Vehicle segment, currently accounting for 30% of oil demand. While the EV technology is also applicable to larger-scale road freight further down the road, other alternatives – like hydrogen – are potentially even more likely to win that race in the medium term.
This trend is probably the most important dynamic, which is negatively impacting oil demand. Also, efficiencies of the traditional combustion engine are increasing by some 2% per year. This is where the most dynamic developments will take place in the next 30 years. That said, what still holds true is that population growth and increasing wealth are positive underlying drivers for oil demand, so these forces are working against each other.
It is technically possible: we have the solutions available to provide carbon-free energy systems
However, society will be calling for more sustainable operations. The entire supply chain – including a design/engineering company like GustoMSC – will have to play a key part in making this happen. The question is: how can the carbon footprint of current drilling operations be minimized? There is also an opportunity for GustoMSC to take part in increasing the competitiveness of offshore wind energy as a renewable power source. This industry has gained much momentum but can only benefit from even more cost reductions. Such cost reductions have so far come with the increased scale of the turbines, which again calls for innovation of the equipment needed to handle such systems.
It has become widely accepted that CO2 emissions are a key driver for climate change, and therefore, an immense focus to reduce such emissions has emerged. While opponents will always argue that this will come at the expense of economic growth, we believe that the next 30 years will see a further heightening of this focus. CO2 emissions throughout the supply chain of the energy industry will likely turn into a key purchasing criterion for decision-makers in the procurement of goods and services. We see this already in certain sectors, such as with Platform Supply Vessels in Norway.
It is technically possible: we have the solutions available to provide carbon-free energy systems. The challenge is to mobilize policies, capital, and industry on a sufficient scale and speed to realize it – especially when the cost and benefits of reaching a carbon-free energy system are so unevenly distributed between economies.
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