MAY-JUNE , 2023 | ESG
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Figure 1 : Total Energy Supply by Source in STEPS and APC Scenarios
before the COP 26 meeting in Scotland , were not the only business issues facing oil and gas players . Another telling initiative was also launched about the same time .
The Global Financial Alliance for Net Zero ( GFANZ ) is a global coalition of leading financial institutions committed to accelerating the decarbonisation of the global economy . In April 2021 , GFANZ commenced its work to co-ordinate efforts across all sectors of the financial system to accelerate the transition to a net zero global economy .
As a result of the leadership provided by GFANZ and strategies proposed in the IEA report , many financial institutions decided not to support new oil and gas developments that had not been sanctioned before Dec 31 , 2021 .
The fundamental impact of some of these policies is that funding for oil and gas projects has been choked back . Figure 2 shows some of the trends that are currently being observed .
THE LONG-TERM CONSEQUENCES OF UNDERINVESTMENT
Oil and gas companies are responding to the pressure and policies confronting them and investing less . From the data recorded in Figure 2 , it seems that even though oil prices are tracking much higher than in prior years , only a fraction of the annual investment levels seen before 2015 are being repeated today .
Figure 2 : Oil and Gas Industry Capital Expenditure Chart ( Source : Rystad / Author )
In fact , recent trends show IOCs declaring bumper dividends and buying back their shares listed on the global capital markets . Even though the larger IOCs appear to be investing in the renewable energy agenda , their allocation of substantial amounts of capital towards share buy-back programs demonstrate a corporate view that such a business strategy is , in the long term , a better way to reward shareholders .
An extended period of underinvestment will cause a shortfall in energy supply . The pathways proposed by the IEA assume that their proposed initiatives are implemented almost flawlessly .
The IEA also identified some 400 key milestones which have to be achieved in a timely manner during a 30-year journey to 2050 . The question that then comes to mind is , ‘ what happens if these milestones are not met and supply shortfalls occur as we approach 2050 ?’
The IEA Roadmap to get to a net zero world by 2050 requires much cohesive implementation work not entirely under the purview of any single agency or authority . The IEA recognises this and prefaces its report with a qualification which reads as follows :
“ the pathway laid out in the IEA Roadmap is global in scope , but each country will need to design its own strategy , taking into account its specific circumstances . There is no one-size-fits-all
approach to clean energy transitions .” EMERGING ECONOMIES NEED TO BEWARE
If we fast-forward ourselves towards 2050 , where might we find ourselves ? Let us visualise a scenario at a future time , say in 2045 , when there is a realisation that :
• renewables were not implemented at a pace that was fast enough ; and / or ,
• human behavioural changes did not take place at the anticipated rate as forecasted 20 years prior ; or even ,
• a war breaking out in the South China Sea pushed back the drive towards 2050 net zero objectives being achieved . Let us then transpose that image on a world in which traditional oil and gas corporations had :
• under-invested for decades ;
• lost human capital with the knowhow to undertake large-scale energy delivery projects ; and
• through their share buy-back programmes , coupled with aggressive dividend declarations were , in fact , much smaller business entities , unable to make any difference in closing energy gaps . At that juncture , the safety net of the oil and gas industry would not exist . Countries starved of their energy requirements would be left further behind with few options .
Developed economies would compete for whatever energy resources that were available , at inflated pricing . This was , in fact , the scenario observed when Russian / Ukrainian hostilities commenced in 2022 .
Western Europe was suddenly starved of gas and as it went desperately in search of energy , the price of Liquified Natural Gas and coal spiked . Nevertheless , Europe could afford to build its energy reserves but the people of many countries , not as economically advanced , were not so lucky .
THE WORLD DOES NOT STOP IN 2050
According to the projections of the IEA ( Figure 1 ), even in their most optimistic scenarios , fossil fuels will supply about 50 per cent of the energy mix in 2050 .
If GFANZ successfully stops investment into new oil and gas developments , what happens in 2055 ? Oil and gas production decline is generally not a straight-line drop . Instead , as oil and gas fields mature and progress into a late life stage , decline rates increase with time .
Therefore , if oil and gas investments do not continue now , its negative impact will be felt by those least able to do something about it , in the very near future . Between 2020 and 2050 , the population of the African continent is expected to increase by 1.1 billion people .
Africa is a continent which is already short of energy . Is it feasible to close the existing gap and fill new demand using only renewable energy technologies ? Should a continent like Africa or some countries in Asia be left energy deficient or should they be allowed a fair opportunity to progress economically ?
Surely , would it not be more beneficial for those who do sincerely care for the environment to take a more holistic view . Do also extend some consideration for those who will live on the planet , in the emerging economies of the future , so that we all will have access to the lifeblood of adequate energy at the right place , at the right time and at the right price .– @ ESG
Dr Kenneth Pereira is managing director of Hibiscus Petroleum Bhd