The transition to a sustainable future of green energy and net zero carbon emissions is now taken for granted by policymakers at both global and national levels, and is increasingly becoming investment dogma. Politicians have been quick to come up with optimistic – some would say delusional – targets, and many corporate leaders have followed suit. “Net zero by 2030/2040/2050” looks good on election posters or integrated reports, but the reality is considerably more complex.
Spare a thought for those who are responsible for navigating the perilous path from a reliable and well understood hydrocarbon-based energy system to one optimistically based on new, less-understood technologies, whose performance at scale is still untested.
“Rebuilding a plane in mid-flight” is a saying used to drive home how difficult changing a business model is, but it’s never been more apt. The oil majors specifically, but all energy sector players, have the Herculean task of keeping the global economy supplied with reliable energy at scale while at the same time making what amounts to hugely speculative investments in developing a new, green(er) energy system.
Bodie Crossingham, head of energy for Africa at Accenture, argues that the focus has shifted, with energy security now seen to be as important as the transition to sustainable energy. "The industry has somehow to strike a balance between the two,” he says, adding that the investment required for the transition is calculated to be in the region of $5 trillion a year – a not insignificant sum, which will need to be competed for on the capital markets.
In short, the simplistic approach of activists such as Just Stop Oil does not survive contact with reality. For a start, explains PWC energy specialist Martin Solomon, a “massive energy system” with an elaborate up- and downstream supply chain that impacts every part of the global economy has to be replaced. Hydrocarbons supply not only energy but also chemicals and fertilisers as well as less obvious things like insulation for cabling.
Also, as Olumide Esan, oil and gas leader for Deloitte Africa, points out, energy needs are likely to keep on growing for the next 30 years – yet another complication.
“How do you displace all of this?” Solomon asks. He goes on to point out that the global economy consumes around 100 million barrels of oil per day, and more than that as natural gas and coal. “At current rates of consumption, we need to discover 3.6 billion barrels of new oil reserves just to keep going through the transition. Bear in mind that the easy hydrocarbon deposits have mostly been exhausted, so it becomes ever more technically and economically challenging just to stand still,” he adds.
Wars in the Ukraine and now the Middle East have significantly disrupted existing supply chains and thus both the price of, and access to, fossil fuels and related commodities. These factors underscore the need for energy security that can withstand not only wars but a wholesale transition to a new energy model.
One important strand in the transition narrative is often missed – perhaps intentionally: whatever the activists or the globalists of Davos may say, it’s clear that hydrocarbons will remain part of the energy mix for the foreseeable future.
Deloitte’s Esan makes the point that the complexities of the transition to green energy and the need to ensure energy security are particularly evident in Africa. The continent is rich in the resources required by the new energy order, with abundant gas reserves set to play a central role, especially as the world has accepted that gas can be credited as a broadly sustainable fuel during the transition at least.
Where’s the money?
As noted above, accessing the huge amounts of capital needed to transform is another daunting challenge for the oil majors. Getting funding for hydrocarbon projects, even gas, says Esan, is increasingly difficult in the West, and so he predicts that Africa will increasingly look to Asia for capital for the massive investments needed to achieve energy security – although, adds Solomon, financing will ultimately follow profitability rather than morality. Esan argues that Africa might need to establish its own energy fund to reduce dependence on foreign capital.
“Enlightened Africans want to play a role in the energy transition, but first and foremost they need to ensure the continent has the energy needed to grow,” Esan says. “Sustainability cannot come first for Africa.” He believes that independent producers will have an important role to play because they are potentially under less scrutiny than the oil majors, and can take over some of the existing investments in both gas and oil.
Indeed, divestment has emerged as a major strategy for the oil majors as they attempt to make themselves more attractive to investors while they look for the capital needed to fund their transition. (A recent divestment was Shell’s sale of its Nigerian onshore subsidiary to a local consortium, announced in January this year.)
However, divestment could arguably be seen as a form of greenwashing because it doesn’t eliminate the carbon emissions but simply transfers them onto another company’s balance sheet.
BP is regarded by some analysts as the oil major with the most robust commitment to investing in renewables but even it, as Rystad Energy senior sustainability analyst Olga Savenkova noted, owes more than 90% of its cut in Scope 1 and 2 emissions to divestments.
In fairness, it should be noted that Solomon believes this line of argument does not properly interpret what the oil majors’ portfolio strategies are trying to achieve.
Divestment is essentially part of a wider discussion around reporting – activists and regulators are displaying great interest in how the oil majors report their efforts to decarbonise. For example, activist group Global Witness has requested the Securities and Exchange Commission to rule on whether Shell’s inclusion of natural gas within its renewable energy totals is misleading to investors.
The same basic point could be made replacing the current highly efficient energy ecosystem, from exploration through extraction and refinement to getting the product to consumers. Past experience may argue the oil majors have the vision and financial heft to develop a new system pronto, but at the least it will be a tall order.
A major shift, Accenture’s Crossingham argues, is the “democratisation” of energy, meaning that consumers will be able to produce at least some of their own energy, and source the rest from a variety of providers.
This emerging reality of a heterogeneous energy ecosystem, which includes the development and perfection of new technologies, and the development and perfection of a new supply chain capable of delivering energy reliably, is a nightmare of complexity and difficulty. A consensus view seems to be that only collaboration across the whole industry, including new players, will make a solution possible.
“A responsible private sector understands that only collaboration, most importantly between the public and private sectors as well as within the private sector, will get us to where we need to go — the scale of the challenges demands it,” concludes Solomon.
Advice for leaders
Here are some things for leadership teams to consider as they navigate the perilous transition from a hydrocarbon-based energy ecosystem to a heterogeneous one:
- Develop the narrative. The oil majors need to communicate effectively with major stakeholders, such as shareholders, regulators, and policymakers. But a wider audience might also be necessary to combat the implicit simplicity of bold targets. “Cleaner energy for all is a positive story, but the fact that it’s not an ‘either/or’ situation needs to be clear,” says Bodie Crossingham, head of energy for Africa at Accenture.
- Put even more emphasis on strategy. Solomon argues that good companies are constantly reviewing their strategies within the context of a changing business, societal and technology environment. Given the long lead times and large amounts of capital needed in the energy industry, boards have a crucial role in ensuring strategy, and its effective implementation, are constantly fine-tuned.
- Focus on change management. Established companies like the oil majors have traditions and long-standing employees – all are threatened by the scale of the change. Change agents within the organisation will be needed to promote the positives of the change, says Buyani Zwane, senior lecturer at GIBS. “Employees also have to helped to deal with the grief of a major career change and the fact that their skills are becoming obsolete.” If the leadership team spends more time in conversation with the staff, it is enormously helpful to both parties, and builds a positive momentum for change.
- “Bring in new revenue streams and never lose sight of what your customers are actually buying from you,” says Crossingham.
- Learn to value the role that activists play, and engage with them, says PWC energy specialist Martin Solomon – they hold everyone accountable and draw attention to important issues.
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