There’s a trade-off not only between what should I invest back into oil and gas, what should I invest to renewables, but also how do I finance the transition going forward?Andrew Horncastle, Partner
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Hear our experts discuss the challenges and opportunities facing oil and gas players across the globe as they strive to balance the energy trilemma.
Hi. Thanks for joining us today. We're having a conversation about the oil and gas industry and energy transition.
Sitting in Southeast Asia, Andrew, I looked at the Middle East region you cover. And I’m always curious, in the sort of economy that is fundamentally premised on what we call fossil fuels these days, how are those economies, those actors, governments, corporates thinking about the energy transition?
Yeah, I think it's a fascinating question because obviously you are one of the largest oil and gas producers on earth. Obviously, we're going through an energy transition. That's the energy trilemma of security, affordability and then, you know, the climate discussion.
Now, the actors in the Middle East think of themselves as a little bit of ‘the last man standing’. So, we will produce oil and gas or hydrocarbons would be very much at the forefront of what's going to continue to happen. At the same time, there are massive investments into green hydrogen, so with the energy transition, there is enormous demand coming now, particularly from Europe. And with the current crisis, I think that demand is increasing.
So, you really have the duality of these investments going forward and I think there's a role for the Middle East to play going forward as well, on both sides.
Absolutely. I think it's a slightly different story in Europe, as we all know, and most of the majors that we work with are really battling with two issues now, which is how do we sustain a transition whilst also performing in the mid term, dealing with all of the volatility that we see in the industry. And you know what becomes a very, very busy room of discussions because you want to maintain your targets and your commitments. You want to ensure that you're providing shareholder returns. And at the same time, there is a broad base of stakeholders that are requesting a very, very rapid transition.
So, what it leads us to is, well, how do we do this sustainably? And when I say sustainably, I mean with security of supply that doesn't lead us to the levels of prices that we've seen over the last 6 to 18 months. And to really ask the question, what is the strategy, what are the levers that are going to help us get there whilst ensuring that we have a level of security within the system?
Yeah, it’s fascinating, right? In Southeast Asia, folks here are looking to the Middle East to understand how the producer landscape is changing because that has direct implications on where infrastructure needs to be built in Southeast Asia, which is generally importing a lot of its energy. And what the price of those commodities will look like in the longer term, in the longer arc of our future, and simultaneously looking to Europe to figure out, for economies that are at the forefront of this transition, particularly the last 24 months have been challenging, shall we say.
And that's caused some trusting of the pace of change. And you come back to the trilemma and we were talking about energy security. And Southeast Asia does have a problem around energy security. And therefore, these countries are starting to think about what is their own path, right? And it feels like the world has three or four different trajectories to getting to a sustainable future.
And it feels like in Southeast Asia, increasingly, there is a lot more thought being given around transition fuels. So there’s not this mythical switch that goes, boom, we’re now in green terrain and green hydrogen, but that ICE engines will stay on the road for a little while longer because to change their entire fleet will take a decade. Biofuels, Gen 2 biofuels, synthetic fuels, gas, in fact, what role does that play?
So you can almost feel the tectonic plates start to shift in pretty profound ways. Certainly where we are sitting, looking at the two geographies you folks represent.
And I think what's important to consider and that's probably also true for Southeast Asia and probably less true for Europe and the Middle East is affordability. Right. I mean, if you look at the Global South - Affordability is a massive issue and we've seen it in the crisis now. We've seen how inflation hits them, how the high energy price hits them, how they are highly indebted.
And, you know, in the end, what do people want to do? They want to build a better future for themselves and for their kids. And if you deny them affordable energy, they just can't. So, you know, this energy trilemma is something that, in my view at least, really calls for a very inclusive debate, a debate where you have the oil and gas industry, where you have, you know, all the movement to green and the activist side of things, but where you have representation from the Global South as well, that is the majority of population in all reality.
And if you start ignoring parts of it and unfortunately in a lot of forums, that's my impression anyway. There is this, you know, “You're the bad guy and I'm not going to talk to you” kind of attitude. If you do that, then you can never come to a resolution on that energy trilemma. I don't know how you see that, Joanne.
No, I completely agree. I mean, as you know, Andrew, the work we've done with the Sustainable Markets Initiative, which really centers on this inclusivity of debate. So, if we are going to build this new future for ourselves, whether it takes 10, 15, 20 years, it is not going to be one industry or one sector of government that's going to resolve any of this.
The importance of the supply side is absolutely critical, and I think it comes back to this point of, okay, I'm sure a lot of people in the wider environment will say, “Well, oil and gas companies and energy companies have made a lot of money over the last two years”. Fantastic, great. What that tells you is they have a lot of capital now to deploy. And I think the question becomes how those companies deploy capital in these twin engines, which is, of course we need supply security. But also, we need a realistic transition.
And to your point, you know, the interim fuels that are going to take us through the next 8 to 10 years, what does that mean for EV evolution? What does it mean in terms of the large solar parks and greenfield investments that have been made? I mean, Andrew, I've been looking with awe at how the Middle East and sovereign wealth funds are doing this and in connection, I think mostly with East Asia, it's a lesson for us in Europe.
Obviously with high energy prices, as you said Joanne, you just have so much more capital, now, we need to remember a large part of the Middle East and certainly the GCC economies are in a transition, and I'm not only talking about an energy transition but a much wider transition of the entire societies.
So that takes a lot of capital and NOCs obviously are the largest income creator. So, there’s a trade-off not only between what should I invest back into oil and gas, what should I invest to renewables, but also how do I finance the transition going forward?
Now that puts you into an interesting position because, you know, necessarily higher energy prices are good for your coffers in the Middle East. But you also want to keep it at a level that is affordable for people, that doesn’t curtail global growth. So, there’s a little bit of a balancing act to be done there. But I think the balancing act is being done and has been done for many, many years. That's the role of OPEC, in essence.
And I personally think if you look at the investments in hydrogen and in solar, they will pay off. I mean, you know, you have space, you have sun, right? You know, and you have a lot of sun. It will pay off. It will make money. It’s an investment. And capital is not short where you can guarantee a return.
Yeah, if I was to think about the mass of Asia similarly, you start to see a lot of nuance in the conversation on how you deploy capital because the classical kind of three horizons, you do have to deliver energy for the people right now, and your markets, and your customers. You do have to start to find that transition while with an eye to what does a zero-carbon future look like, right. And nuance around whether it's kind of the nature of large investments we make, whether it is kind of the portfolio of carbon that we develop, whether it's carbon offsets or carbon capture or whatever have you.
And it's actually becoming this pretty nuanced and sophisticated conversation overall, even amongst governments and regulators, and NOCs to say, what does that portfolio look like and kind of how do we gradually pivot it over the years ahead?
Yeah, absolutely, I mean, jumping off of that point, I think what we're entering now is a stage of actually doing, getting on with it and delivering on some of these commitments. And it's been great to talk about strategy for sometime. And, you know, both of you I'm sure have done.
But there is a need now to see delivery. And I think what that calls for is a very focused approach to capital allocation. And for many of the European and say Western energy majors, they don't quite have the coffers of the Middle East or some other sovereign wealth funds.
And I think one of the greatest risks we have right now is that we spread ourselves too thin and we don't focus on those really, you know, what are the horses that you're going to put your money on over the mid term, for example, is it going to be the structural build out of renewables? Are we going to see integrated supply chains into the EV market? Are we going to, for example, see the buildout of energy parks which connect chemicals to renewable fuels, to sustainable products further downstream? But I think that’s a big question now for the energy majors. And in part, I think they're partners on the sovereign wealth side.
The other question is how much risk do we take in this environment? There are risks that we know, there are risks we know we don’t know. And then there are the ones we really don’t know. And I think as we’ve seen, no one could have predicted COVID-19, no one could have predicted what happened with the current conflict. And this is an environment we need to get used to, a very different risk profile.
I think building on your point, it's not only the oil majors that need to make decisions around how to deploy their capital and how to generate cash flow to be able to continue investing. It's the government too. And if you look at Europe, I mean, there's a high amount of debt on most governments. I would argue the Germans are probably the only one that can pull off something really large. They’re the only ones with a balance sheet that, you know, allows them to stretch into the kind of massive investments into infrastructure that are required.
So, I think there's some soul searching in Europe to be done on, you know, my role as government in the green transition, my whole role as Europe in the green transition and how we're going to finance it. In the end, you either take up debt or you increase taxes. So, one way or the other, you have to go. And that will ultimately also create cost for the consumer. It will drive costs up. Energy transition is not for free.
This transcript has been edited for clarity.