The energy transition and the fight against climate change are big, bold ideas that have consistently been making their way up the table in terms of importance among policy makers, industry stakeholders, and the general public.
While industry leaders across the board are investing in climate action initiatives, disagreements persist around how to decarbonise effectively and the tools, strategies and energy mix that will enable a realistic energy transition for the oil and gas sector.
“Oil and gas will be around for longer than most people think,” says Peter Wood, the chief energy adviser for Shell. “Electric vehicles are coming. [The energy transition] is going to be a patchwork, it’s going to happen faster in some places than. That is what you feed into your company strategy. We need to move away from monolithic sounds.”
For Shell, for decades known as an oil major, and now a company vertically integrated across a large number of energy sectors, the aim has historically been to serve the same products to customers all around the world. As Wood notes, “everybody drove a car.” Now, however, the energy industry is changing, with countries increasingly turning towards electrification.
In this environment, Shell and its counterparts will need to pivot. “Our customers, they want to charge [their cars], not tank. And as a company, you want to hold onto that customer’s business. So you want them to be indifferent about whether they’re [filling their gas tank] or they’re charging. That’s what we’re doing here,” Wood explains, noting the simple business case for energy companies to diversify.
Yet this change is uneven. In some parts of the world, electrification and customer demands have yet to push the oil and gas industry towards a more agile model, including transitioning energy products. Indeed, the overall industry push towards sustainability is a relatively new concept, which has left planning for the future significantly more uncertain than it has been in the past.
“I think the idea that the last 20, 30, 40 years are a reasonably good guide for the next 20 to 30 years is probably not as valid today as it maybe was when I joined the industry in the late 90s. It feels like the world is itching for change,” Wood notes. How that change will take place is still unclear.
Shell sees three main future scenarios as to how the future could unfold. The firm’s most optimistic scenario, called “Sky 1.5,” imagines a world that achieves the Paris Agreement to limit global warming to 1.5 degrees Celsius (C), a level which scientists broadly agree is necessary to prevent catastrophic climate damage. In contrast to modelling by other groups, Shell expects energy demand to be more persistent and higher, as “we feel it’s difficult to expect developing countries to not grow their energy demand,” Wood says.
Energy poverty persists as a global issue, and a June 2021 report released by the World Bank, among other agencies, notes that universal access to sustainable energy will continue to lag if inequalities are not addressed. Without fair and equal access to sustainable sources of energy, demand for hydrocarbons will grow among nations escaping energy poverty.In contrast to Sky 1.5, Shell’s “Islands” scenario envisions a world wherein countries pursue their own policies alone, creating islands of security. “In the Islands world you see slower economic growth. And unfortunately, because we don’t have the economic growth, we don’t have the muscle that allows us to transform quickly. Basically, the whole transformation drags out much longer,” Wood explains.
However, while these two contrasting scenarios represent two ends of a spectrum, Shell’s “Waves” scenario imagines a world where economic growth is prioritised over climate initiatives. “It’s back to business, back [on a] plane, back on holiday, whatever you like… And in that world, energy demand and CO2 emissions continue going up,” Wood says.
With emissions continuing to grow, the “Waves” world sees a cataclysmic crescendo of climate damage in forest fires, weather events, natural disasters on a regular basis that influence people to “wake up and finally push for change,” according to Wood. This dynamic precipitates a rapid, “very steep pushing” of fossil fuels out of the energy system.
The Covid-19 kick
If the coronavirus pandemic upended the energy industry, the recovery may be equally as surprising. Fossil fuel demand has bounced back to its pre-COVID level, with oil prices continuing to rise. While this may at first appear to be a negative in the column for the fight for climate, the picture is brighter than it seems, Wood explains.
The pandemic forced companies across the spectrum to retire old, inefficient capital stock. For instance, aviation firms no longer fly older, dirtier planes but are committed to newer, more efficient aircraft. “So the energy system will have become a bit more fuel efficient, and that’s structural,” Wood says.
Contrastingly, the overall behaviour of the general populace has led to a reconsideration of future trends. While last year industry insiders were predicting a long-term structural drop in energy demand due to more people working from home and shift in work patterns, the COVID-19 recovery suggests demand for energy is not going anywhere soon.
In personal transportation, Wood believes consumers have “rediscovered the beauty of the car, the independence of the car, they don’t want to be in forms of transport in an aluminium tube [like] planes, subways, buses, no, they want their own space.”
Meanwhile, for those that do expect to continue to work from home, consumers will still need to keep their house warm, increasing demand for energy, and, Wood notes, continue to purchase products online. These factors are likely to mean that energy is still required for the transport of goods, increasing the long-term need for fossil fuels.
Don’t underestimate money plus ingenuity
Expectations for a rapid decarbonisation of the energy system have not been upheld, with activists continuing to push for a faster switch to renewable and sustainable energies. While frustration focused on this issue is well-founded, Wood notes that “it’s just a matter of time” before the “money and the brains associated with it” have some level of impact.
“We’re probably overestimating the change in the energy system this decade,” he says. “But we could be under estimating it next decade, in the sense that you have an exponential kind of change.”
Uncertainty over the future is natural in a shifting energy landscape, but this time it could be different. With climate change representing an existential threat, and with politicians and consumers taking the issue significantly more seriously than in the past, Wood expects change to be swift when it does come.
“[When you] start combining these things, you’ve got the ingredients in place to have a much more material change in the energy system in the next 15 years than potentially what we’ve seen over the last 50 years,” Wood says.
Middle East NOCs last to pump
Much of the world’s energy supplies are controlled by national oil companies (NOCs), which tend to be focused on upstream operations, unlike vertically integrated suppliers like Shell. In the Middle East, these companies produce the cheapest and cleanest barrels of oil in the world.
“These are oil barrels and cubic feet of gas that are going to be the last ones coming out of the ground. So you’ve got this sort of long game,” Wood says of NOCs.
The push to adapt is, therefore, less for NOCs than it has been for other energy providers, with NOCs less directly tied to consumers. However, this adaption push could come from elsewhere, with the Middle East home to young, ambitious populations looking to the future.
For example, countries across the Middle East have already stated intentions to become hubs for hydrogen in the future. In July this year, Saudi Arabia unveiled the world’s largest green hydrogen project yet, while the UAE launched the region’s first industrial scale green hydrogen facility in May.
“In the hydrogen space, hydrogen is nascent, in the sense of green hydrogen, new hydrogen,” Wood explains, adding that existing facilities around the world already produce around 100 million tonnes per annum of hydrogen as a “hugely important chemical feedstock.”
As such, the future of hydrogen is all about “taking it out of the battery limit and finding new applications for it whilst also greening it,” Wood adds.
Regardless of the shape that the future of energy will take, change is coming. “[With] the amounts of money and brainpower that getting into that area, I wouldn’t want to bet against them,” he says.
Wood advises all energy firms to keep a close eye on what’s changing and remember to develop for the future in mind, rather than relying on the same model that has existed for decades.
“I think the idea that you can sit on your oil field and that will remain your meal ticket for the next few decades, those days may be coming to an end,” he says.
