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The energy crisis – what’s on CEOs’ minds?
Energy’s looming challenges and opportunities
Chairman, Chief Analyst and author of The Edge
Chairman, Chief Analyst and author of The Edge
Simon is our Chief Analyst; he provides thought leadership on the trends and innovations shaping the energy industry.
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We hosted our EMEA Global Energy and Natural Resources Summit in London last week. Here are some of the big themes debated on the stage.
The global economy needs more oil and gas
At least for the short term. Energy security is dominating the agenda and fossil fuels are a vital part of the solution, even at the cost of higher emissions. Lower investment in upstream and infrastructure through the pandemic has amplified the impact of the loss of Russian gas and oil volumes in 2022. Europe’s ability to meet demand this winter and next will be severely tested if the weather is colder than normal.
US LNG developers accessing Henry Hub gas are responding to the red flashing price signals. But the pick-up in upstream spend on new oil and gas supply has been more muted than past upcycles. Companies are still wary of fickle investor sentiment and seem determined to stick to capital discipline. We expect budgets will rise by 10% to 20% in 2023, at least half of which is related to cost inflation.
Gas is the critical transition fuel. On the road to net zero, and beyond the crisis, there is little alternative to gas for end users for heating and in industry until emerging technologies – including hydrogen, heat pumps and battery storage – break through. Providing flexibility in increasingly renewables-dominated power markets and displacing coal in developing markets supports the resilience of gas demand well into the 2030s – even in an accelerated energy transition scenario.
A growing raft of LNG projects are gearing up to ease supply tightness in Europe and Asia from 2026. But some buyers remain concerned about price and demand risks and are reluctant to commit to long-term contracts, especially in Europe. And the scale of development threatens to severely test the global EPC supply chain, with pinch points in regions of high activity. For the time being, though, weaker commodity prices, including steel, have been helping.
Finance is available
For some, anyway. Senior bankers argued that higher interest rates have done little to stem the flow of money into developing renewables projects.
In oil and gas, carbon is starting to play a constructive role for providers of debt and equity. After the Paris Agreement, finance was gradually withdrawn from much of the oil and gas sector. Companies found it harder to borrow and had become virtual pariahs to many institutional investors by 2020.
Things have moved on. Redemption, perhaps too strong a description, has been hard won through self-help: capital discipline leading to the rebuilding of balance sheets and return of surplus cash to shareholders. More broadly, the crisis in 2022 has led to the realisation that investment in oil and gas is necessary to keep the global economy ticking over for some years yet.
Finance needs to be found. Banks and investors have established decarbonisation targets for their own portfolios. Oil and gas companies that align with these frameworks find it easier to access cheaper finance. Those which don’t, won’t. Finance, therefore, is becoming a major driver of emissions reduction across the wider industry.
Access to capital, though, still varies widely. Investment-grade balance sheets can borrow whereas it’s much harder for smaller E&P companies; North America is more open for business than Europe as are some markets in Asia Pacific.
Power markets face bigger challenges than gas
Security of supply is also a major concern in European power markets. French day-ahead prices hit a record EUR780/MWh in late summer, many multiples of the sub-EUR100/MWh market of a year ago and EUR50/MWh in 2020. The spike reflected countless and region-wide supply constraints as well as high gas prices. Traders at our Summit reckoned a winter squeeze could still push prices in northwest Europe to well over EUR1,000/MWh.
High prices are a boon for low-cost generators, including wholesale-exposed wind and solar, but are causing severe distress to consumers and politicians. The European Commission plans a revenue cap of EUR180/MWh on generators making these unexpected gains. This short-term fix (for this winter only) will raise funds to be directed to consumer cost-of-living support.
Enduring, structural changes to weaken or break the linkage between gas costs and power prices will take time. The UK government’s Review of Electricity Market Arrangements (REMA), for example, will require extensive industry engagement and is not expected to be implemented until, it says, the “mid-2020s”.
The key goal of market reform will be to underpin the transformation of the power market. Any new market model must incentivise substantial and sustained investment in low-carbon power capacity (including flexible technologies such as battery storage and interconnectors), ensure security of supply and support gas as a key enabler of transition. Striking the right balance is the challenge.
Our Americas Summit takes place in Houston on 4 November.
Thanks to colleagues Massimo Di-Odoardo and Kateryna Filippenko (Gas and LNG,) Alan Gelder (Refining Oils and Refining), Peter Osbaldstone (Power and Renewables), Fraser McKay (Upstream), Ed Crooks (Vice Chair Americas), Tom Ellacott (Corporate Analysis).